Between A Rock And A Hard Place!

“I could end the deficit in five minutes. You just pass a law that says that any time there’s a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election”.- Warren Buffett.

Last year’s Russian-Ukrainian war spit out a bitter truth about the “energy” vulnerability of the major economies around the world.

The energy-driven inflationary spike has been catastrophic for Europe and has led to Europe underperforming its energy-neutral counterpart, the US.

In the multi-polar world, energy prices will see occasional spikes and the oil’s geopolitical risk premia will remain elevated for years.

Higher energy prices will create several macro headwinds for energy importers, while primarily, energy exporters will be at the forefront of the geopolitical conflicts.

Furthermore, wartime colossal deficits will put enormous stress on the bond markets and thus, loose fiscal policy will negate the effects of the tight monetary policy.

Unfortunately, since the Central Banks can’t “create” energy and can’t control the reckless decisions of the politicians, they are stuck between a rock and a hard place. As a result, stagflation has become the most probable outcome for the West, riddled with low to negative real growth, high inflation (4-5%) and a higher unemployment rate (5-6%).

Let’s analyze the economic data released globally in the last fortnight and also understand the consequences of the recent geopolitical developments on the oil markets.