Iran ended negotiations in response to ceasefire violations and Israel’s renewed attacks on Hezbollah in Lebanon.
Iran is also threatening to close the Strait of Hormuz. As a result, oil prices spiked, and interest rates followed.
Per the likes of Luke Gromen, Exxon’s CEO, Peter Zeihan, and Doomberg – energy prices are only going to continue to climb now because so much production is now offline or restricted.
And – more importantly – prices will also spike because much of the world is now running off its energy reserves, which will soon run out.
And worse, myriad other prices will spike because so many other products need to travel through the Persian Gulf (making the midterm elections pretty scary for Mr. Trump).
There Are Two Huge Questions Looming:
(1) What will the Fed do to stem this inflation?
(2) Why can’t or won’t Trump “finish the job” with renewed attacks – when the political fallout from higher prices is enormous?
Please count a very frustrated mortgage industry as part of that political fallout, as these rate increases are wreaking havoc on the entire industry (somebody might have to fire up the “Implode-O-Meter” again).
Interesting sidebar: “Implode-O-Meter” tracked almost 400 mortgage company implosions after 2008. What is even more interesting is that some of the failed mortgage company owners weren’t on steroids, and several others didn’t drive leased Lambos that were underwater.
I. What Will the Fed Do?
Hopefully, NOTHING. Raising interest rates to fend off inflation that is clearly caused by supply constraints will do very little to stem inflation.
Raising rates makes borrowing money and financing purchases more expensive. This reduces demand, which then causes prices to fall.
But it also shrinks the money supply (the true and more lasting influence on inflation), as bank lending is the source of almost all of our money supply increases.
In any case, per economist Judy Shelton, an economy already being pounded by higher prices due to supply constraints doesn’t need further damage from higher rates (there is no “excess demand” to be stemmed).
All the Fed can do to stem inflation and lower rates, per Ms. Shelton, is drill for more oil… (The Fed’s new Chair is much more aligned with Ms. Shelton than is former Chair Powell).
II. Why Trump Can’t or Won’t “Finish the Job!”
This is extremely interesting, especially when so many prominent generals, neocons, politicians, and mortgage dudes are pushing him to do so.
Here are several reasons, illuminated by Doomberg (again), and numerous other news sources, e.g. Axios, and think tanks like CSIS
- Trump is a deal maker who just wants a deal far more than he wants the destruction of Iran. And Trump thinks he has enough leverage now, with his naval blockade and threats of additional force. A deal with a more functional Iran is much better in Trump’s eyes than a deal with a destroyed Iran.
- The longer the Gulf is restricted, the more it benefits U.S. energy suppliers for a variety of reasons.
- The U.S. is far less impacted by the Gulf restrictions than Europe or Asia.
- It’s all about China. This is Doomberg’s point. A closed Strait actually gives Trump more leverage over a China that is very dependent on Gulf oil supplies. China is forced to either help the U.S. more and/or to buy energy from the U.S.
- THIS IS THE MOST INTERESTING REASON: Iran can endure and fight back – much better than we anticipated. I love Doomberg’s analyses because he does so much more research than other analysts – particularly from sources outside the U.S. Doomberg says: (1) We were caught off guard by Iran’s resilience; (2) Iran was much more successful with their attacks in the early part of the war than U.S. news sources have been led to believe; (3) Iran has much larger stockpile of missiles and weapons still than we’ve been led to believe; and (4) the U.S.’s weapons supplies are too depleted to allow for a significant escalation.
TLDR: Expect higher energy prices and higher rates for some time – unless we get a stock market crash or credit crisis.
