Navigator – Linking Dots.
The global energy supply crisis driven by the Middle East (ME) War is set to get worse. Demand exceeds supply for oil and LNG plus some critical raw materials like sulphur. Absolute product shortages will be generalised by the end of summer. Oil prices in excess of US$ 150/bbl will be the order of the day.
But alas (!) the bad news does not stop there.
Sovereign debt markets are showing stress. Yields are rocketing in Japan and the US. The fundamental cause is the same in both countries: uncontrolled budget deficits and poorly understood fiscal arithmetic by leadership.
The crunch is this: Japan is the biggest creditor to the world and purveyor of a smooth supply of liquidity. The US is the major borrower. The flows are now becoming disrupted.
This matters to the ME conflict because an economic supply crisis can be seen as the disruption of a vast series of ledgers for trade, manufacturers, consumption and investment. In normal times the debt and credits balance, When disrupted the right side of the ledger and the left no longer balance, Importers cannot find the exports they need. Manufacturers cannot find the inputs to balance their outputs. Consumers cannot afford what they once could but need credit to sustain life. Bankers worry about solvency and cut off credit where it is most needed..
Financial liquidity is vital to plug all these ledger gaps while the economy adjusts. But that may not happen. A sovereign credit crisis could become a multiplier for the impact of the ME crisis on the global economy. Financial liquidity is not the cure-all for Global Chokepoints. But it is the fire service to fight the flames. QS Wealth Protection Portfolio is at the end of the report. It shows how we invest to avoid the worst of the Coming Crisis.
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