What Me Worry?
It’s been a long while since my last post, which decried the Iran War, asking the rhetorical question “what the f are we doing here?” I can’t say that the situation has clarified, particularly with Secretary Rubio stating yesterday that the US Administration’s objective now is a “Project” to open the Strait of Hormuz, which isn’t open because…the US started the war in the first place. Then Trump suspended the Project. What a time to be alive.
Amongst many maddening aspects of the war is the utter disregard that the markets have for its consequences. Setting aside the conjecture-driven geopolitical theorizing, there are actual objective facts about the decrease in supply of oil, LNG, helium and fertilizer. The impact of this decreased supply is already being felt in Asia, and is starting to impact Europe and North America. You likely have seen reports of Asian gasoline rationing, WFH mandates, air conditioning restrictions (which wouldn’t be fun in Thailand!), and the re-starting of coal-fired power plants. Australia imports over 90% of its gasoline, jet fuel and heating fuel from Asian countries that are now increasing their stockpiles for domestic consumption: it faces the prospect of shortages or price hikes. A very frank synopsis of what Asia is facing can be found starting at the 10 minute mark of a recent episode of Bloomberg’s FICC Focus podcast.
I’ll focus on two products that I think are under-reported in the US media: helium and fertilizer chemicals (urea). NPR reported yesterday that 70 percent of farmers surveyed by the America Farm Bureau Federation said that they can’t afford to buy all of the fertilizer they require this year. It mentions that many will rotate out of corn to soybeans, which don’t require as much urea, but the soybeans will be used mostly for biofuels, not food stock. And if farmers don’t have enough fertilizer, then yields for their crops will be down, meaning higher food prices in general. Helium is critical for chip production. Chips are the key component in the AI industrial complex, which is driving the US economy. Again, if supply is constricted, the only responses are demand destruction, or inflation, which will either be passed on to consumers, or result in losses for companies in all stages of the AI food chain, as inventories pile up.
So a war that was started for no established reason is going to lead to higher prices for fuel, food, and the assets underpinning the US economy and stock market. And yet, listening to or reading Bloomberg (apart from the podcast linked above), or Forbes or the WSJ, there is no hint of concern about any problems. Physical prices for oil in the middle east reflect scarcity, but long-dated futures prices reflect some belief that all will be back to normal in six months. Treasury yields are starting to rise in the far end, but the overall response in the market is “Trump will stop the war”, or “Europe/Asia/[random allied country] deserves it”. I think that in the equities market there is also a belief that any bear market will get rescued by a pliant Fed.
It reminds me of early 2020, when the markets weren’t prepared for Covid, despite the warning signs in China and Italy. The people and institutions that we pay a lot of money to, and who get outlandish salaries, wish the problems away, until they can’t, and then they hope for a bailout, either for them directly, or for their clients. We should all be so lucky.