Luca Bindi, LL.M.

    What the Iran war will mean for emerging market economies  

What are the more narrowly economic lessons from this shock?  The first is that we need to reduce our vulnerability to shocks in the availability of fossil fuels. For the US, the net effect of big rises in fossil fuel prices on aggregate real incomes is modestly positive because it is a net exporter, though the distributional effects are malign. But the opposite is true for almost all other industrial countries. Their need to invest in renewables, in order to reduce vulnerability, is clear.  The second is the need for central banks to ensure that inflation expectations do not get unanchored. Unfortunately, the price spike after Covid makes this more likely. Central banks must be prepared to act against second-round effects of big price rises.   The economic consequences of war with Iran  

  Beyond the duration of the shock, we also need to monitor the impact on central banks and on the macroeconomy. Societe Generale’s Manish Kabra lays out the criteria as follows: An exogenous shock lasts beyond a week, but oil spikes usually peak in three months. That’s the timeline and only two things matter: 1) shock duration and 2) the Fed’s reaction function. Alternatively, Henry Allen of Deutsche Bank suggests that for a risk-off bear market to follow an oil shock, three conditions need to be met: 1. Large and sustained oil price spike: An oil price spike of at least +50-100% that is sustained over several months. 2. Hawkish policy response: The shock forces a sharp, hawkish pivot from central banks to fight the resulting inflation (e.g. 1979, 2022). 3. Broader macro damage: The shock is big enough to tip an already-slowing economy into recession.   Iran Oil Panic: Enough Cool Heads Are Pulling Back From the Brink - Bloomberg  

Iran Oil Panic: Enough Cool Heads Are Pulling Back From the Brink - Bloomberg

   US Consumer Delinquencies Jump to Highest in Almost a Decade - Bloomberg    

   Oil at $110: A Longer War Is Already Here for Markets - Bloomberg

  Oil at $110: A Longer War Is Already Here for Markets - Bloomberg  

  Oil at $110: A Longer War Is Already Here for Markets - Bloomberg

This is a nice story, but it masks real potential harms for retail investors and the economy. For starters, the private markets are not as rosy as the industry claims. While some indices show private equity outperforming public markets, academic research suggests that much of that premium disappears once risk and leverage are properly accounted for. So even if retail investors could replicate the industry’s historical average returns, it’s unclear whether those returns would meaningfully improve their risk-adjusted outcomes compared with public-market exposure. A massive influx of 401(k) money would only drive returns down further — a classic “money chasing deals” problem.    This would be an especially bad time to usher 401(k) investors into private markets and private funds. The market is already saturated with institutional money, and a multi-year bottleneck in deals means that private equity and venture capital funds are struggling to turn their holdings into cash. Al...

 Chart of the Week: Europe’s extra energy tax, FT Unhedged