Why The Iran War Could Reignite Inflation

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That is the percentage of US imposed regime changes that have ever led to a successful and lost in democracy.

They are the 90% have actually made things worse, resulting in harshly governance and in many cases civil war. But I'm sure that this time will be different. Welcome to Property Markets. I'm Adelson. It is March 4th. Let's check in on yesterday's market vitals. The major indices all dropped in early trading as much as two and a half percent before pairing losses, still they ended the day firmly in the red. Meanwhile, treasury yields spiked again, and the price of oil rose as much as 9%.

Before pulling back on those gains. Okay, what's happening? As war with Iran escalates, so do investors' anxieties. The major indices sold off yesterday morning as the US warned that it strikes on Iran will continue to ramp up in force.

Brent crewed the international benchmark briefly hit $85 a barrel for the first time since 2024.

Then President Trump said the US will escort and provide insurance for oil tankers moving through the straight of her moves. The indices recovered some of their losses on that news, and crude retreated from its highs, still oil prices are up. 13% over the past week in the bond markets, the tenure treasury yield moved higher on fears that higher energy prices could boost inflation in the US. Meanwhile, the risk-off trade spread overseas with European stocks falling 3%. In the Asian market, slipping South Korea's cost be plunged over 7% investors rushed to safe haven currencies.

The dollar rose to its highest level since January in the Swiss frank hit a tenure high against the euro. Tons of stuff in here, tons to unpack, and so we're going to do something different today. Instead of going to one guest, we are going to go to three guests. We've got our panel of experts here today, we're speaking with Mark Zandy, chief economist at Moody's Analytics. Who you know, Robert Armstrong, US financial commentator for the Financial Times,

Matthew Martin, Semaphore's Saudi Arabia, Bureau Chief Mark, Rob Matthew. Thank you very much for joining me on the show. Rob, I'm going to start with you. We've seen some interesting reactions here from the markets. Specifically, it seems that people want that worried on Monday and then on Tuesday, maybe more worried,

“because suddenly stock sold off. What do you make of how the markets have reacted so far?”

It seemed pretty clear on Monday morning that the market was pricing in a short, tidy little war. Something on the style of Venezuela regime change light, where you strike or kidnap or whatever, and it all ends fairly briskly. I think the market is still pricing in some of that, but as Iranian resistance has proved a bit more resilient than expected, that has to show up in things like crude prices and by extension inflation expectations,

that in turn means that stock prices are creeping down. Again, nothing like the worst case scenario is being priced in right now, Ed. But a slightly worse best case scenario is what I would say is priced in now. Matthew, one of us who's actually in or around the region right now, what are you seeing in the Gulf and does Rob's view of what that's surprising in makes sense to you?

“Yeah, look, I think it does. I mean, I've been, look, I'm based in regard to today, I've been”

out and about in a city, generally people are still going about business. You know, went out to dinner with some people this evening. You know, obviously the war is a topic of conversation, but it's not like it's not the only topic of conversation, people are still continuing to talk about other things, and I think that is kind of reflective in what you're seeing in markets, and that it is a factor, but it's not the number one thing that people are thinking about.

very, very differently as well. I mean, if you look into buy, you know, there are some people who

have been in buildings which have been struck by Iranian drones who never expected that they would

live through something like that and are panicking about it and are wanting to leave. And depending on, you know, you could live in other parts of the city and have no idea of what's going on

“and be pretty isolated from it as well. So, you know, I think that sort of goes into this kind of”

psychology of how people are responding to it. You know, some people are thinking this is going to be really significant, this is going to be dramatic and long lasting, and some people are kind of taking a much more sanguine view of it. Mark, it sounds like people are worried about this, but not maybe as worried as we would have thought a week ago a month ago, if you told us what the headline actually is, what do you make of investor reactions? I mean, I think the description

that Rob gave us dead on. I mean, I think people are still investors who are still expecting

this thing to blow over pretty quickly. Maybe it's not going to be in a day or two like Venezuela, but more like a week or two. So, if that's the case, then $10 on a barrel of oil, you know, a couple of three percentage points off stock prices, bond yields up a little bit, you know, that kind of consistent with that perspective. And I think that's kind of my sense of things.

“I mean, I think that would be my kind of baseline view down the middle of the distribution”

of possible outcomes. Now, the distribution is, is why there's a lot of ways this can go. And if this does drag on beyond a week or two into, you know, a month or two, then then we're talking about, you know, different kind of scenario, and I think the market reaction

would be much more severe. But right now, I think, you know, people are a little disappointed

maybe this was going to be Venezuela, but it didn't turn out to be that way, but I still think people are holding onto a week or two. So, in that context, this kind of market action is pretty close to what you would expect. One thing, Ed, if I may, just follow up on that is what I would have your listeners be alert to. If things do get worse is the relationship between stocks and bonds, which is really interesting here. If you get positive correlation between the two,

that's bad. Right. One of the things we like to happen in our portfolios is that when the stocks go down, the bonds go up and vice versa. But an oil price shock, like you might get, if the straight-of-horse moves, is stuck close for a while, is inflationary. So, the bonds can't go up when your stocks go down. Right. And so, it's been interesting that they've been going down together. And that's a painful scenario. That's stagflationary. And that's kind of the pain point

to watch, I think. I don't have any predictions. I don't know anything about wars. I don't have any predictions for what's going to happen, but that's the thing that kind of worries you about this particular flavor of conflict. Yeah, Mark, there are pretty significant implications. It seems for consumers here. And that is, we put oil in our cause. And most of the oil is coming out of this region. What actually is the relationship between what is happening in Iran right now and how

that would impact our lives and prices at home? I give you some rules of thumb. And so, if oil prices are up, stay up 10 bucks at barrel. So, on WTI Westx their immediate, which is the key price in the US was 65 bucks at barrel before all of this. Now, we're 75 bucks at barrel. I'm rounding obviously, but say it's 10 bucks. That would, if it's sustained for two, three, four weeks, we'll sustain and increase in the cost of regular and let it by about 25 cents. So right now,

the US consumer nationwide is paying about three bucks for a gallon of regular and let it be three bucks 25. You know, that's manageable, but a bit uncomfortable, particularly in the context of all the affordability concerns that Americans are facing right now. Everything else was up in price.

“The only thing that wasn't was the cost of a gallon of regular and let it, and now it's also”

headed up. And of course, if it's going from three to three, 25, the next question is, well, is it going to go to 350, 375? And then that's real money. So, you know, it's moving in the wrong direction. It's going to make already very anxious Americans even more anxious. And in this case, the other pernicious aspect of it is, you know, a higher gas price doesn't matter at all for a high income, high networks of household. They don't really, you know, that doesn't matter if they're paying

a quarter more for a gallon of regular and let it. But it means a lot for lower middle-income Americans. I mean, that's real money. And if you add it up over a year, it's two, 300 bucks in addition, you know, 20 bucks a month. And that's pretty tough for people that are in that kind of situation. So there's a lot of aspects of this. And from the prison prison of the American consumer, they make it, you know, more uncomfortable than it typically would be, just because of where

we are on this affordability issue. Stay tuned for more of this panel myself for the break.

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careers market down. Germany's DACs is also down, footsy in the UK on on track for its worst day and almost a year. What is kind of interesting here is that it seems that the concerns are more exacerbated outside of the US. Perhaps because of proximity to the region, perhaps because of what

“that will do to energy. I mean, why is that? How do we account for the difference here?”

Well, I think probably a big part of that is going to be the impact of gas prices in particular, because we've seen the attacks on the cattle energy facilities and the shutdowns that they've had. I mean, that's led to huge increases in the gas price, which is obviously that's a big part of the feed stock that's going into Europe and that's going into Asia as well and cattle has become a huge producer of gas. So that's going to feed immediately into a big inflation

problem for a lot of those economies. I think that's really what is at the root of the way that those markets are digesting this. Yeah. The difference between Henry Hubgas here in the United States and European natural gas is striking. You know, our natural gas is up 67% or something that mark me no better than me. European gas is up like 40% and especially Germany is an extremely

“gas-censive economy. So. You know, the other thing that is that the US produces a lot of oil, right?”

I mean, at the end of the day, the US produces as much oil as it consumes. So consumers get nailed, but, you know, producers benefit not immediately, but over time it prices remain high and persists. But in many of those other countries, they're full on consumers. They don't produce any energy. So there's nothing but negative here. So you have these differentials across the globe because of this the fact that the US is now the largest oil producer on the planet.

Right. Which brings up questions of how insulated from all of this actually all the way. And perhaps we all quite insulated, but it's kind of an interesting dynamic because

it was us who launched the attack in the first place. So does that essentially mean that we can

kind of do what we want over there in Iran? And we don't, we aren't particularly affected. I mean, let's look at like liquid natural gas, for example, what kinds of effects mark would an increase in LNG prices over in Europe? Would that have much of an effect on the US? Would that be a problem?

second order, third order. I mean, don't get me wrong. I mean, I think the effects, most immediately,

most significantly, are negative for the US. There's no doubt about it. Consumers, American consumers, low-middle-income households of the folks that vote, they're going to feel this right away, and it's going to affect them in a significant way. Over time, the Hyrule prices might live investment in production in the oil patch and offset some of the negatives. But this is, this is still, you know, soundly negative. But the fact that natural gas prices are rising in Europe

has effects on Europe, obviously, and then that reverberates around the world in the form of weaker economic growth. But I view that to be more second, third order, as opposed to, you know,

the initial things that we should be worried about. I don't think we have enough export infrastructure

to really make hay off Europe's price problems. We'd like to have more export terminals and so forth.

“We just don't have them. I mean, I think the point of connection to US markets for US investors and”

how we feel it is going to be the federal reserve. So, last week, we got two unpleasant inflation prints in the form of producer prices, prices paid was high, and then we had the ISM manufacturing report in their prices paid, reading was bad. And so already, you can sort of see the federal open market committee thinking, geez, maybe these these were cutting rates might now not be so smart. And then you get another inflationary element into the picture, which is gas prices going up,

which feed into food prices and have a big effect on sentiment, you know, inflation expectations. Maybe those rate cuts come off the table. And, you know, it's a horrible thing when there is something as serious and mortal and morally important as a war going on. And you're sitting here talking about what a bunch of nerds in Washington are going to do with interest rates. But, you know,

this is what they pay me to do. I'm not saying this is the most, I would never say this is the

“most important thing about what is going on right now. But the fact is where US investors are”

going to feel it might be through rate policy. Right. You know, the other thing I might think of the way to think about it is, you know, the US economy has been hit by three negative supply shocks in the last year, first being the tariffs, right, that's inflationary and weakened growth. And it's the immigration policy, heavy handed immigration policy, that raises costs and reduces growth. And now you've got these higher oil prices. So the US economy has been

pretty resilient, you know, kind of managing through those other shocks. But you've got to ask yourself the question, you know, at what point does this all kind of feed on itself and become, you know, too difficult to digest? That's exactly my question. And I think the thing that is striking is what when I look at having spoken with people who, you know, work in energy or who consult an energy and having spoken with investors, there seems to be this assumption that this is not that

big of a deal. And maybe that's right. But it seems in this discussion that there are so many larger implications here that could be actually quite rattling. There's also the question of like, is the situation in Iran even resolved? And it seems to me there is almost no clarity on that question. In which case, it seems that there is actually pretty enormous tail risk here to the downside that is not quite being reflected in markets right now. I mean, you look at the price of oil,

which has gone up. But it hasn't gone up that much. People were saying it was probably going to hit $100 a barrel. That isn't really happening, which tells me the investors say, you know, this is, this is contained. This is only going to happen in a small region. It's not going to affect us much. And it's not going to affect other nations that much. I'll take their word for it. But I'm just a little bit skeptical of it. Perhaps Matthew, you could provide some clarity on this

question for me. I mean, I get the sense that maybe we're underrating the gravity and how much

“this could affect all of us. Yeah, look, I think if you look at what's happened over the past”

couple of years since the October 7th attacks on Israel and this heightened geopolitical risk in the Middle East, you know, markets have, you know, reacted and largely shrugged it off quite quickly. And generally being rewarded for taking that view. And I think, you know, that's the position that people are going into into this time with that same sort of view that we can shrug this off. And this is maybe something that's going to be a couple of weeks of disturbance to markets. And then

there'll be some sort of reconciliation, some sort of ceasefire compromise and everyone will get back to business. I think given, you know, that's very easy to say if you're sitting in New York

that you have, have been in and stayed in and restaurants that you've eaten in, glowing up, then,

“you know, you feel quite differently about it. And you know, I think this is the real risk of this”

is that actually I see this, there's a very, very significant chance that this goes on a long term that we see a lot of problems with getting oil out of the region and into markets. And that is going to push prices up higher than we're seeing them already. You know, not to count as well, of course, the, you know, the human catastrophe that's going to be happening here as well. So, you know, I think that this, that there are a lot of tail risks here that I don't think the market

is quite accepting and quite pricing in at the moment because it's taking this optimistic view

that this all results itself in the next sort of 10, 15 days. Right. I think that maybe one way to

look at it, it's like, is the world more or less certain than it was a week ago? And that to me seems to be the question that investors are not totally an agreement upon. Some people would say, I probably would say the world seems less certain to me at this point. Others would say, no, we've taken action, it was conclusive action and the world is more certain. In Saudi Arabia right now, in the Gulf, what would you say that the consensus is on that question?

I think that the, the next couple of weeks is going to be very, very uncertain. You know,

“I think, you know, okay, so last week, the big question was, is the U.S. going to invade?”

Is it going to launch a strike? Okay, we know that that has happened. But it doesn't seem clear that there is a very political strategy about how this conflict proceeds from now. It doesn't seem very clear from the Gulf states about how involved they're going to become in it. Obviously, very unclear how the Iranian regime is going to respond. I mean, I think the, the forcefulness of their responses, one of the things that has caught everybody by surprise and the fact that

you know, you have seen these attacks on on, on Gulf states as well. So, I think that, you know, uncertainty, people should be pricing a much higher degree of uncertainty now than they were. I like the way you framed it in terms of the uncertainty. I think, though, what's happening is that investors are still kind of in the middle of the distribution of possible outcomes. And that's still, even though the distribution of possible outcomes is pretty flat,

you got fat tails. They're still in the middle, because we're only a couple days into this. But if they go on for another week or two or certainly three or four, then you can jump to the tail. And then you get the kind of scenarios you're talking about. Then you see the big consistent declines in in prices across the whole asset market. So, I mean, it really interesting point, prices are down for everything. That's just not, you know, stocks are down, bonds are down,

“gold is down, crypto is down. The only thing that is, it's got to be going into cash, right? So,”

there are, that's, that is an indication that people are nervous, you know, about what's going on. Right. But they haven't jumped yet. But we will jump, but this goes on for anything like the time. The market was fragile going in, right, that because of the AI stuff. The market was expensive and jumpy on the way in. Right. I think what one thing that is something to watch that several of my colleagues who work on the oil side and analysts who work on the oil side have talked to me about

is the crucial question of damage to infrastructure in the gold. We all like to talk about the

choke point that is the straight of more moves because it proves we can look at a map. But, you know, you can close the straight of more moves. You can open it. Yeah. Right. It doesn't disappear. But if refineries, ports, water desalination plants that provide Matthew with his drinking water, if Iran can really damage these bits of infrastructure. That is a lasting damage. Not something that can be turned around in a week. And so I think the fact that that hasn't happened yet,

there's been a hit on a Saudi refinery. But I think it was a contained hit. Matthew will be able to correct me on that. But that is something that would change the game. A devastating hit on infrastructure in the Gulf region would be would change the scenario and make things look much uglier, more frightening, more uncertain. If that happens, Rob, what is the safe haven? Because to Mark's point, gold is down, bonds are down. I mean, it seems to me that the flight to safety is going

to just be, that's the trade of 2026. People are not interested in speculation. They want safety

of inflation. I mean, it leaves you with the dollar and gold. And gold's been jumped because it's

so expensive already. You wish gold wasn't so expensive going into the situation all time high in inflation adjusted terms already. So it really is the dollar. And it is kind of putting, you know,

“putting behind us this view that the dollar is dead. I think you're going to find it. We get a”

proper global crisis. The greenback is going to be pretty appealing for people. It's a place to wait it out. Does that make sense for you as well? Mark, is that what you're saying? I think people

are going into cash. I mean, the dollar is, it's up a little bit, but I wouldn't say, you know,

it's still down quite a bit from where it was a year ago. I don't think it's the safe haven that it was. You know, I don't think there's, there's anywhere to hide. And, you know, one of the reasons to be more nervous about all of this in the current context is the valuations are high across all asset classes. I mean, there's been some correction in crypto, but, you know,

“still bitcoins what? $68,000 a coin. You know, so gold is, as drop pointed out, it's, you know,”

it's still very high. Silver is still very high. Corporate bonds, budget is still very paper thin.

Equity prices or valuations are, you know, extraordinary. So, you know, again, that, that raises the potential that you get out onto those fat tails that you jump from the baseline to you kind of in the middle of the distribution, everything's okay. So, it's, well, it's not okay, and there's nowhere to hide because the valuations are so high, and it's all goes into cash. It's just all goes into cash. It's not a great setup. No, it's not a great setup. All right, Mark Zandee,

Robert Armstrong, Matthew Malton, gentlemen, really appreciate your time. Thank you, pleasure. Thank you.

“Okay, that is it for today. We appreciate you joining us for another”

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