Why higher inflation will sink the US economic supertanker?
Both Israel and the US were careful not to target Iran's oil export terminal at Kharg Island, a major reason why Brent crude trades at 68 and not 100. It is ironic that Iran's oil output is now 5.1-MBD (this figure includes condensates and gas to liquids), its exact amount in 1978, the last year the Shah ruled from his Peacock Throne. There is no danger of an oil price spiral triggering an inflation shock in the US as long as the 'drill baby drill' mantra suffuses the Permian Basin and Saudi Arabia does its best to pressure OPEC+ quota violators Iraq and Kazakhstan with 400,000 barrels a day of monthly output releases. The United States has achieved energy independence and the manufacturing sector's oil intensity has plummeted since the 1970's oil embargo era.
The sources of potential inflation lie in Trump's whimsical tariff policies and immigration crackdown, which will dramatically reduce labor supply at the precise moment that the Baby Boom generation reaches 'peak retirement'. This means a wage price spiral risk that is not remotely priced-in to the current valuation metrics of the financial markets and the US dollar is imminent. This wage price spiral risk is also the reason why Fed chairman Jay Powell is so adamant about keeping the policy overnight borrowing rate (Fed funds) at its current midpoint rate 4.375% until credible inflation data emerges from the tariff spasms of Trump's multiple trade war. Net-net, Wall Street obsesses over a softer labor market when the real battle is a structural shortage of workers to pick citrus in the orchards of the San Joaquin Valley in central California or code software in the Bay Area.
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Economics 101 argues that even taco Trumponomics will mean higher US wages and higher cost of imports, taking inflation rate closer to 3%. In a world where the bond vigilantes can precipitate a mini gilt/sterling prices at the very sight of Chancellor Reeves in tears at the PMQ in Westminster, a 3% US inflation rate is certain to trigger the mother of all Treasury bond meltdowns.
Economic 101 argues that Trump's tariffs, immigration crackdowns and even tax cuts mean debt securities will be gutted by the cancer of inflation even as economic growth slows, consumer credit risk goes ballistic and the $80 trillion housing market collapses under the weight of 8 or even 9% mortgage rates.
The post Lehman golden age of low inflation/low interest rates will end not with a whimper but with bang that will resonate all over the world sometime before Santa Claus fills up my Christmas stocking with a new list of shorts delivered by Rudolph the red nosed reindeer (camel?) direct from the North Pole. This is why I believe the current speculative mania is destined to end in tears as the macro stars are aligned for another 2008 scale endgame.
Wage push inflation has a seismic impact on inflation expectations and will usher a protracted period of Fed monetary tightening. This shift in inflation expectations will be the final nail in the coffin of easy money and go-go property speculation, as it was in the autumn of 2008. The laws of economics, let alone gravity, have not been repealed in Umm Suqeim.
The big beautiful bill's tax cuts and the trillion dollar arms race with China mean a $2 trillion budget deficit and record Uncle Sam borrowing in the debt markets means a higher term premium in interest rates that is simply not priced into current Wall Street valuation models. The global economy is poised to enter the twilight zone of zero/minimal growth and structurally higher inflation. My call, fasten your seatbelts and brace for a painful hard landing.
Also published on Medium.
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