Inflation is back on the front page

Whether from war or home-grown, if inflation is indeed back on the front page, it accounts for the rise in the 10-year yield. Even if the Iran war lasts only another 4-5 weeks, higher oil and natgas prices are a sure thing. As we all know to our rue, oil prices permeate practically every other price—food (via transportation) and consumer goods using plastics (for wrapping, if not content). This is not the 1970’s with gasoline shortages, but the overall inflationary effect is inevitable.

So is the inflationary effect of tariff-driven input prices to manufacturers, who were blunt and scathing in the latest ISM survey. They make the point that higher input prices are a complete offset to the intended rise in on-shoring manufacturing.

Europe is worried about falling back into slow or zero growth, if not stagflation or outright recession. At least winter is behind us, but the cost of energy has nearly doubled. Asian countries dependent on foreign oil are hysterical. In the energy-independent US, the average Joe is unhappy about gasoline prices (if fighting back with some success against data centers raising their electric bills).

Bottom line, the dollar rally is a function of the global oil situation. Traders and investors are not buying dollars because they like the US economy or its president (or the war). Every rumor that the end of the war might be on hand is a dollar-negative, even the now-ancient story that the Iranians reached out to the CIA on Sunday. That was eons ago in wartime and foolish to have hope (as in some European analysis) that the end is nigh. To be fair, Trump is impulsive and prone to backing down, but this is not even close to being over.

US Politics

We must not forget what we know about Trump if we want to predict how the Iran war will play out. We know (1) he doesn’t tell the truth (2) he doesn’t have plans (3) he doesn’t respect norms, the law or any institutions, domestic or foreign. As The Economist wrote, “Disregarding the rule of law is not a casualty; it is a central part of his approach, as are displays of American might.”

These might be useful characteristics in a general on the battlefield, but not in a president who was a draft-dodger and prone to impulsive words and deeds. We are not in safe hands. We’d be better off if Netanyahu would move into the guest room at the White House.

Tidbit: The biggest losers so far are merging market currencies and stock markets. Bloomberg’s Authers points out that the correlation is quite high between a weak dollar and rising EM currencies and stock market indices.