Ho-boy. Things are getting spicy.
One of these days I’m going to write a blog that says, “You know, not much has really happened lately. Property prices are growing to trend and should just keep on doing that.”
But it’s not this week.
This week, the US bombed Iran.
The middle east looks like it’s about to descend into a messy war. Oil prices are lifting (fill your car asap) and gold is the new crypto. Property in far-distant Australia will once again be the safe-haven asset that all the world loves.
But beyond that, nothing seems certain.
The big shift here – and what has caught most analysts off-guard – is what this says about Trump’s approach to global politics.
There’s been a strong movement inside the Republican party to make sure America keeps its wang out regional conflicts. America First, in this telling, means not galivanting around the world in the name of Freedom. It means avoiding disastrous and ultimately failed wars like Iraq and Afghanistan.
And while you can’t take anything Trump says at face value, it really seemed like this was something that Trump believed in – or was at least pragmatically committed to.
That this u-turn comes seemingly out of nowhere at best, or at worst, following junior-partner Israel’s lead, suggests that Trump could end up being just another President ready to launch another forever war if its politically convenient.
So that changes the game a bit.
And it really seems it could go anywhere from here.
The best-case scenario in my mind is that this is an attempt to put Israel back in its box. Israel launched an attack because they said Iran was ‘weeks away from a nuclear bomb.’ Sure. They’ve been weeks away from that for twenty years now. I don’t think anyone’s buying that.
So perhaps this is Trump saying, “Ok, there’s no more nukes now. See? They’re all gone. Stop lobbing missiles at Tehran. Back in your corner.” And things settle down a bit.
That’s the best-case scenario.
But it doesn’t seem likely.
The worst-case scenario is that this opens up another front for Israel, that just grinds on into an expensive and deadly war.
A war that ultimately forces the US to get involved (unless they’re willing to hang Israel out to dry but I don’t see that happening.)
And that means war and devastation and thousands of lives lost. But it also means ongoing disruptions to oil markets, and most importantly for assets and markets, it throws a massive question mark over the US bond market.
Remember the total cost of the Iraq war was $2.9 trillion!!!
Afghanistan was $2.3 trillion! And they were largely fighting people riding on donkeys there. Iran is a whole other story.
Currently none of that expense is factored into future budget projections.
And markets have already been looking at Trump’s tax cuts and looking nervously at where the budget deficit is going.
As dangerous as the budget outlook already appears, a war in Iran just isn’t a line-item.
This could be the tipping point where markets say, you know what, this budget just isn’t sustainable.
At which point bond yields rise, interest rates rise, and the American financial system teeters on collapse.
That’s when things get ugly.
Hang on to your hats.
JG.