The tensions in the Middle East are dominating global news headlines. With major players within the oil markets involved, there will undoubtedly be implications that impact territories across the world and generate concerns around economic stability.
To make matters much more serious, as a member of BRICS (a group of countries with a greater GDP now than the EU, some 29.3% of Global GDP), the BRICS Council has made a call to all members to avoid the use of the US Dollar when making settlement trades in oil. Since 1974 all trades in oil have been completed using the Dollar.
So, what does this mean for us and for any country that uses the Dollar? Well for a start you don’t need to hold as much in Dollar debt if you’re purchasing oil, so where will the Dollars all end up? Back to America, and this will make oil in the Dollar far more expensive and US debt far less attractive. It will force long dated US Treasury bonds to offer a higher yield, which in English means the value of this debt will
plummet as people try to get rid of it.
All your food is delivered using Diesel, your bottled water and coffee cups are made from petroleum, much of your clothing is also made from petroleum as well as many medical supplies. An increase in the price of oil will hit more than the petrol pump price. This is the stealthiest of all taxes, as it reduces government debt in their currency and at the same time reduces what you have to spend on your family. It’s
worth remembering that inflation is ONLY caused by an increase in the money supply, and not by nurses asking for a pay rise.
Inflation expectations will increase, but it might increase the value of your company shares, as the value of cash falls. One asset that is particularly sensitive to higher inflation expectations is government bonds and so you should talk to your IFA about how much exposure to longer dated debt your portfolio holds.
As always, being well diversified and investing for the long term will help, but things take a turn for the worst, especially looking at the light weights that are making decisions internationally at the moment.
