The expectations gap
Central banks are hiding the truth about the economic and financial consequences of the crisis in the Persian Gulf. Markets are badly misled and discovery will be explosive.
Summary
In this article I explain the market consequences of America and its allies hiding the truth of its failure in the Persian Gulf war from markets. So successful has the propaganda been that markets are now more mispriced than I can remember in the 56 years of following them. Yet investors are blissfully unaware of the acute dangers to their wealth.
The extent of the US’s propaganda campaign even fooled central bankers and government treasury ministries. But the closure of the Red Sea at the Bab el-Mandab and the potential loss of a further 7 million barrels per day from global oil supplies is a wake-up call for policymakers. There are signs that they are now very worried about the prospects for consumer prices, the global economic outlook, government finances, bond yields, and financial markets generally.
But of course, they are not telling us for fear of spooking markets.
Introduction
The inflationary consequences of the closure of Hormuz and now Bab el-Mandab are beginning to undermine policymakers’ expectations. It seems that the Houthi’s attacks on Saudi refining have removed up to 7 million bpd and their derivatives from global supply, which will have dashed lingering hopes that the consequences of the war on Iran can be contained. And from his actions it is clear that President Trump is cornered into falsely claiming time and again that the Iranians want peace when they do not, to conceal the true seriousness of the crisis from financial markets.
None of government insiders’ assessments and concerns are made public. But central banks and finance ministries in the G7 communicate with each other continually. They will have some grasp of the current situation, know that there is no resolution in sight, and are reassessing the consequences.
In Europe, which is home to four of the G7, there is the additional problem of drought which is more than halving crop yields. For lack of grazing, farmers are forced to feed their livestock with hay and silage stored for next winter. Furthermore, it is reported that Russia has closed Ukraine’s shipping access to the Black Sea, which effectively stops her cereal exports. Before the war, Ukraine was routinely referred to as the breadbasket of Europe and the impact couldn’t come at a worse time.
Therefore, food prices across the board are set to rise significantly, which combined with the consequences of the Hormuz and Bab el-Mandab closures for diesel, petrol, aviation fuel, and shipping bunkers ensures that consumer prices will rise sharply by winter. Evidence that this is now feared in the UK’s Treasury was confirmed by the new Chancellor, John Healey threatening supermarkets not to “price gouge”. There was no necessity for his statement, which was almost certainly triggered by internal Treasury briefings.
Collectively, the investing public seem blissfully unaware of the true situation, nor are
