What if?

After one week of the conflict in Iran, we can already see the impact on the global economy, and how, if sustained, it’s going to leave its mark on the world, perhaps like the pandemic. Despite the fact the U.S. is a net oil exporter, gasoline is up in the U.S., is going up in Europe, and it will be probably up in China. But one thing that is getting clearer is, who was ready for this conflict (or any conflict for that matter) and who wasn’t. The big loser so far is not China, is Europe, that has been dragged into this conflict and seen as a passive ally of the Americans, but has no sit at the table, no oil and no gas. China, has been storing oil, gas, grains and metals, among other commodities, and it is still under deflationary pressures, and can absorb an inflation spike; the US can’t afford it, and Europe will suffer too. Putin knows this and will use it against Brussels when he knows he can cause max pain and can leverage it to end the Ukraine conflict. In the chart below you can see how the market is pricing the problem with oil. Inflation swaps (see chart below) tell us the problem will last 12 months, and then recede. They are still pricing a short term conflict with mild disruption and no escalation. What if?

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