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- [00:00]
A
All I'm hearing from them is, taco, taco, taco. You know, Trump always chickens out. Hello to the rest is money. It's a special edition with me, Robert
- [00:20]
B
Peston and me, Steph McGovern. Yeah, so a special episode for you to update you on the economic ramifications of what is a very fast moving situation with the Iran war. We talked in our last episode on this about investors potentially underestimating the impact this war could have on the global economy. And it felt like this week that they woke up to the impact because we suddenly saw oil go over $100 a barrel. The stock market started to drop as well. And then yesterday, Trump came out with some very vague statements about the war being very complete, whatever that means. And we saw a big reaction again. So, Robert, just bring us up to speed on it.
- [01:07]
A
Yeah, so it was an absolutely hair raising day yesterday. I mean, obviously since 2007, we've, you and I have lived through some hair raising market days. There were some extreme months during the global financial crisis. And yesterday quite a lot of that sort of just feeling of chaos and mayhem just came flooding back. I mean, just on oil, you know, at one point yesterday, Brent crude, one of the benchmark measures of the oil price, you know, touched $120. And yesterday that was a sort of massive 20% surge. But actually the thing that was most extraordinary was the way that it yo yoed because after Trump said that his war aims were almost complete, whatever that means, it then plunged $30. Right. So actually, as we speak, it's around $90, which is still way higher. It's about 50% higher than it was before this war started. And that's still going to have pretty significant economic consequences if that price for oil is sustained at that level. But when you get volatility of that sort, some people will have made a fair amount of money, some people will have lost a ton of money. And it wasn' the oil price where we saw volatility. I mean, we saw astonishing moves also in the price of government debt. I mean, if you just look at this British government short term borrowing, that's when it borrows on the gilt market for two years. There was an increase in the yield. That's the interest rate. It effectively pays for that debt of more than 20 basis points. That's not more than, you know, of a percentage point, which is an enormous swing in the bond markets. It represents a very big fall in the price of government debt. And we saw not quite so big, but it's very significant moves in the price of 5 year debt, 10 year debt, 30 year debt. And again, one of the things that is a concern for the government is, although gilt prices, bond prices, have recovered a bit this morning, the rate that the government, the interest rate that our government pays to borrow is significantly higher than it was before this war broke out. And we'll go on in a minute or two to discuss what that means for the interest rates that all of us pay. Because, you know, what's been happening has very significant implications both for the inflation rate and for the interest rates on mortgages, on business borrowings and all the rest of it. So we'll come on to that.
- [04:05]
B
We're proud to say that the rest is money is powered by Octopus Energy this year. Greg Jackson is back to answer another question. Now, this is something that we see a lot that I wanted to ask you about. When you're starting something new, how do you think about risk and momentum?
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A
I think people think entrepreneurs love risk,
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B
but I'm not sure they do. I hate it. I never buy individual stocks and shares on the stock market.
- [04:30]
A
I don't gamble. I think the thing about an entrepreneur
- [04:33]
B
for me is I've got more control.
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A
When you're working for a company every day, you're at risk of what that company chooses to do with you. If you're an entrepreneur, actually, you've got far more say in what happens tomorrow
- [04:44]
B
and next year than when you're, you know, at the mercy of your bosses. Nice one, Greg. Well, thanks to Octopus Energy for powering this episode of the Rest is Money.
- [04:56]
A
I'm just gonna make the big and obvious point that we've talked about often. You know, I'm talking to sort of big investors in the market yesterday who some of them genuinely sort of shocked by the magnitude of the swings they're seeing. And all I'm hearing from them is taco, taco, taco. You know, Trump always chickens out that phrase that says when the going gets tough for the pro, for the president in market, when markets massively move against, he tends to do a reverse ferret, a U turn on whatever it is that he's been doing that's causing the markets to move against him. And it was absolutely, I mean, again, we have been talking about this on the podcast. You know, we always thought that if it looked likely that us drivers would be, you know, car owners would be paying a lot more for what they call gas and we call petrol, that that is always so politically unpopular, a rise in the gasoline price, that he would do a U turn and then, you know, absolutely true to Trump form, he then decides to get a message out by having a telephone conversation with a CBS journalist and then declares to this journalist in a telephone call that he thinks the war is, is almost over. Markets see this as the taco moment. And at that point, oil plummets, bond prices recover, the stock market recovers a bit. Now we need to unpick whether or not actually the war is almost over and whether this is a chickening out moment or whether it is still messy. But it was nonetheless for markets, a very big moment.
- [06:41]
B
Yeah, I know. And it just shows you, doesn't it, how sensitive markets are to every development in the Middle east at the moment. I think it's worth then just looking at what, what is going on in terms of, you know, are the markets right to have this positive reaction to what Trump's saying? Because I've become now quite obsessed with how things are moved around the world with, with shipping and, and everything else and what the alternatives are to it. Because what we have seen is, I think it's something like between 15 and 20% of global crude oil and gas supplies have been disrupted or suspended as these, you know, producers struggle to reroute the flows. And, and on previous podcasts we've talked about that. That has been because of the, you know, that chalk hold of the Strait of Hormuz, which is still a problem. We've talked about the ships being, you know, ships being attacked in the area. We've talked about major oil facilities being hit as well. There's also other things going on. You've also got the electronic warfare that is really impacting shipping in that area at the moment. So this is GPS being jammed. I've actually got mates in the Middle east who've been telling me about how this is o a trivial level, but it shows what's happening is that when they go out for a run with a GPS, it's now showing that they've done like 5,000 kilometers on a run instead of what they might normally have done. So it is all going on that electronic warfare is also causing chaos for all these ships that are trying to do their job of taking major energy supplies around the world. And I've been looking at what, what is the alternative here because there is, you know, is the Strait of Hormuz, it's still a problem. There's still very limited movement around there. We've heard Trump talk about, well, he's going to send naval ships to help get them through and offer an insurance because an insurance of these ships is another a big problem. In the meantime, obviously everyone's trying to work out are there other ways to move this stuff around. And there are two interesting pipelines. So there's, there's a Saud pipeline which is an east to west pipeline. It's about 740 miles in length and it kind of crisscrosses the Arabian Peninsula from the Persian Gulf to the Red Sea. And I'll come to the Red Sea in a minute because I think that's probably still problematic too. But the Saudis built it about 45 years ago on the worry that one day Tehran would manage to do what they have done and halt shipments through that narrow waterway. And if you look at how much goes through the Strait of Hormuz, it's about 20 million barrels a day. This Saudi pipeline, if they get it, all the ships in the right places at either side of the port is about 5 million barrels a day that they can get through. So that might help to, it's not going to obviously do what the Strait of Hormuz is doing, but it might help a bit.
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A
Can I just ask you before we go on to the other pipeline, is the problem when it gets to the Red Sea that there's a risk that the Houthis are going to fire at shipping because the Houthis obviously in alliance with Iran. So are there worries that the shipping, the tankers won't be safe even there?
- [09:57]
B
Yes. So that's the other thing that's going on. So we've talked on this podcast before about the Red Sea. So that's on the other side of Saudi Arabia on the Africa side. And it's also a major shipping route connecting the Mediterranean and the Indian Ocean. And it's actually the shortest route by sea between Europe and Asia. And about 15% of global sea trade goes through it. And what we've seen recently is major shipping companies like Maersk have pulled some traffic from the Red Sea because of the fears that the Iran aligned Houthis, the Houthi militants in Yemen could resume attacks on the commercial vessel. So they, that that had been a problem, we talked about it last year, they'd only just started to use that route again. And now Maersk, given the concerns about what's happening with Iran, have been rerouting some. And, and the rerouting would now divert the ships around the Cape of Good Hope to reach Europe. And that is about 10 more days to do that route than it would have been to go through the Red Sea route. And when I remember when we were talking about this last time, I was looking up the costs of this. That's something like $3 million more per ship to go that way because it takes longer. So these are all like the smaller things which could have a major knock on effect in terms of the cost of these goods because, you know, it's an inflationary problem.
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A
So what's the other pipe?
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B
So the other pipe is owned by the United Arab Emirates and it's another separate bypass option to the Gulf of Oman. And it's about one and a half million barrels of oil that can travel through that. But again, this all involves getting enough tankers into the parts where the oil ends up. And right now you've got quite a few of those tankers, super tankers, I think it's something like 25 super tankers who are capable of loading 2 million barrels are being diverted from their original destinations and are heading towards these new pickup points. So they are trying to use this new super power and which hopefully might buy a bit of time and mean the prices don't go up as fast. But, you know, if it all works.
- [12:13]
A
Yeah, but we're talking about, you know, nonetheless, even if it does all work, well, not small, but, you know, we're still talking about a reduction in the overall supply and therefore we can assume that the oil price would stabilize still at a, at a, at a level much higher than it was before the war. And, you know, one of the things that's striking about what you've said is none of that addresses the, you know, the problem that gas, particularly from Qatar in its liquefied form, you know, that, as I understand it has to, you know, could only come out in these supertankers that go through the Straits of Hormuz. And so, you know, although there's been a little bit of a recovery or, sorry, a little bit of a fall in the liquefied gas price today in the wake of Trump's, you know, it could be over soon remarks. The gas price is still, and this is very material for the UK and Europe is still a lot higher than it was because there has, you know, there's already been both a reduction in production of gas in the region as a result of the Iranian threat. And, you know, as far as I'm aware, almost no gas is getting through the Straits of, of Hormuz. I mean, this is why Trump reinforced yesterday's message. I mean, not only the point that you were making that there's this $20 billion emergency insurance fund that he's made available to provide war cover to shippers who currently can't get war cover, you know, from, from, from private insurers. But you know, truthfully, insurance is one thing you're not going to ship through. You're not going to take your ships through the Straits if you think the Iranians are going to hit you with missiles, even if you are in, in short, which is why Trump is talking about sending, you know, you know, aircraft carriers and American ships into the Straits to protect it. This is all, at the moment, this is talk rather than, than action. But, you know, I think we have to assume he would probably do that at some point. But the thing about the disruption to the gas market is it's not just what it means for the gas that we pay to heat our homes. And at the moment, unfortunately, there does seem to be quite a big risk that the next resetting of the price that we pay for power, you know, in a couple of months or so that price will go up really quite a lot for British consumers and British businesses. But there's already been quite a big impact, hasn't there Steph, on businesses around the world that rely on shipments of liquefied natural gas and other products coming out of the region. I mean, talk me through the use of so called force majeure by some very big companies that basically force majeure is when you basically say I don't have to honor a contract because I can't get the materials. And obviously if there's a war going on, that's quite a standard trigger for ripping up contracts. But explain what, tell us which companies have been doing this and why.
- [15:43]
B
Yeah, this is interesting because you're seeing for corporates the immediate issues are obviously energy costs, input prices, shipping delays, anyone with energy intensive operations or petrochemicals or airlines, logistics or anyone moving consumer goods around and now thinking about, about how it's going to impact them. And as you say, this force majeure now has been used by several big companies. So we've got in the Middle east it's people like Qatar Energy, they have declared this force majeure on all their LNG shipments. So this liquefied natural gas, because they've been attacked, they've actually physically had attacks. Also you've got petrochemical giants like South Korea's Yachin ncc, which is the country's largest ethylene producer. Anyone involved in using petrochemicals and gas and energy, the national oil companies in Kuwait, so Kuwait Petroleum Corporation there, they've declared force majeure on their exports because they're unable to guarantee delivery. But then if you look outside of the region, this isn't just hit in the Middle east, so you've got it manifesting in other ways. So like insurance no go zones. So marine insurers now have withdrawn war risk coverage for areas we've just been talking about. So the Persian Gulf and any waters near or adjacent to that, that, so the, the shipping rates for those Middle east to Asia routes are now at very expensive six year highs. And ship, some ship owners, as you pointed out, are just refusing to even do it. Then you've got specific material shortages as well. So semiconductors, we talk about them all the time on this podcast. And Qatar produces about 40% of the world's helium, which is critical for making these chips. So you're then thinking, well, that's going to hit the high tech sectors in the US and Taiwan, where everywhere really. Then there's agriculture, we mentioned last time about fertilizers and how important they are and you know, the substances and the chemicals that go into them made in the Middle East. And so they're looking at, you know, the fact that they can't deliver the chemicals for that. And then construction as well. There's, you know, specialist materials used in steel and heat reflective glass which are being used in major projects around the world and they're having to freeze construction of those because of the, the supply chain links. It re emphasizes the point which I don't think we talk about enough in life. I always think this about when kids are learning about careers and stuff at school is the supply chain. The supply chain is absolutely crucial to everything. So we can talk about big name companies, but behind the scenes are all the smaller companies who are absolutely critical to the production of things that we use every day. And that's where we're seeing the volatility now is because these supply chains are being hit, you know, not being able to be insured or just not even able to move stuff or not be able to make stuff. And that is having a huge impact already.
- [18:46]
A
So this time more to discuss about what this mayhem all means for us after the break.
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B
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- [19:24]
A
The advantage of just running through some of these examples of businesses that have been hit is it helps to explain why we have been saying that this war would have a very significant impact on inflation. If there's a shortage of fertilizer, that puts the cost of food up. Right. Partly because the cost of the available fertilizer goes up. Partly because if it were to go on for a very long time, actually agricultural yields would fall and there would just be less food and the price goes up. You've just talked about the importance of helium to the production of semiconductors. If in Taiwan there's either a shortage of semiconductors or the prices go up again, that feeds through to the price of really just almost every product in the look in the world is now smart in the sense of using semiconductors. The number of products that are impacted when the price of oil and gas is either limited or goes up is huge. That is why we are now in an era where we were confident before the war started that inflation was on a downward track. There'd been arguments about how fast it was falling. There's obviously constant arguments about wage pressures and all the rest of it, but broadly, we seem to be on a path where it was moving towards target. This war has given everything a jolt upwards such that we now expect inflation to be higher for longer. Investors make bets on when interest rates will fall. And before the war, the probability, according to pricing in the markets, the probability was that the bank of England would cut cut interest rates by another quarter of a percentage point next week. That is now off the table, according to investors. Investors are now betting there will not be a cut next week. The probability of a cut in May, according to market pricing is about 50 50. And actually, the thing that is most striking there is this financial sort of instrument called an overnight interest swap, the ois. Right. And that is the best guide to what the market thinks is going to happen to interest rates. And before the war, the OIs curve was anticipating a couple of interest rate cuts in the UK this year. So that's a half of a percentage point off interest rates in the course of this year. Actually, the current pricing is there'll be zero interest rate cuts this year. That's a massive and very painful shift for anybody who either has to refinance a loan or has to take out a loan. I think you were telling me before the program that you've had a rather painful personal experience of all of this.
- [22:29]
B
Yeah. So I am in the middle of buying a property at the minute and was doing the usual shopping around for my mortgage. And I've got a broker I've worked with for years and he came to me with this rate. I'm getting a 10 year, 10 year term mortgage fixed rate for five years and it was at 3.64% when I started this whole process. And yesterday he was like, oh, I'm really sorry, it's now 3.89%. So just in the space of a couple of days, it's already gone up because as you say, they're now factoring in that rates aren't going to come down, which is now. I mean, I hate the fact when you're making a decision on your mortgage, you're basically taking a gamble on what is going to happen in the world. Like, do you do a variable rate? Do you do a fixed rate? And I remember back in the credit crunch, I had a variable rate mortgage on a previous property and it was at that time when the rate I had was below base rate. So it was one of Those minus whatever, minus 1% base rate. And then of course the economy went nuts. Then the base rate came down so much that, that at that time the building society had the mortgage with, should have been paying me money for the mortgage. And of course there was all the, all of that chaos of all these people who had these minus base rate mortgages. So, you know, it is always this big gamble of trying to work out, and the bank's trying to work out what is going to happen next and that if you are someone now who's trying to remortgage a property or get credit for something, you will see that the rates are changing and changing on a day to day basis.
- [24:06]
A
Yeah, all the big banks have been repricing their mortgage offers for two year and five year loans. So, you know, it's just another manifestation, you know, the interest rate going up for those who want a mortgage, of just how significant an economic event this war is turning out to be. And you know, the thing that I'm afraid is slightly dispiriting news is although, you know, we did see signs yesterday of to go back to that, you know, wonderfully resonant phrase that he is tacoing, that he is chickening out. There is still an enormous amount of ambiguity around precisely how and when that will happen because I had this sort of weird experience. I'm at ITV News, I'm about to go on air to talk about just these sorts of issues on the news at 10 and I'm holding my Phone to my ear, because literally in the. In the seconds before I'm. I'm going on, Trump is giving this press conference in which he is being asked questions about, you know, what does it mean that the war is almost over? So he's asked, is he, does it mean that it's going to end this week? And he says, well, probably not. Probably so. You know, not this week. That's still days of military action, and goodness only knows what damage that will do, you know, on both sides, as it were. So still lots of uncertainties there. He then said this thing that made my jaw drop. Now, I don't know if whether you noticed that he had a long conversation with Vladimir Putin earlier in the day, the Russian dictator. Right. And he then says in the course of this press conference that in order to try and get more oil onto the market and get the price down, he's thinking of easing sanctions. So immediately, your brain just goes, hey, well, I think, is he really. When the Ukraine war is still going on, is he really gonna lift sanctions on Russia and make it easier for Russia to ship oil and gas? And then he's asked in the press conference, well, which countries are you planning to lift sanctions on? He dodges it. He doesn't answer. Anyway, what it illustrates is there are still these massive uncertainties around how and when the war will end, which means that markets will continue to be volatile, uncertainty will still be high. That has a very significant economic consequence. So although we may get into a position where it does end relatively soon, and we see stock markets recover, bond markets recover, oil price gradually come down, the recovery will take a while, and we will still have paid a price in terms of lower growth, higher inflation, lower living standards. But we can't make a rational forecast about how quickly things will return to normal. And one of the big imponderables is also, as and when it ends, will Iran be less of a threat to the Middle east, less of a threat to Israel, and also less of a threat to Western countries like ours? Or will it simply go into its bunker for a while and rebuild its offensive and terrorist capabilities? And will actually the world, as a result of this, end up more dangerous over time? Because, of course, quite apart from the threats of lives, that also means that the economic stability that we want will be less than it would otherwise be. So the honest answer, I'm afraid, at the moment is there are just too many painful uncertainties still persisting as a result of this war.
- [28:14]
B
Yeah. But what we will try and do throughout it all is explain it as and when it happens, won't we? And what that impact might be. As we said, there's a lot of guesswork at the minute, but each time something happens, we will try and unpick it for you and tell you what this might mean for you and for the economy.
- [28:32]
A
That's exactly right. And because this is such a big and important moving story, later in this week, we will have an interview with an absolutely brilliant economist and markets analyst, Mohamed El Erian, who's been on this program before. So that'll be an unmissable episode. Episode.
- [28:46]
B
Yes. That is coming up after this one. But thank you very much for listening to us. But that's it for us on the Rest is Money. Bye. Bye.
- [28:53]
A
Goodbye. From me.