MARKET PERSPECTIVE
By J Mulraj
AUG 10-16, 2024
And world leaders are missing!
The world appears to be teetering at the edge of a cliff, with the Supreme leader of Iran threatening to attack Israel in response to Israel having killed the Hamas leader, Ismail Haniyeh, in Tehran. The US has pledged to support Israel, and this could easily spin out of control, into a global conflict.
Russia has offered its S500 system to Iran, perhaps the best defense system designed to shoot down incoming missiles. Russian President Putin has also warned he could use nuclear weapons if Russia perceives an existential threat.
That would be a nuclear Armageddon!
Less calamitous, but as economically destructive, would be a disruption by Iran, of oil trade passing through the Strait of Hormuz. Some 21 million barrels of oil, representing 40% of global oil trade, passes through the Strait of Hormuz. Iran can easily block traffic through the Strait, and has threatened to do so if attacked by Israel or by USA.
A blockage of the State would be an economic nuclear bomb! As per the article above, after the first oil shock, in 1973, about 9% of oil production was affected, and oil prices went up 4X. The next oil shock, in 1979, removed 6% of production, and oil prices went 3X. After the next one, in 1990, prices went more than 2X after 7% of production was removed.
A closure of the Strait of Hormuz would affect 22% of production. The oil price shock would be tectonic.
India imports over 87% of its requirement of crude oil. A big spike in the price of crude oil would cripple its economy. Import of petroleum products constitutes a quarter of all imports.
Where is the evidence of statesmanship, the type which seeks to prevent conflict and, if unsuccessful in preventing, tries to promote a negotiated settlement to end it. No leader of major powers is mooting a negotiated settlement of the Ukraine war, or is trying and stanch an escalation of the Arab-Israeli conflict. On the contrary, the leaders of the collective west continue to provide military and financial support to prolong the Ukraine war. They care not for the deaths of thousands of their youth. The country is being slowly killed. Ukraine’s fertility rate (births per woman) has dropped from an already low level of 1.4 in 2022 (a rate of 2.1 is needed to sustain a population) to a dismal 0.9, now. Deaths of thousands of its youth in fighting an unwinnable war ensures that the fertility rate will never rise to the 2.1 rate required to sustain the Ukrainian way of life. So, Ukraine is already doomed. For the collective west, together with the myopic Ukranian leader, Zelensky, to prolong the war, is, in truth, a crime against humanity. Just two months after the Ukraine war commenced, both sides had, in peace talks initiated by Turkey, agreed to a ceasefire. This was scuttled by the then British PM, Boris Johnson, guided by the US. The scuttling of a negotiated end to the war has led to countless deaths, and the destruction of Ukraine, physically, economically, and demographically.
Ironically, at a time of bubbling global crises, elected leaders are missing. In the US Biden has become a shadow President, handing over the baton to Kamala Harris and those who support her. Even before his emasculation he wasn’t a statesman.
In China, the once unchallengeable President, Xi Jinping, has been missing in action for months, with no public engagements, which never happens, nor daily articles praising him. Watch this video and this one , analyzing the public disappearance of Xi, and dwelling on the possibility of a silent coup.
So if the leaders of the two largest world economies are missing, who will be in a position to prevent a situation in the Middle East from escalating into, God forbid, a nuclear Armageddon or, heaven forbid, an economic one.
The world is on the edge of a precipice.
China’s woes are manifold, and increasing. As per this article the parent of real estate company, Evergrande, has filed for bankruptcy (Evergrande itself had filed for US Bankruptcy protection in 2023), and the Chinese EV, or electric vehicle, sector, is in trouble. A collapse of the Chinese real estate sector, which used to represent 30% of its GDP, and its EV sector, representing under 2%, will have repercussions on supplier industries. Steelmaker Jiangsu Delong has filed for bankruptcy. Several foreign companies have exited and shut their manufacturing facilities in China, creating huge youth unemployment. Nature, too, is venting its fury through floods that are affecting millions.
China has, though, done a smart deal with Morocco, to manufacture EVs in Morocco, which has several bilateral free trade agreements. This would allow Chinese EVs made in Morocco to escape high import tariffs.
In USA, too, the leader, Biden, is somnolent, as Vice President Kamala Harris, and her backers, drive the policy agenda. In a bid to tame inflation, the Fed has raised interest rates by 5%. As a result, the country’s interest cost is running at an annual run rate of $1 trillion! It is the largest item of expenditure in its budget.
Fortunately the inflation rate has fallen to 2.9% in July. This increases the possibility of a rate cut by the Fed in September. Stock markets are anticipating a rate cut, so, unless it’s more than the expected 25 bips (0.25%) it would not lead to a big rally as it’s baked into the pie.
In India the Shapoorji Pallonji group is trying to raise ₹ 20000 crores from PFC ( Power Finance Corporation, a PSU) against pledge of shares of Tata Sons. Tata Sons is a privately held holding company of the Tata group, in which the SP group has about 9%. All three independent directors of PFC have raised concerns, as the shares can be sold, if required to, only with the consent of the Tata group, as provided in the Tata Sons Articles of Association. Because of this, they cannot be considered a collateral.
Last week the BSE Sensex closed at 80436 for a weekly 736 points.
The coup in Bangladesh caused the exit of Sheikh Hasina, who was compelled to leave, under duress. She had friendly relations with India, to recreate which will take effort. Bangladesh was one friendly neighbor in a hostile environment. The ease and speed at which she was made to exit is worrying.
Several factors threaten disaster if they were to happen. But the global pool of money is so large, it ignores them. It’s like a game of passing the TNT parcel….the guy holding it when the music stops will need a helping hand.
Comments may be sent to Jmulraj@asiaconverge.com
COMMENTS