"...we need to put "the risk of wars" into our macro outlook as they are increasing not only in intensity but also in the numbers of casualties.
...The simplest way to “measure” geopolitical risk is to look at the price of energy. Energy is everything for a macro economist as it’s a tax on the economy when high, and a discount when low.
...Everything you did this morning involved energy consumption: Waking up to your smart phone (charging overnight), putting on the coffee, pouring the cold milk from the fridge, taking a shower, driving the car to work and walking into your air-conditioned office.
...The world's energy resources are primarily extracted from “volatile” or underdeveloped regions, creating a real risk of disruption of supply. Herein lies a clear and quantifiable risk.
...The overall impact from war is negative despite the glorified analysis of how World War II stopped the recession – think of the 1970s – probably a better and more relevant analogy to today’s trouble in Gaza, Iraq, Russia/Ukraine, Libya, and Syria. Many will argue it’s different this time, back then we were too dependent on the Middle East. Sure, but prices were only between 10 and 25 US dollars a barrel back then.
Now we have lived with an oil rise in excess of USD 100 more or less since 2007! Crude is now four times higher in price than during the “inflationist” 1970s – the era in which we ended the Bretton Woods system of monetary management and where central banks started targeting inflation instead.
...The market, however, maintains a steady hand: Israel will be contained inside a couple of weeks, Russia vs. Ukraine will find a solution. The non-acceptance of tail-risk (Black Swans) is clear for everyone to see. The market is “perfect” in its information, zero interest rates will save us and we have all been fooled into believing that the real world no longer matters.
Unemployment, social inequality, wars, innocents being killed, and TV images of people fighting to live another day are not relevant………except for the fact that for world growth to keep increasing we need to continue to see growth in Africa, the Middle East and Eastern Europe.
...escalation of wars reflect a world where growth is low, energy is expensive and increasingly hard to get and that we have gone full circle with macro and interventionist policies.
...whenever there is an action there will be a reaction. If the present state of alertness continues through the summer you can bet on higher energy prices having a serious impact on not only world growth but also on markets..."