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Transcript

A Financial View of The Iran War · Cash Lads

• 0:01
  SPEAKER_01: Welcome to Cash Labs.
• 0:02
  SPEAKER_01: My name is Paul Malloy from BoxcoverTax.au and this is Marcus Doyle from Clear Financial.
• 0:08
  SPEAKER_01: We're here to take the mystery out of money and finance with some history, some stories, and plenty of humor too.
• 0:21
  SPEAKER_01: Good morning, Marcus.
• 0:22
  SPEAKER_01: How are you?
• 0:23
  SPEAKER_02: Oh, I'm not too bad, Paul yourself.
• 0:24
  SPEAKER_02: Good to see you today.
• 0:26
  SPEAKER_02: Great to see you as always.
• 0:27
  SPEAKER_02: So we we this is our first opportunity to talk about the Iran war, which is I mean, if you turn on the news, it's just there nearly every day.
• 0:36
  SPEAKER_02: Um, you know, uh, you're beginning to see other stories slip in a bit more, but it's still very, very important.
• 0:43
  SPEAKER_02: And you know, aside from the fact that there's you know a military conflict between um, you know, United States, Israel, and and Iran, you know, all you know, you know, strong militaries in their own regard.
• 0:56
  SPEAKER_02: This is really about oil.
• 0:58
  SPEAKER_02: Like that's how it's affecting us in the West.
• 1:00
  SPEAKER_02: And you know, you pass by uh the pump or you you pull into the the station and you wince at the uh the increase in prices.
• 1:09
  SPEAKER_02: So so what we have here is what is known as a supply shock.
• 1:15
  SPEAKER_02: Um it's not that people want less oil, it's that there's less oil available.
• 1:20
  SPEAKER_02: Supply and demand.
• 1:21
  SPEAKER_02: Supply and demand, which drives the prices of many commodities.
• 1:24
  SPEAKER_02: And we might talk a little bit more than just just a rant, uh just oil today.
• 1:28
  SPEAKER_02: Um it is it is simply the the amount of supply has been reduced because effectively the Straits of Hormuz, that narrow uh waterway in the in the in the Persian Gulf is effectively closed for business.
• 1:42
  SPEAKER_02: Uh very, very few uh ships are getting through.
• 1:45
  SPEAKER_02: China are getting through.
• 1:46
  SPEAKER_02: They're good friends of Iran, I believe.
• 1:49
  SPEAKER_02: There's apparently very, very good getting through.
• 1:51
  SPEAKER_02: And we might touch as well on the Red Sea, which is the other side of Saudi Arabia.
• 1:56
  SPEAKER_02: Um, and you know, there's quite a lot of oil going through there at the moment, and if that was to be stopped, what would that mean?
• 2:02
  SPEAKER_02: So, you know, uh oil has such an impact because it's it's a foundational price in the economy.
• 2:10
  SPEAKER_02: If you think about now, um, you know, when you're ordering your steaks for for for lunch or breakfast, even Marcus, you know, someone's got someone's got to deliver those steaks to Shadowed Oil.
• 2:21
  SPEAKER_02: Um, so whether that's uh you know, yourself in in the Ferrari or you know, one of the staff, I don't know who you have, bringing your steaks to you, somebody's got to get that to your gaff.
• 2:33
  SPEAKER_02: Simple as.
• 2:34
  SPEAKER_02: And um so we know that what what no matter what, the the the the extra fuel cost is going to have an impact passed on to the customer on the meat.
• 2:44
  SPEAKER_02: Um, but when you think about the importance in in terms of food production of you know, fertilizer and nitrates and all that kind of stuff, a lot of that's natural gas, you know, and that's also being affected.
• 2:57
  SPEAKER_02: You know, Qatar has just an unimaginable amount of natural gas.
• 3:01
  SPEAKER_02: Um, and and it's been it's been stopped from making those shipments.
• 3:04
  SPEAKER_02: So um it's it it has then, you know, and that's what we want to, I suppose, just tease out for for everyone, the the the impact of on what all this happens.
• 3:14
  SPEAKER_02: So you see you start going into the into your your super value or little and things have ticked up.
• 3:22
  SPEAKER_02: It's not huge because I mean, you know, packagostas is a pack of sostash, but if it's gone from 420 to 470, there's there's an impact there.
• 3:32
  SPEAKER_02: And so there becomes a very kind of uh you know gradual change in in things for us all.
• 3:39
  SPEAKER_02: And you know, one of the things I want to talk about today is that the we're looking at potentially two new taxes, one is an inflation tax and one is an interest rate tax, that's going to squeeze discretionary spending.
• 3:51
  SPEAKER_02: Um so so a little bit of history, you naturally this has been coming up a bit, um, is the first before our time marks, uh the first major oil shock of 1973.
• 4:06
  SPEAKER_02: What had happened was that there uh in in October 73, uh Yom Kippur, which is a very important religious festival in in the Jewish faith, uh, Egypt and Syria attacked Israel simultaneously uh early in the morning.
• 4:22
  SPEAKER_02: And uh within a day or two, Israel was in major, major, major risk.
• 4:26
  SPEAKER_02: Yeah, they were in big trouble to start, weren't they?
• 4:28
  SPEAKER_02: They were in big trouble, they were in big trouble.
• 4:29
  SPEAKER_02: So they put in the call to the United States, and this the the relationship between America and and Israel had really just started to really become very, very strong.
• 4:39
  SPEAKER_02: And Richard Nixon decided to uh assist the Prime Minister uh Golden Meyer, and they provided, I suppose, uh guarantees, they provided equipment, and it just their intervention turned conflict in Israel's favor.
• 4:54
  SPEAKER_02: And it was kind of a moral victory for Egypt and Syria, but there was no doubt Israel won militarily.
• 5:00
  SPEAKER_00: And nothing's changed ever since America keeps them there because it's well, I mean, there's America didn't supply all that hardware like they do, they probably would be gone at this stage.
• 5:08
  SPEAKER_02: But there is, and and and there is clearly a very strong Israeli lobby, and it's not a lobby living in Israel, it's a lobby living in America.
• 5:16
  SPEAKER_02: I mean, there's no question about it.
• 5:17
  SPEAKER_02: You know, people have written books about it.
• 5:19
  SPEAKER_02: Um so so that they're they're very much you know tied together.
• 5:23
  SPEAKER_02: And what one of the consequences of the direct consequence of that intervention by the United States was that the people in the Arab world were so angry that there was rage in the streets, real, real anger um at what America had done to assist Israel.
• 5:39
  SPEAKER_02: Um, that the governments of of um OPEC, you know, the members of OPEC, which is the oil-producing exporting countries.
• 5:48
  SPEAKER_02: Um, I know my my my dad is correct to be on that once or twice.
• 5:51
  SPEAKER_02: Um, OPEC essentially said, well, we're not going to really supply much oil to America uh or um Europe.
• 6:00
  SPEAKER_02: And very, very severe impacts uh because oil was, you know, we're we we use renewables these days.
• 6:08
  SPEAKER_02: We have all kinds of alternative sources of energy.
• 6:11
  SPEAKER_02: Oil is still bloody important, but back then it was just oil.
• 6:15
  SPEAKER_02: Like that was just oil.
• 6:16
  SPEAKER_00: That's how all the economies are wrong.
• 6:17
  SPEAKER_00: But actually, when you say it, it's come up a few times with my clients who are a little bit older than me, they remember uh queuing for the petrol at the petrol stations.
• 6:25
  SPEAKER_00: And I even remember seeing, I think it was on real in the years, and did and then the the guy in the petrol station or the lady um used to put a sign on a certain car and that's the last car to get petrol.
• 6:36
  SPEAKER_00: That's only that's that's all yeah.
• 6:38
  SPEAKER_00: Yeah, you know, and it really, I mean, when you think of how disruptive you're kind of seeing in the east um in Asia at the moment, we see people queuing up and for for the fuel now.
• 6:46
  SPEAKER_00: So that we haven't had it here.
• 6:48
  SPEAKER_00: Look, lucky we're shielded a bit because it's been very windy the last month or so.
• 6:52
  SPEAKER_00: We've been shielded from it.
• 6:53
  SPEAKER_00: I'm lucky I'm still electric until the electricity goes up.
• 6:56
  SPEAKER_02: I'm okay.
• 6:56
  SPEAKER_02: Well, a lot of electricity is generated by oil, also.
• 7:00
  SPEAKER_02: So um what what what what is a little bit frightening is this is statistic.
• 7:06
  SPEAKER_02: I I I heard um that there was a 7% oil supply shock, as in instead of 100% of oil, the normal oil, 93%.
• 7:18
  SPEAKER_02: Now we're already past that.
• 7:20
  SPEAKER_02: You know, we're at 10, and obviously if the red if they close the Red Sea, well God.
• 7:25
  SPEAKER_02: Um so so this is this is a major um major disruption to the uh supply of oil.
• 7:31
  SPEAKER_02: We're the world goes through uh 94 million barrels of oil a day.
• 7:36
  SPEAKER_02: And we're not doing that at the moment because simply the supply the supply the supply isn't there.
• 7:41
  SPEAKER_02: So so so so I suppose the question is, you know, to anyone who's familiar with economics, economics tends to look at a short run and kind of a long one.
• 7:51
  SPEAKER_02: And and the short run is there's no in my opinion, clear way of this conflict ending um in a in a in a matter of weeks like that.
• 8:01
  SPEAKER_00: That just seems to me.
• 8:02
  SPEAKER_00: I just thought of how Trump believed it was going to happen because as I always put it to people, as long as Iran still has enough missiles, keep getting supplied by the missiles, they'll keep firing them.
• 8:11
  SPEAKER_02: So it's never gonna Well if you if if for for those that uh I don't uh uh claim to be an expert on the Vietnam War, but it was very evident that America hit the the North Vietnamese with as many bombs as were used in the entirety of World War II, which is just just an unimaginable amount of punishless cluster bombs and everything that are banned now, yeah, you you know, napalm, all all that awful, awful, awful stuff.
• 8:38
  SPEAKER_02: Um and they hit them with it from about somewhere, let's say around 65 up till about 72.
• 8:45
  SPEAKER_02: Seven years, and the North, the North Vietnamese, they didn't give in.
• 8:50
  SPEAKER_02: No, they didn't give in.
• 8:52
  SPEAKER_02: They eventually agreed to a peace deal between uh the United States, uh, you know, obviously uh Henry Kissinger was involved, and so was Nixon.
• 8:59
  SPEAKER_02: Um but there was no doubt at all that the Americans had decided at that point by by 1972, not just because it was an election that year, which Nixon won, um, but there was they knew that they couldn't beat this opponent because no matter how hard they hit them, other than a nuclear weapon, they weren't going to give in.
• 9:17
  SPEAKER_02: And I think that's what I think that's the playbook that Iran are using at the moment.
• 9:22
  SPEAKER_02: I think they are loving this.
• 9:25
  SPEAKER_02: I think they are looking.
• 9:26
  SPEAKER_02: I I don't think they remotely care about how many of their own people get killed.
• 9:30
  SPEAKER_00: I think their strategy is very smart.
• 9:32
  SPEAKER_00: They want the oil to keep going up, then all the other countries get annoyed about oil, and as long as they can keep it going.
• 9:37
  SPEAKER_00: America, and we saw there the other day that they lost one of their fighter jets.
• 9:42
  SPEAKER_00: Um, the more bad news comes to America, the more it's going to turn on Donald Trump, I think.
• 9:46
  SPEAKER_02: Yeah, yeah, no, no, and it it it does seem that he is it does seem that he's stuck, you know, and and again, look, this isn't a politics show, it's it's it's w we're here to talk about the finance of things, but you know, clearly he must be very mindful of what's happening for the ordinary person in America who, like here, are seeing the prices of you know, stuff in the shops and and and fuel they use they they they drive their cars more than most countries because it's just such a big country, so spacious.
• 10:17
  SPEAKER_02: People drive everywhere.
• 10:18
  SPEAKER_02: So they're they're very sensitive to the uh increasing the price of fuel.
• 10:22
  SPEAKER_02: And even though America produces a huge amount of oil, believe it or not, people would believe it.
• 10:27
  SPEAKER_02: America is actually the biggest producer of oil in the world right now, because of all the kind of the shale oil on the on the west coast.
• 10:34
  SPEAKER_02: Um that's still not changing the fact that oil is more scarce and so its price is going up.
• 10:40
  SPEAKER_02: Um and we're now, you know, we're now getting into getting into April.
• 10:45
  SPEAKER_02: It's hard to imagine this ending before May.
• 10:48
  SPEAKER_02: The midterms are not in in November, and he he he must turn this around, or else the midterms are going to be awful, and he's going to be, you know, blamed for that, which he will be blamed.
• 11:00
  SPEAKER_02: Simply, he'll be blamed for.
• 11:02
  SPEAKER_02: I mean, he won his election on based on the price of eggs.
• 11:05
  SPEAKER_02: That's what they say hit Kamal Harris and Joe Biden, more than Joe Biden's kind of, I suppose, uh, frailty.
• 11:11
  SPEAKER_02: Um, it was just that people were paying more at the shops for stuff.
• 11:14
  SPEAKER_02: And this is this is the world that that this is the world that we're in now, you know.
• 11:20
  SPEAKER_02: So so for the longest time, if you go back to 2000, 2001, um, ignoring a slight increase in prices in 2007, um, prices in general, inflation to be very low.
• 11:32
  SPEAKER_02: Inflation has to be close to be pretty much zero.
• 11:34
  SPEAKER_02: When inflation is low, interest rates don't have to be high at all.
• 11:37
  SPEAKER_02: So, what we're now seeing, um you know, when when inflation rose in twenty in 2022 for the literally the first time in 20 years, because obviously the war in Ukraine, um, the impact of you know the disruption to energy markets with with Russian oil and gas no longer being flavor of the month, um, to say the least in Europe.
• 11:59
  SPEAKER_02: And then obviously we had COVID, which, you know, let's say there's a phone on the desk here and uh in bad need of replacing.
• 12:08
  SPEAKER_02: But let's say there's, I don't know, 60 parts.
• 12:11
  SPEAKER_02: You know, if even one important component of that phone isn't available, I can't make that phone.
• 12:17
  SPEAKER_02: I can't deliver that phone.
• 12:18
  SPEAKER_00: Yeah, the the the famous one was that parch made for cars in Ukraine, none of the cars can be built.
• 12:24
  SPEAKER_00: It's only when these things happen you realize that then I doesn't it Ukraine produces a lot of wheat for all the food.
• 12:30
  SPEAKER_02: And with a lot of wheat gets exported to the third world, you know, and and that's um the the pain now being felt in poor countries because the governments don't they they can only subsidize these prices for so long.
• 12:45
  SPEAKER_02: This is real, real economic pain being felt.
• 12:48
  SPEAKER_00: And um it's the poorest, the hardest, at least it is the Irish government and some more wealthier nations, they can s start giving tax uh tax credits or fuel credits.
• 12:58
  SPEAKER_02: Yeah, but the government the government the government here has has made some effort on um reducing the excise on on fuel.
• 13:04
  SPEAKER_02: But um, I'd like to just talk um about two of the two of the taxes that we uh I am a tax consultant, and these aren't actual taxes, but they're effective taxes.
• 13:14
  SPEAKER_02: And the first one is that like so everyone has their their their every everyone who might be listening has you know most likely um you know a gross wage every month, and then there's certain taxes get deducted like PY, USC, and PRC, and then you get you get the rest.
• 13:32
  SPEAKER_02: Um but there's this new tax that we're all going to be paying now, and it's called an inflation tax.
• 13:38
  SPEAKER_02: So if your wages are the same and the prices in the shop start going up, you have less disposable, you have less money to buy the things that you want.
• 13:50
  SPEAKER_02: So not just pay your bills, but go on holidays, go to restaurants, get get a coffee, meet a friend, go to the cinema, all that stuff that makes life so enjoyable.
• 14:00
  SPEAKER_02: That's all gonna start getting squeezed because um the prices are rising.
• 14:07
  SPEAKER_02: All kinds of stuff.
• 14:08
  SPEAKER_02: Oil has just has the knock-on effect of oil, is just just and plastic as well, though.
• 14:14
  SPEAKER_00: We forget about that.
• 14:15
  SPEAKER_00: All the plastics are made is from oil, yeah.
• 14:17
  SPEAKER_00: So that's all the packaging.
• 14:18
  SPEAKER_02: Look around, look at look at uh glass, um, you know, you know, obviously windows, um, the amount of stuff that uh is in some way uh you know the the the phone is in some way comes from oil or natural gas, which are both being hugely affected right now.
• 14:33
  SPEAKER_02: So so these these are just knock-on effects, and now we're all going to be paying an inflation tax.
• 14:39
  SPEAKER_02: We just don't know how big it's going to be.
• 14:41
  SPEAKER_02: But we you know, so this is kind of what happened in the the 1970s.
• 14:47
  SPEAKER_02: You know, the the world had been going pretty well up till the mid-1960s, and then two things happened.
• 14:53
  SPEAKER_02: We've spoken about it before, but two things happened.
• 14:55
  SPEAKER_02: One, the Vietnam War started, and America spending lots of money, and second one was President Johnson's Braid Society programs, which was an attempt to provide, I suppose, um, you know, some social welfare or just somewhere to somewhere to protect the you know the working poor or the you know the elderly poor.
• 15:15
  SPEAKER_02: Um these exploded the American budget deficit.
• 15:18
  SPEAKER_02: None of that was raised in taxes, it was all borrowed.
• 15:20
  SPEAKER_02: And then you had the Iran, or not the the the first um 1973 war, and then you then you had prices just start to to lift from kind of three or four percent up to seven, eight, nine, ten.
• 15:36
  SPEAKER_02: And governments didn't know what to do, and we're possibly at this moment now, that's where we are, I think, at this moment, depending on how long this war goes on.
• 15:46
  SPEAKER_02: We're in the equivalent of 1974, where prices have clearly risen above an acceptable, an acceptable level.
• 15:56
  SPEAKER_02: And uh one of the things that happened in the 70s was this kind of the trade unions were very, very strong in the Western world, extremely strong, and they wanted better deals for their members.
• 16:09
  SPEAKER_02: So inflation goes up by seven percent.
• 16:11
  SPEAKER_02: They lobby government will say we'll we'll go on strike, which they did, we'll go on strike, they had the power back then, and we don't have that now, we but there there could be some other mechanism that chases prices up, you know, yeah, even higher.
• 16:27
  SPEAKER_02: So um that led to you know, mid-range 10, 12, 15 percent at times inflation in the 1970s, and uh governments well central banks um central monetary policy, which is obviously kind of interest rate uh interest rates, that was good determined by governments lar largely as opposed to central banks, and governments just couldn't face up to what needed to be done.
• 16:54
  SPEAKER_02: They couldn't if you can't get the interest, you know, uh get the interest rate up high enough, that inflation will just it'll just stay there.
• 17:03
  SPEAKER_02: And just governments couldn't bite the bullet.
• 17:05
  SPEAKER_02: So that is going to be a challenge now.
• 17:08
  SPEAKER_02: Um in in Europe, it seems very, very clear that if if prices rise to three, three and a half percent, that the um ECB will jump all over that.
• 17:18
  SPEAKER_02: They will, even though the economy in Europe has been struggling for quite some time.
• 17:23
  SPEAKER_02: You know, the likes of Ireland and Spain, for example, are kind of outliers, the rest of Europe.
• 17:29
  SPEAKER_00: Germany hasn't been doing as well as it usually does.
• 17:31
  SPEAKER_00: Ireland is always we're always out doing the uh the rest of it.
• 17:34
  SPEAKER_00: Well, we have been, we have been, we have been.
• 17:37
  SPEAKER_02: But you know, these are these are the decisions that are gonna have to be made.
• 17:42
  SPEAKER_02: And then it'll be interesting to see what happens in Britain as well.
• 17:45
  SPEAKER_02: But the really interesting will be America, because Donald Trump has finally got his man in now in May, uh his new guy in the Federal Reserve.
• 17:55
  SPEAKER_02: And, you know, if inflate interest rates need to go up to six or seven percent, you just know Donald Trump isn't gonna let that happen.
• 18:02
  SPEAKER_02: So if inflation just starts to take off in America and they won't deal with it, what happens to government bonds?
• 18:11
  SPEAKER_02: I mean, American treasuries are just that's when he pulled back.
• 18:14
  SPEAKER_02: No one's gonna want treasuries, they're gonna they're gonna be a sell-off.
• 18:17
  SPEAKER_00: That's when he pulled back before his uh tariffs because it wasn't the bonds.
• 18:21
  SPEAKER_02: This is this this is this is the ultimate nightmare for him, where he can't do what he needs to do on interest rates, but the pain is now being felt very, very severely.
• 18:33
  SPEAKER_02: And then you have you then you have um, you know, the American the US treasuries are no longer triple A, they're double A, which is a credit rating.
• 18:43
  SPEAKER_02: So they used to be top rated, now they've been dropped down.
• 18:47
  SPEAKER_02: And if the budget deficit, which is like 7% a year, I mean, it's massive the amount of money they borrow every year, year on year, um what will happen then?
• 18:57
  SPEAKER_02: So if you if you own, if you're China and you own all these American government bonds, and you can see if you own something that you know is going to go down in price, because the way they're going, it is gonna go down in price, they are gonna have this bond price you know sell-off.
• 19:11
  SPEAKER_02: Uh, we would see based on the current current facts.
• 19:14
  SPEAKER_02: Is China then in a position to literally finish the United States um by dumping all the bonds?
• 19:21
  SPEAKER_02: Dumping all the bonds to the own.
• 19:23
  SPEAKER_02: And they become uh, you know, it becomes almost like a kind of a jump bond status, but uh I don't know.
• 19:28
  SPEAKER_02: So we we don't I'm I'm I'm sorry folks, we don't have any we don't have any great answers for for for what for what may unfold and uh hopefully we will see a peaceful resolution because as we've as we've talked about today, um if this keeps going on at the current level, it ain't gonna be good.
• 19:47
  SPEAKER_00: No, we don't want to we don't want this 1970s thing to happen again.
• 19:51
  SPEAKER_02: Definitely not, definitely not.
• 19:54
  SPEAKER_02: Marks, I think we'll we'll leave it there for the time.
• 19:56
  SPEAKER_02: We'll wrap up there, will we?
• 19:57
  SPEAKER_02: We'll leave it there.
• 19:58
  SPEAKER_02: Thanks uh thanks for everyone who's listening.
• 20:00
  SPEAKER_02: And if you have any comments, um please drop them in the uh in the comment box below.
• 20:04
  SPEAKER_02: Thank you.
• 20:05
  SPEAKER_02: Thank you.