The damage to our super, our inflation rate and the overall economy from this Iran war will hinge on how long hostilities last.
Late yesterday, the AFR told us the story of the Iran war emphasising that “more than $100 billion has been wiped from Australian retirement savings since the United States and Israel launched missile strikes on Iran late last month”. As the price of oil spiked towards US$100 a barrel, early in the day, our market lost over 4%, which is huge.
The S&P/ASX200 index, which is the indicator that tracks our stocks, hit a level not seen since last December, the AFR told us. This means there’d been a lot of ‘wiping on’ of value for our super funds and investment portfolios before the US and Israel got serious with Iran.
Overnight, while the Yanks started very negatively, with the Dow off around 900 points, this was pared back to less than 400 points because the price of oil that had hit US$119, then came back to around US$92 a barrel.
The price surged on the likes of Iraq and Kuwait announcing that they had to cut production because ships carrying their oil hadn’t been allowed out of the Strait of Hormuz. But then the news broke that the energy ministers from the Group of Seven nations — namely, Canada, France, Germany, Italy, Japan, the United Kingdom and the U.S. were to set up a virtual meeting to discuss releasing their reserves of oil.
This buys time for the global economy and for President Trump to do one of his famous TACO tricks (Trump Always Chickens Out), which really is him backing off from going too hard early in a negotiation or encounter.
“Stop the presses!” Trump has told CBS that “the war is very complete, pretty much — they have no navy, no communications, they’ve got no Air Force.”
And the market has believed him, so there has been a 1000 plus point turnaround for the Dow Jones index and it also coincided with a bigger oil price fall.
The oil price is now US$85 a barrel and probably going lower. It was US$56 in December last year!
As a consequence, the local stock market index is expected to be up 132 points at the start of trade (or 1.55%), and this is great, but I doubt whether this oil price challenge for stocks and our super returns is over yet.
The recent oil price surge will lead to inflation, no doubt.
But if this goes on too long, it will lead to a recession, and when you get both inflation and recession happening, it’s called stagflation.
This last happened in the 1970s and really poleaxed the stock market. The S&P 500 index for the US stock market took seven years to recover its former peak level after the OPEC oil crisis, which started in October 1973.
This is why we should hope that Donald Trump is not gilding the lily in saying the war is nearly over, and we will soon see the Iran leadership and the US President talking peace.
The market and our super funds would love this!
This morning, I was asked to explain what was going down for our super and general economic life on the Today show on Nine, so I thought I’d answer the questions here for you. Here goes:
How long are high oil prices expected to last? President Trump says the war is nearly over, but he can exaggerate and the Iranian leadership is not an easy one to read. The US has 125 days of oil in reserve. We have about 30 days. The UK has 2.9 billion barrels left in the North Sea.
Prices should come back to lower levels but they will be higher for longer compared to the low prices we saw a couple of weeks ago.
- How will this affect interest rates? The longer the war goes on, the higher oil prices will go and vice versa. The RBA is very unlikely to raise in March but if the war ends soon and oil prices fall, the short-term effect of recent higher oil prices, and our own inflationary readings could make a May rate rise on the cards.
- If the war goes on longer than Trump tips and oil prices remain high, a recession is possible and that could stop the RBA from raising rates in May.
- How long are these higher prices sustainable, and how will they affect Aussie consumers day to day? If the price of petrol remains at the current elevated level the more likely our economy slows and inflation spikes. Things will be more expensive for shoppers and businesses, so unemployment would rise.
- Trump has said this is a ‘short term pain‘ and prices will drop once the Iran nuclear threat is over – what do you make of his comments? He could be wrong on how long the pain lasts but he is right to argue that a more cooperative, post-war Iran could be good for oil prices and the global economic recovery.
- Should the Government be stepping in to offer relief? The budget deficit is over $36 billion, which makes it hard for the Government to be too generous. If this war drags on the Treasurer will go less hard in May because it could turn a oil-price-created slowdown into a recession.
Our best hope is that Donald Trump is right about the war ending soon.
