A new
crisis in the Middle East does not seem to have frightened anyone, neither
investors nor Central Banks. The former continue to buy stocks, while the
latter reiterate their dovish stance.
It seems
that everyone has decided that the conflict will not last long, that the recent
spike in energy prices will not significantly impact inflation and that there will be no recession.
However,
the facts tell a different story. Let’s start with the impact of higher oil
prices. For those who missed it, the deflationary trend slowed in August and
probably in September due to the rise in gasoline.
So it
should come as no surprise that analysts at JPMorgan and former U.S. Treasury
Secretary Larry Summers fear a new wave of inflation
similar to that of the 1970s and 1980s. In other words, the Fed’s work may not
be done yet.
Of
course, it is not entirely accurate to draw a direct parallel with what
happened 50 years ago, as it is improbable that OPEC will repeat the OAPEC
decision to impose an embargo on those who support Israel in the conflict. No
one wants to get into that now.
However,
companies could take advantage of this upturn in uncertainty to raise prices,
just in case. As the saying goes, strike while the iron is hot. So, it is too
early to celebrate victory over inflation.
On the
other hand, it is essential to note that the end of the rate hike cycle does
not equate to a monetary policy review. Neither the general population nor
businesses will have an easier time without the former.
Incidentally,
corporate bankruptcies are already growing at record rates since the pandemic:
according to S&P Global, 459 companies had filed for bankruptcy at the end of August.
Globally,
the situation is no better: there were 107 corporate debt defaults in August,
the highest monthly total since 2009. And given the actions of central banks,
this figure will likely continue to rise.
Tighter
lending standards, increased operating expenses and reduced pandemic support
programs also add to business challenges.
Not only
entrepreneurs but also the real estate industry and the banking sector are
feeling the adverse effects. In particular, the real estate sector is suffering
from declining demand due to the rising cost of servicing debt.
According
to Bankrate, the average interest rate for a 30-year mortgage currently stands
at just under 8%, the highest since June 2000. In addition, the median home
price stands at $407,100.
In the
banking sector, the 25 largest U.S. banks have experienced a significant
slowdown in loan growth, with only 1.5% growth, down from 8% a year earlier.
In
addition, banks are under pressure to offer higher savings rates to retain
customer deposits, which are their primary funding source.
Moreover,
the U.S. government’s attempt to sell nearly $13 billion in mortgage bonds
purchased from failed lenders Silicon Valley Bank and Signature Bank could
destabilize an already weak market.
In
conclusion, there is enough reason to worry even without a war in the Middle
East. Although a stock market collapse is not guaranteed, there is a high
probability that it will occur.
When
considering potential assets that could benefit from a market turnaround, U.S.
Treasuries look more attractive than gold
(XAUUSD), particularly TMF or TLT.