← The Rest Is Money
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- [00:00]
Robert Peston
Even if he chickens out, he has unleashed something that he cannot control.
- [00:05]
Steph McGovern
There's no turning back.
- [00:06]
Robert Peston
This morning, I am feeling pretty anxious about what awaits us all. HELEN welcome to a special edition of the Rest Is Money with me Robert
- [00:26]
Steph McGovern
Peston and with me Steph McGovern. Now, obviously the major unrest in the Middle east is a huge political, huge humanitarian problem. It's one that's still very much unfolding. But what we want to do today is focus on the economic side of all of this because it matters hugely what happens in that region in terms of the global economy. So in this episode we're going to explain why, we're going to look at the impact of, of oil prices and in turn what that means for energy prices, what that might do to inflation and from that, how central banks might react to all of this with things like rate decisions. But Rober, first of all, should we just look at the market reactions? Obviously the markets have just opened. Hey, the stock market, what's going on? Because it doesn't look great this morning, does it?
- [01:13]
Robert Peston
Price action on markets is absolutely predictable. So we are currently seeing the oil price up a little bit less than 10%. It has been higher in trading overnight. That's the Brent crude oil price. But you know, that is a significant increase in the cost of energy. Gas prices up much more than that. And obviously, particularly for Europe and the uk, a rise in gas prices. I mean, I think the market price is currently nearer 20% up. So that is very significant. We're seeing the stock market, the FTSE 100, down a bit more than 1% as we speak. We are, are seeing the futures price, that is the expected price in US stock prices, share prices down more than one and a half percent. That is what if you look at the S&P 500, currently investors expect the S&P 500, that's the broad based American stock market, to open at least 1.5% lower. The dollar is up, which is what you would expect at a time of uncertainty like this. Even though we have talked in the past about or the last year since Trump got elected, how actually it doesn't always happen that the dollar rises in value in conditions of uncertainty because of the way many would argue that Trump has undermined the value of American assets. Gold is up very sharply too, which again always happens at a time of uncertainty. So there are two things we're going to be looking at today, as you say, one is the impact on all of our living standards of the rise in energy prices which we are seeing we can talk a bit about how long that might persist for what that will mean for interest rates. And then we'll also talk, I think, quite a lot about our old enemy uncertainty, because, of course, uncertainty is, I'm afraid, way more significant than it was before. Trump launched these extraordinary. Trump and Israel launched these extraordinary historic attacks on Iran. And as you say, obviously the most important impact is on lives, but also we should be under no illusion. The economic impact of all of this is very significant.
- [04:01]
Steph McGovern
Yeah. And it's worth just looking at which sectors in particular are being hit the most in the stock markets from this because obviously travel and leisure is under a lot of pressure from this in terms of what it means for them. So the owner of British Airways, that's been the worst performer this morning on the FTSE 100 IAG, the company that owns them, is down more than 12% this morning. Also you've got groups like the InterContinental Hotels and EasyJet, they're down more than 5%. And then those big companies that run the international exhibitions that you've got, Informa, who've just signed that big deal with Dubai World Trade center, they're down 8% this, this morning because of this. You know, it's less than a month since they signed that deal. So you can see how this is really impacting specific companies that are important to our. Me too. We're delighted to say that this year the rest is money is being powered by Octopus Energy. So Greg is back with us. Greg, I've got another question for you. So in terms of energy companies, are we just back to the big six?
- [05:05]
Robert Peston
You know what, we've only got like six or so major supermarket chains. No one worries about that because they invest ferociously in competition. You've got differentiation. You know, we thought the market was stable, then Aldi and Lidl turned up. Competition is not about reinventing the souk. We with dozens of identical companies. It's about companies having different approaches to looking after customers and competing ferociously on that. Energy could well be going that direction.
- [05:32]
Steph McGovern
Well, cheers, Greg, and thank you for powering this episode of the Rest Is Money. And let's, I think, just explain why. I mean, it's something we've talked about before, the importance of this region because of all the oil that comes from and through the area. You know, it's a key part of international shipping, particularly that narrow waterway called the Strait of Hormuz, surrounded by Iran, Oman and the uae. And a fifth of global oil supplies travel through that tiny waterway every day. So it's One in every five barrels of oil going through that strait. It's a real choke point. Also, liquefied natural gas goes through there and it's often used at times of unrest in the Middle east as a bit of a bargaining chip. Iran used this strait as a strategic bargaining chip and repeatedly threaten it. We've talked about it before. So what's happening there at the moment is international shipping has pretty much come to a standstill there. We understand that at least three ships in the area have, have been attacked and there's, you know, people like Lloyds of London who are a major insurer saying that they're not going to ensure ships going through that area. So because of that, it's put a real chokehold on, on move oil moving through that region. You know, it's a key part of getting it across to Asia and lots of oil coming from that area. So it's, and it is an area that's, you know, we've seen targeted before. As I say, it's kind of used as a bargaining chip. We saw back in the 80s in the Iran Iraq war. It was also used then. We talked about it last year, about the problems there. But in the, and it's what happens next in terms of whether they can get the oil through there and this liquefied natural gas and whether that is going to be a sustained problem or if they can get it sorted. And if they can't get it sorted, that's the real pressure point on oil prices, isn't it? Because that's then going to mean they're going to stay high if they can't use that straight in the way they have been every day for many years. Robert?
- [07:30]
Robert Peston
Yes, that's absolutely right, Steph. There is a second, though, oil and gas related factor that is weighing on markets and causing considerable concern. One of the most striking characteristics of Iran's retaliation against America and Israel is the way it has lashed out against other Gulf states, states that you might have thought they would have wanted. I mean, obviously places like Saudi and the UAE are not exactly allies of Iran. They had been urging caution on Trump. They didn't want these attacks to happen. And one of the things that's very striking is the way that Iran has been firing missiles at these Arab states. And therefore there is a real worry that oil production, oil refining, gas production, gas liquefying facilities will be damaged. And so it's not just traffic through that incredibly important shipping lane, the Straits of Hormuz, that is forcing up oil and gas prices. It is also the Fear that the productive capacity of these countries will also be damaged. And around all of this is the uncertainty, the extraordinary uncertainty about where this conflict goes just overnight. You know, we have heard Donald Trump tell the New York Times that this conflict could go on for four to five weeks. You know, there are concerns, frankly, that over that time period, America and Israel will exhaust their stocks of missiles and, you know, ballistic armaments. And which is one of the reasons why the bombing is so intense, because they want to disable Iran as quickly as possible. But four or five weeks is an enormous period of uncertainty for the economy and uncertainty for markets. And then the other thing, I don't know how you felt about this, but he's asked, what's the plan? And he varies between, well, we want an uprising. We want the Iranian people know, obviously suffered the most brutal oppression at the heart the hands of the Tehran regime to rise up. And he keeps saying, this is your. This is your moment. Although there doesn't appear to be any American plan for supporting the building of democracy in, in the event that that happens. And nobody knows whether that's going to happen. But then he also talks about a Venezuela kind of outcome, you know, essentially the, you know, having killed Khamenei, the ayatollah. You know, he also talks about, well, you know, one outcome is, would be we'll have the equivalent of Venezuela, where the sort of second in command or somebody would be chosen from the existing regime with whom Trump would feel he could have a relationship. But nothing internally would change that much other than Trump's insistence they cannot develop nuclear weapons. But given that he doesn't appear. Oh, and he also said, and this is the bit that made me by jaw drop, he told ABC News. So he was asked by ABC News, so who would that, you know, equivalent to the Venezuela new president be in, you know, which of the ayatollah's colleagues would be that person you could do business with. And he actually said that their attacks on Iran had been so successful that they don't. They. They managed to kill the two or three people who might have left that role.
- [11:40]
Steph McGovern
So you just emerge from all of
- [11:41]
Robert Peston
this thinking, actually, I am slightly surprised, if I'm honest with you, given this uncertainty, that markets haven't reacted more strongly, that the oil price isn't up more and stock markets aren't down more. Because every time he opens his mouth, you just feel even more unease and uncertainty because he patently doesn't. He's sort of basically just hoping for the best. There's no plan.
- [12:10]
Steph McGovern
Yeah, I know, and that is really scary. I think there was an Iranian, a tweet during the Rams yesterday from an Iranian which explained this point really well. And I'm just going to read you a little bit of it. And it says, as an Iranian, I can tell you the situation is no longer just political, it's existential. We are trapped between two collapsing structures, one internal, one external. On the one hand, we face a deeply dysfunctional government, decades of economic mismanagement, suppression of dissent, brutal ideological problems. And then, on the other hand, this is the paradox. They're also terrified of regime collapse because they've watched the aftermath of Western intervention in countries like Iraq and Libya and Syria and Afghanistan. Each was promised civil, you know, freedom, but they descended into chaos, civil war or foreign occupation. And that's the point here, isn't it? It's, you know, as an Iranian, you are stuck between these two, Two collapses of regimes, and that that's a huge, awful uncertainty for them, a terrible situation to be in. And as you say, how do you work out then what happens next in all of this?
- [13:19]
Robert Peston
I mean, you are right. I mean, this may be, I don't know, fourth or fifth time lucky for America. But, you know, as you just said, the problem is the precedents. Whether it's Iraq or Libya or Afghanistan, they are really depressing because what followed the toppling of autocratic brutal regimes was chaos, terrorism. It is sort of extraordinary how little effort the American administration seems to have put into how you build nations in these, in these circumstances.
- [14:04]
Steph McGovern
But this is the whole thing with popularism, because two things can be true at the same time. And yes, they were in a terrible situation with their supreme leader and the oppression felt there. But there's also the truth that the alternatives that are being offered by, you know, foreign intervention and not liberation, their potential collapse. So, but what Trump plays on and what we've seen with populism is he'll just focus on that one truth, won't he? I've got rid of. Same with Venezuela. I got rid of an evil dictator. And that's the narrative that's told to the world. And forgetting about, as you say, a plan, but also what taking away a regime without any plan actually means for
- [14:45]
Robert Peston
a country, the fact that the regime, you know, Ayatollah Khomeini, who was behind the slaughter of tens of thousands of Iranian protesters only recently, we've all got to pray that this is the end of that kind of slaughter. But we did a podcast recently about not just the brutality of the regime, but Also that many people are frankly struggling to feed themselves there. The economic conditions are terrible. And again, we've got to hope that within Iran itself because obviously in these sorts of circumstances, the blow to their living standards and cost of living will be, you know, significant. But as you say, we should probably also now look a bit about what it means for all of us.
- [15:41]
Steph McGovern
And it's a good point after the break to focus on what this all means then in terms of oil energy prices and then how that feeds through to inflation and what that means for central banks deciding interest rates. All of that's come after the break. This episode is brought to you by Vanguard. Now, when it comes to your finances, you want to work with companies you trust, don't you? It can be really complicated when you're investing, you know, trying to work out where your money's going. And it can be confusing, can't it? And that's where Vanguard comes in because they always put investors first and they're delivering on that promise for 50 million investors worldwide with a wide range of funds and a platform that keeps costs low and makes investing simple. You can also open an ISA or a self invested personal pension, choosing investments yourself or letting Vanguard choose them for you. Search Vanguard Investor to find out more. Now, when investing your capital is at risk, tax rules apply.
- [16:42]
Robert Peston
Hello and welcome back to the Rest Is Money, with me, Robert Peston.
- [16:46]
Steph McGovern
And with me Steph McGovern. So, Robert, what's interesting, I think, to look at now is what the possible outcomes are here. If we are right to assume that this is going to go on for some time and there's certainly be some unrest and oil prices will be pushed higher in that time, what is that going to mean in the longer term? Because the, the, I suppose the intuitive thing is to think if oil prices go up, energy prices go up, that hits us all inflation will go up. But there is another alternative to all of this, isn't there? So do you want to just explain what, what this, the ways that this could play?
- [17:20]
Robert Peston
Yeah. So look, I've been talking to central bankers and economists over the last 24 hours because one of issues around all of this is what is the overarching macroeconomic impact on the world of this? Is it higher inflation or is it lower growth? And I'm afraid my sort of settled position is that it's both, which is the sort of worst of all possible worlds. Now, let's put this into a bit of historical context. I don't think this is 1973. And the way that oil producing Countries in the Middle East, OPEC massively reacted by choking off oil supplies in the wake of the Yom Kippur war involving Israel back in 1973. That led to massive rises in oil prices and absolutely spiraling inflation. It actually was in many ways the dominant force within the global economy. That inflationary force for years after that, I mean, that's not going to happen this time, partly because the global economy, while oil is still incredibly important as a cost for businesses and for all of us as individuals, citizens, consumers, there are alternatives. One of the important, you know, one of the good things about the transition to greener energy is we are less dependent on oil and we use it more efficiently than we used to. You know, the motor car is less dependent on oil. There are lots of electric vehicles now. So just to be clear, we are a less oil dependent global economy. But you know, the kind of rises we've seen in the oil price today would lead probably to a half percentage point or something like that, somewhere between a half and a percentage point increase, probably near a half in the global inflation rate. And on the basis of that, you would say the kind of interest rate cuts we've been seeing across the developed world in Britain, America, Europe, they're going to be slowed down. And I think they will be slowed down. Right, I do think. But central bankers will also be acutely aware that both the rise of business uncertainty, consumer uncertainty and the increase in the costs that we all pay as a result of rising energy prices that slows the economy down. So, you know, we had hoped in the UK this was going to be a slightly better year for economic growth. Undoubtedly what's happening in the Middle east will slow down that growth a bit. And I have to say, you know, I slightly pity the Chancellor, Rachel Reeves, because tomorrow she will be laying out the official forecasts for the economy over the coming few years. And I have to say that, you know, pretty much everything that's happened, they don't, you know, it doesn't, what's happened overnight doesn't make those forecasts completely useless. But there's no way the OBR will be able to update properly for the economic inflation, you know, the growth and inflation impact of what's happened overnight because of the uncertainties we've been talking about. So you have to sort of say that this spring statement tomorrow, if not, as I say, if not pointless, it's way less important than it was because we just know now that those sums that have been done, you know, leader to announce the outlook for the economy, they're wrong. They're just wrong. We know they're wrong. Donald Trump and his attack on Iran has made them wrong. So this is politically, for the British government, this will be bad because the British people will feel less prosperous, poorer than would otherwise be the case. And just finally on that point, on this, one of the big political claims that the Prime Minister has constantly made is that they've been taking action to suppress the cost of living. As you know, they took a lot of costs, gas price to get the gas price down. That gas price is going up again, right? It is going up again as a result of what's happening in the Middle East. So all that benefit to the, you know, to, to, to our living standards that he's been shouting about, pretty much all of it, in my view, will have been wiped out again by events in the Middle East.
- [22:11]
Steph McGovern
And the way though, that this looks to the electorate, you know, to, to everyone out there, normal people, is it's another excuse for our lives not getting better. You know, it's the same reason we heard Rachel Reeves when she announced us £40 billion worth of tax rises in her first budget. She said at the time, I won't come back for more. You know, we've got a plan. Oh, you know, several months later, well, this has happened geopolitically and this has happened. So, sorry, I am going to have to ask more. And, and so to normal people, this is, oh, well, there we are. There's another excuse. We've been let down again. I think the point for me as well in this is, and I've said this before on the podcast, it just proves the point again about how monetary policy is such a global thing and not domestic. So, you know, the way that the bank, central banks try and control inflation is by changing interest rates. So if they put interest rates up, that means people will save more, they'll spend less, that'll bring demand down, that will bring prices down. But, and then, you know, the, and the alternative side of that is at times when we're worried about growth and we want people to spend more and inflation's okay, then we bring interest rates down to encourage more spending and people to borrow more and everything else. But the point is inflation is so controlled by things like oil prices, which we domestically have no control over unless we change how we supply our energy. And we, we are more domestically able to supply ourselves rather than relying on international markets. So it feels like it is not the same economically. We can't rely on the same economics that we've used in the past to try and domestically control an economy.
- [23:53]
Robert Peston
I mean, you've actually been talking about one aspect of that, which is just citizens appetite to absorb increased costs. But the more fundamental economic markets resilience is to do with the indebted of the government. And one of the big problems that this government inherited, and we should be clear about this, this was an inherited problem from the 14 years of both coalition and then Tory governments is certainly on the international measure, we've got debt at 100% of our national income. We've got not interest payments made by the government of 100 billion plus per annum. And the government's ability to stimulate the economy by spending its way out of this is close to nil. And the big worry is that if interest rates fall slower than expected, if growth is slower than expected, if tax revenues come in less than expected, that actually it just heightens in the view of international creditors to the uk, the view that we are a precarious economy. And that's the, you know, this was supposed to be the year where all those tax rises that Rachel Reeves imposed would have a dividend in the sense that at that point, you know, the tax rises were supposed to be over and growth was supposed to be rising again. If we don't get that growth, then questions will be raised again about the sustainability of our, of our debt. And so the British government needs this like a hole in the head.
- [25:36]
Steph McGovern
Yeah, yeah. Because as you say, if you look at what's happened, you know, the, the treasury had a record budget surplus of over 30 billion in January. And that was really celebrated as this is because of the higher tax receipts. And you know, retail sales have grown a bit. If you look at the Institute of Directors, their confidence surveys improved a bit. Like it did feel like there were some, I don't know if green shoots is the right word, but essentially, you know, a bit of optimism about, okay, it's been really tough, but things are going to get better. And so do you think now, Robert, that that just is going to knock that on the head?
- [26:11]
Robert Peston
Well, that is the point. There's a real risk that the confidence of consumers, the confidence of businesses will be massively knocked by seeing energy prices rise again and the huge uncertainties around what's going to happen on stock markets. So another area where things are really precarious is that this attack came against a backdrop where investors anyway, were incredibly nervous about whether we were going to see a very significant market, stock market fall for two reasons we saw. I mean, there are two things going on and you can't ignore them in the context of the oil price and market shock directly from Trump and Israel's attack on Iran and the two other factors that we talked a little bit about last week and we have talked a lot about in previous weeks, in case of one of them, one of them is the AI bubble, where there are big concerns, particularly in this area called private credit. And this is lending for massive projects to AI auto software businesses that is not direct from banks, but is essentially raised from investors and some cases from retail investors. We saw massive blow to confidence, the massive rise in fears that there are going to be 2007, 2008 scales of potentially losses in this market, when one of the players in this market called Blue Owl, stopped its investors from taking their money out. And you'll remember the blow to confidence that people felt back in 20078 when, you know, whether it was investment vehicles like this or even banks, when fears were raised that investors couldn't get their money. So that was one market jolt. And this was a business. The reason they were worried about, the reason they froze these redemptions by retail investors is because they themselves were worried about the liquidity of the assets they held, particularly in the wake of something else that's going on, which is there are these extraordinary fears that the AI Industrial revolution is massively undermining the profitability of really important software companies. That basically a lot of very important software companies are being rendered effectively redundant by the rise of AI. And that has seen a collapse in confidence in those businesses. And all of this nervousness about stock markets and indeed the credit market, all of that is there at a time when Donald Trump has created a whole new wave of uncertainty. So where I sit right now, I would say that these are genuinely really worrying times for global markets and for the global economy.
- [29:35]
Steph McGovern
You mentioned this on the last podcast, which reiterates what you're saying now, which is that the boom in AI has kind of masked what the negativity that things like the trade tariffs have had, because that's kind of superseded all of that negativity. And actually it's whether that is an artificial creation as well, whether that is a bubble, whether they are these, some of these companies that are in the trillion dollar market valuations are really worth that. And that's another worry for investors and for global market markets, but at the moment is being used by Trump as a means to carry on doing what he's doing because he's not seeing the hit he would have seen if the AI growth hadn't been There. And that's another part of this.
- [30:19]
Robert Peston
Yeah, it is. And look, we know that some of those investments will, you know, whether, you know, it's in some data centers or some businesses or some, you know, some of them will go bad. You know, as you know, I'm a great believer that underlying all of this, there is a real industrial revolution going on that will spur growth. There are issues about how many jobs will be lost. There are issues about who gets the benefits, which we'll come back to on another program, but on another edition. I mean, we should probably wrap up in a minute or two. I just want to, I suppose, finish with, I suppose, a bit of a. This is my closing thought, as it were. There was a massive markets reaction, huge downturn as a result of Trump's tariff, initial tariff, wave of tariff increases, enormous uncertainty, enormous volatility. We're not seeing interest. We've seen some, you know, we've seen, as I say, significant market falls and stock market falls and oil price rises today. I actually think, weirdly, that whereas it. It's probably the case that in the early phase of Trump, some of the market reactions were slightly overblown, I actually now think that what we've seen is probably a bit underdone. I am genuinely anxious about what's going on. And we've already seen significant market shifts. I think the volatility is going to continue to be fairly extreme, and I think we could see really quite significant market falls in coming hours and days, unless out of nowhere, we get some kind of stability in the Middle east. And it's very difficult to see where that's going to come from.
- [32:02]
Steph McGovern
Yeah, I think there's a bit of Trump fatigue, though, as well, isn't there? There's a. If we react to every single thing Trump's doing in the irrational way that he announces everything, you will be just constantly, you know, up and down, up and down. And it feels like maybe markets and investors now are just a bit more, you know, they're factoring in more of that instability. You know, it's kind of been factored into markets for a bit that there was going to be some type of hit on Iran eventually because of what's been going on there. So I wonder if maybe it's just. It's just slightly more. It's been factored in and it's Trump fatigue of not reacting because you don't know what he's going to do next.
- [32:40]
Robert Peston
That is true, Steph, but what I would say that is different on this occasion is with tariffs you can put them up and you can bring them down again. And indeed that's what, you know, up until the Supreme Court limited his ability to put them up. That is indeed what he was doing. And markets knew that if they reacted in a negative way, Trump always chickens out and he adjusts. Right. But it's because it's in. And in that case, it was under his control. Trump has a go, undermining the independence of the US Federal Reserve, US Central Bank.
- [33:15]
Steph McGovern
Frank.
- [33:16]
Robert Peston
He steps back when markets react negatively. The problem with what he's done in Iran is he cannot control the reaction of.
- [33:28]
Steph McGovern
Yeah.
- [33:28]
Robert Peston
That government, that country, that military, terrorists, potentially terrorist cells potentially all over the world. You know, that is not under his control. He is. He has. The reason this is of a different order of magnitude of uncertainty is even if he chickens out, he has unleashed something that he cannot control.
- [33:53]
Steph McGovern
There's no telling him why. Yeah.
- [33:55]
Robert Peston
You know, and that is why, you know, this morning I am feeling pretty anxious about what awaits us all.
- [34:03]
Steph McGovern
Yes. Yeah. And that is very fair. Okay, well, we should wrap things up for now. And I no doubt think we'll be talking about this again in a couple of days. We'll do specials as and when, when any news comes out that we think is important to tell you about. But yeah, until then, thank you very much for listening and we'll chat to you again soon. But that's it from us on, the rest is money. Bye bye.
- [34:24]
Robert Peston
Goodbye.
- [34:31]
Steph McGovern
Close your eyes. Exhale. Feel your body relax and let go of whatever you're carrying today while I'm
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Robert Peston
letting go of the worry that I wouldn't get back.
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Steph McGovern
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Robert Peston
And breathe. Oh, sorry.
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Steph McGovern
I almost couldn't breathe when I saw the discount they gave me on my first order. Oh, sorry. Namaste.
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Robert Peston
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Steph McGovern
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Robert Peston
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Steph McGovern
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Robert Peston
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Steph McGovern
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Steph McGovern
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Robert Peston
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- [35:31]
Katie K.
Hi, guys, it's Katie K. And Anthony Scaramucci here from the Rest Is Politics Us. We have just recorded a four part series that's all about Donald Trump becoming the global phenomenon we know him as today.
- [35:44]
Robert Peston
You know, Caddy, I knew Donald Trump since 2005. So in this series, we rewind the clock right back and dig into the people, the events and the scandals that built him.
- [35:56]
Katie K.
Yeah, we're going to take you from his days in military school, what he learned there, how he actually went weirdly thrived there, to his father's ties to the Ku Klux Klan, his days as a business mogul in New York, and how that really shaped his worldview and his way of doing business. And we're going to explore parts of the Trump story that you might never have even heard of.
- [36:14]
Robert Peston
Not to mention Caddy, the nefarious trickster, Roy Cohn. Where's my Roy Cohn? I heard him say that so many times. I mean, I was only there for 11 days. Caddy, where's my Roy Cohn? Well, let me you tell, tell you something. If you want to know who Roy Cohn was, you're going to tune into
- [36:30]
Katie K.
this series with all the headlines that come out of Trump world every single day. We just felt there'd never really been a more important time to try to understand the America that created Donald Trump. To listen to episode one of Becoming Trump, head over to the Rest Is Politics Us, wherever you get your podcast.