The Next Global Recession?

0:00David McWilliams: On the podcast today, it is all about the coming global recession. I don't say this with any glee, but we're looking at interest rates rising, stock markets falling, bond markets falling. We're looking at inflation rising everywhere. We're looking at people cutting back. We're looking at people panicking. We're looking at even in certain countries now, we are going to be seeing not just increases in the price of fuel, but actually reductions in the quantity of fuel. all this is coming at a time when the world is as leveraged, as overborrowed as it's ever been. It is not a nice combination. We are going to be discussing that all in the next couple of minutes.

0:43If your eyes are the windows to your soul and your glasses are the windows to your eyes, then it's pretty important to find your perfect frames. That's why at Warby Parker, we've made shopping for eyewear as easy and fun as can be. Peruse endless styles in our stores, or use our app to virtually try on frames and get personalized recommendations. To find your next favorite pair of glasses, sunglasses, or contact lenses, or to locate your nearest Warby Parker store, head over to warbyparker.com. That's warbyparker.com. Shipping, billing, admin, payroll, marketing. You're managing all the things.

1:18So why waste time sending important documents the old-fashioned way? Mail and ship when you want, how you want with Stamps.com. Print postage on demand 24-7 and schedule pickups from your office or home. Save up to 90 % with automated rate shopping. That's why over 1 million small businesses trust Stamps.com. Go to Stamps.com and use code PODCAST to try Stamps.com risk-free for 60 days.

1:46To understand the economy, you have to understand human nature. This podcast is powered by Acast.

2:22David McWilliams: man. He is down about 14 ,000 miles away. The podcast today will not be on John Sartorio choices. Well, it could be. It could be, but it'll be more on the global effect of the disaster that is turning out. Many people would have predicted this. Many people would have thought it was going to be at least better planned, but the disaster that is the Israeli-American attack on Iran, the closure of the Straits of Hormuz, the increase in the price of oil, the massive reduction in bond markets and stock markets, the nervousness, the inability of the United States to bring allies on board, the inability of the United States to express exactly what it's doing there.

3:07David McWilliams: And, of course, the tremors which are percolating throughout the world as a result of particularly the immediate increase in oil prices, fertilizer prices, etc. But more importantly, the tremors that are percolating around the world as well. What is the end game? What does this signify? Is this a historical moment, etc.? We're going to have a quick look at the history, a brief history, John, of five oil shocks. The basic idea is, at least in the last 70 years, in the era of petroleum, oil shocks have always been followed by recessions, both short, shallow, long, and sharp. But there's always been a slowdown activity, number one.

3:50David McWilliams: And number two, going further back, if you want to do that, prior to oil, the main combustion fuel of the Industrial Revolution was coal. And if you look back at history, you'll also see shocks to the coal market, be they very, very cold weather, number one, or strikes, number two, which was typically the shocks to the coal market, have also precipitated recessions in the couple of quarters afterwards. So that's what the podcast is going to be all about. It's a recessionary one. It's a chilly one. But down in the sun, the baking heat of southern Australia. G'day, mate. How are you enjoying your road trip, Johnny Boy?

4:31I'm loving it because there's several different elements to this trip. So we started in Melbourne. Melbourne's a fantastic city. Really busy, really vibrant. like even on walking around on Saturday afternoon, the streets were packed, almost like Christmas shopping type packed, you know? Actually, it was Sheena's birthday. So we went to a comedy wine tasting. Oh, I like that. I like that. It was really fun. A guy called Merrick Watt, and he's a proper wine connoisseur and a Barossa Valley master and all the rest. But he's also a comedian and he's very funny. I love the name Merrick Watt.

5:12David McWilliams: Merrick Watt is such an Aussie name. That's the sort of name that, you know, an Aussie cricketer or an Aussie rugby player would have. Yeah. But then we left there and we did the Great Ocean Road, which we're still on at the moment. And actually, you know, you're talking about oil shocks bringing on recessions. I can actually see it here happening. And I've been talking to lots of different people, you know, even the Carhartt guys, the hoteliers, my brother-in-law and farmers. I mean, I chant to everybody, actually. Anyone who would listen. That would not surprise me, John. John is the sort of man who you probably know if you're a regular listener to the podcast, who will actually go into a bar and befriend everyone at the bar.

5:54David McWilliams: Whether they want to be befriended or not, that's the key thing. There's always a sort of like, are we gauging this situation properly? But you're still alive. You look very healthy. You're having a big swig. By the way, I'll just tell you, it's 8 a.m. in Ireland. So I'm just out of the scratcher. It is, I think, 6 p.m. in Adelaide. I'm just having my first wine. First, I doubt it. I think our friend is in the second or third bottle of Pinotage or whatever it is. Tell me more. So farmers, farmers. So, yeah, so farmers. Well, first of all, actually, just picking up the car, the whole car park was stuffed with cars.

6:31Easter is coming up, and Easter is a really big weekend. It's a really big deal here. my brother-in-law was saying they normally go off traveling and hiking and and camping and all that

6:43David McWilliams: kind of stuff dingo chasing and whatever else exactly yeah and barbecue and whatever they can find but loads of people are cancelling that now the car hire guy was saying car hire has fallen off a cliff the hoteliers on on all these beautiful little towns along the great ocean road are empty and they were expecting huge numbers for Easter, but they've all cancelled. For them, actually, it was particularly hard because it's a double whammy because they suffered terribly from the bushfires a couple of months ago. And they were hoping that this would be a time when they would recover and, you know, get a little something back.

7:25And they're being hit again. And there was one particular person I was speaking to, this farmer, and she said her family farm, enormous thing, it's something like 1 ,900 acres, which is absolutely ginormous. But of course, with a farm that size, they run something like five tractors, all running diesel. Now, fuel prices have shot up here by somewhere between 30 and 60 % in the last few weeks. And she was saying that the impact that they have, at the moment, it's fertilizing season. where they spread the fertilizer over the 1 ,900 acres, running those five tractors. And then in May, it's sowing season.

8:10And she's saying, we have to now start making decisions and prioritizing what should we do? Do we run all the tractors? Do we, you know, fertilize all the land or what? So it's really interesting. You can actually see the impact and the struggle that each part of the community here are experiencing.

8:34David McWilliams: Yeah, no, I mean, look, this is what we're going to talk about the podcast, right? Which is the absolutely rapid, ubiquitous and global nature of an increase in energy prices, notwithstanding the fact that the Aussies are a terrible bunch of whingers and would complain about anything, right? There might be an element to that. I don't know. Oh, there is, there is. I love them, but they love a whinge, right? But no, but the point is, the point is, that this is ubiquitous. John, we're going to start with a poem, right? Oh. The Wasteland by T.S. Eliot. Okay, those of you who are into poetry will know that The Wasteland is one of the classics of modernism.

9:11David McWilliams: But John, it starts with the immortal line of April is the cruelest month. Breeding lilacs out of the dead land, mixing memory and desire, stirring dull roots with spring rain. April is the cruelest month. which is one of the great openers. And April will indeed be the cruelest month because what you are seeing now is the price effect of the contraction of the Straits of Hormuz. But that has not taken into account the quantity effect, which is when will this 10 % fall? So we're talking about a 10 % fall in the availability of global oil supply, about 10 million barrels a day, right? When will they actually start to percolate into petrol stations where they're actually, it's not that the price has increased, there just isn't any oil.

10:06David McWilliams: There isn't enough. So, JP Morgan, the investment bank, did a very interesting piece of research. I'd advise people to just Google it. And it talked about, they published it yesterday or the day before, about when oil stops flowing into Europe, into Asia in particular. and of course where you are, Australia is, bizarrely, Australia is an incredibly resource-rich country, but it is incredibly oil-dependent, oil-import-dependent. Yes, it is. And there are actually big queues at some of the petrol stations and there's reports, my brother-in-law was telling me, that some petrol stations in more remote areas have run out.

10:49So there you have it.

10:50David McWilliams: So basically the next, the reason we quote Wasteland, John, April is the cruelest month, is April will be the cruelest month because that is the month where the actual supply of petroleum, fertilizer you mentioned, we mentioned this in the podcast about three weeks ago, people weren't watching the actual impact of all the reductions in the flow of petrol, LPG, but actually another huge production, another huge problem was that fertilizer prices go through the roof. So that is where we are, John. We're going to look at, while you have another swig of that very fine vintage there, we are going to look at five oil shocks and how they percolated through the system.

11:37David McWilliams: That's the first part of the podcast. Second part, John, we're just going to analyze, is there any strategy at the top in the White House? Is there any exit strategy? All that sort of stuff. So let us kick off, John. We're going back to, you're talking about oil. 1973, we were kids. you will remember, and the reason I quoted this is I was in Africa, as you know, last week, the rumble in the jungle. The reason I wanted to explain the rumble in the jungle is why in October of 1974 was there an extraordinary boxing match in Zaire, and what does that tell us about the flow of money after an oil shock?

12:13David McWilliams: And we will focus on that first. Then we're going to go through very, very briefly again, 1979. Then we're going to look at the oil shock of 1991. Then we're going to look at the oil shock of 2008. People forget that preceding the global financial crisis was an oil shock. And then finally, we're going to look at the present one. And all of them, John, all of them have precipitated recessions. That's the key. And I don't think there's any way out of this. I'm not too sure how deep it will be, how shallow it will be, how long it will be. But I just might add that an oil shock coming at the same time of a heavily, heavily leveraged financial system, heavily overborrowed, heavily indebted, heavily overleveraged financial system is a particularly nasty prognosis.

13:01David McWilliams: Why? Because the oil shock increases the rate of interest because the central banks have to respond to the rate of inflation. So they increase the rate of interest. We've seen this already in bond markets all over the world. Bond prices falling, interest rates rising. Now, what that does, John, is that makes all those borrowings much more expensive. Yeah. At a time when the economy is beginning to slow down. Now, why is the economy slowing down? Because a higher percentage of people's take-home pay is, like your farmers in Australia, going on energy costs. That wasn't the case two, three, four months ago.

13:37David McWilliams: So then they retrench a little bit. All the while you have this extraordinary AI and tech bubble, which was fueled by a profound increase in private debt. All that private debt has to be paid. All that private debt has to be paid at rates of interest that make sense. and you have an entire subsection of the American economy called the AI subsection, which we know in the future may well deliver miraculous results, but at the moment is making no money because nobody's paying for Claude or ChatGBT. We're all just using these things and hoping for the best. So that's the background noise, John. That's the background noise.

14:11David McWilliams: But we start in 73. Quick question before you start. You mentioned there that the global oil supply is down 10%. 10%. The actual, yeah. So basically, just back of the influence of 100 million barrels a day is what the world consumes. Yeah. And 10 million barrels a day have disappeared. They're stuck in the straits. But 10 % doesn't sound like a huge amount to have such a major impact and ripple effect across the globe. Well, this is where the difference between... economics is all based on what's called the marginal supply. So it's the extra bit of supply. It's not the absolute supply, it's the marginal.

14:56David McWilliams: It's the difference between what they call static and dynamic analysis. Now, what happens when 10 % of the supply disappears is that it creates panic, right? This is the idea that at the cornerstone of all economics is this weird creature called the human being. And the human being is driven not by actualities, but by expectations, anticipations, and perceptions and fears of the future. So if you reduce supply even ever so slightly, so think about what's happening when there is a queue of cars outside a petrol station. What's actually happening is not that the petrol station has run out of petrol, but there's a fear that it will run out of petrol.

15:37David McWilliams: So consequently, the panic triggers a change in human behavior. and that's why modest changes, 10 % changes, can have profound immediate impact on the way in which people perceive things. Yeah, it's like a bank run. It's exactly the same. It's a collective psychology. But like if you think, for example, that 10 % of oil supply disappears, well, what happens if you are part of that 10 %? Then you get none. And of course, the whole idea is that once you get a panic, that precipitates a change in behavior, that precipitates hoarding. What that does is it increases demand in the immediate term. So even if there was a modest, modest deficiency in supply, that can become endemic very, very quickly, which is exactly what's happening.

16:31David McWilliams: That's the first thing. The second thing, John, is that we've heard of the Ayatollah. What about the Ayatollah, right? The toll booth that is going to be put on the Straits of Hormuz. The Ayatollah, right? I love it. I love it. Yes, exactly. Okay. So there's going to be an Ayatollah gate. An Ayatollah gate on the Straits of Hormuz. What might bloody well happen is the Americans have lost the plot so much that they might even cede control of the Straits of Hormuz to Iran. Of course, the key thing in Iran is all Iran has to do is stay standing to win. Yeah. And it is staying standing. I think there was a headline in today's economist or this week's economist called Advantage Iran.

17:13David McWilliams: And it's basically about the tactics and the strategy that the Iranians will use. But the very weird thing, John, the very, very weird thing before we get into the history of oil shocks is like before this war, Iran didn't control the Straits of Hormuz. Now it does. Before this war, Iranian oil was sanctioned. Now it's not. Iranians are selling their oil to the Chinese. Before this war, Iran was not building a nuclear bomb. Now it definitely will. Before this war, US bases in the Gulf were described as assets. Now they're clearly liabilities. And before this war, inflation was declining around the world.

17:50David McWilliams: It is now rising. And before this war, growth was rising around the world. It is now falling. And before this war, stock markets were rising. They're now falling before this war. Bond prices were stable. They are now falling and interest rates are accelerating. That is the prognosis, John. And before this war, we were kind of sane. Now the whole world has gone completely and utterly insane and batty and full of angst and anxiety and the whole shebang. Absolutely. So let's have a look, right? So what happens. 1973, I just mentioned the rumble in the jungle because it's important to see that this has profound effects on just the way people live and we behave, etc.

18:32David McWilliams: In 1973, you have, we've touched on it before, the Arabs are, particularly Syria and Egypt, are so angry at losing the 1967 war to Israel that they spend the next four or five years doing in effect what the Americans were doing up until now, which was negotiating. I mean, the Americans were negotiating in Iran, but all the while planning to invade. Arabs were doing the same with the Israelis. They were negotiating. They said, OK, we accept these new borders, et cetera, but we don't. We want them all back. We want the West Bank back. We want East Jerusalem back, et cetera, the Golan Heights back.

19:09They invade in early October of 1973.

19:16David McWilliams: the Israelis with huge amounts of American money, two and a half billion dollars of American arms go to Israel. Nixon signs that because Nixon wants to change once and for all the balance of power in the Middle East on the Israeli side. The Israelis win, right? Okay. Yeah. The Arabs get very, very angry. And of course, what happens then is they realize, hold on a second, we have one particular weapon, which is oil. We're going to punish those Western people for supporting the Israelis and not supporting us. And of course, in the background, the Soviet Union was supporting most of the Arab countries, particularly the so-called nationalists, Ba 'ath nationalists or socialist parties of Egypt and of Syria.

20:00David McWilliams: An interesting little caveat, Cubans were involved in the invasion of Israel in 1973, which is a kind of a bizarre story. Yes, yes. Many Cuban soldiers were killed in the Golan Heights, fighting with the Syrians as part of a Cuban delegation for the International Solidarity Front on behalf of the Arab people. So it's a more kind of international war than people think about. But I mean, the most important thing is the Americans were not combatants. But the Americans get hit because it's America is the big oil consumer. So in late October of 1973, there is an embargo. That embargo affects, now interesting, you talk about 7 % only of world global supply, but it precipitates a threefold rise in prices.

20:50David McWilliams: Henry Kissinger is sent out by Nixon all around the Middle East to try and get a peace, to try and get the embargo lifted. It took him five months to get the embargo lifted. Now, the reason that's important is that you can start a war very quickly. It takes a long time to end a war. It takes a long time to negotiate. As we're experiencing now. Exactly. So what happened in 74, John, is you got this massive, massive shift of money from the West, who were consumers of oil, to the Arabs, who were producers of oil. The Arabs don't have the infrastructure. They don't have the investment to spend all this money.

21:27David McWilliams: So what they do is they give it back to the West. They relend it back to Western banks. Those Western banks, particularly driven by Citibank, the American bank thinks, okay, we need to lend this money out to somebody, but our Western economies are in a recession because of the oil shock. They're spending lots and lots of money, so their collateral is getting less and less enticing. What will we do? We will lend this money to countries that have deep, deep reserves of commodities. Because once the oil price rises, as you're seeing today, price of all commodity rises. Where are those countries? Largely based in what we call the third world.

22:06David McWilliams: So what you see, European and American money goes to the Arabs. The Arabs can't absorb all this. They give it back to the Americans. The Americans lend it out. And you see it going to Latin America and to Africa. This is the beginning of what became the third world debt crisis of the 1980s. For those of you who are into sport, you can see that the Mexican World Cup was built with that money. The Argentinian World Cup was built with that money. And the rumble in the jungle was bit with that money. Why? Because those leaders wanted to put their countries on the map and the best way to put their country on the map then and now is buying sport.

22:41David McWilliams: Sport washing is not a new thing. It's an old, old thing, right? De Junta in Argentina and in Mexico, they were sport washing with the World Cup. Mobutu was sport washing with the rumble in the jungle. But we have a profound recession. Just to give you a figure in Ireland, the rate of inflation goes in 1973 from 4 % to 22 % in 1975. The rate of unemployment goes through the roof. The growth rate collapses. And of course, government borrowing goes through the roof. Why? Because the governments in the West decided, well, how do we react to this? Well, we need to borrow to increase social welfare, to pay the people who've just been laid off.

23:20David McWilliams: And you get this extraordinary instability that characterizes all of Western Europe and the United States through the mid-1970s into the late 1970s, when your friend Bruce Springsteen was writing songs like The River. Yes. About the unemployment of blue-collar workers in the United States, all coming about because of this oil shock. So Ireland obviously borrowed enormous amounts of money at that stage. Yes. And that started this whole thing of Ireland being hugely in debt. You're absolutely right. So basically, Ireland under Fianna Fáil, little aside for our international listeners, bear with us two seconds.

24:00David McWilliams: Fianna Fáil, our great populist party, and when I say our great populist party, I mean a populist party that is not great, but it's greatly populist, okay? It came into power in 1977 with a fantastic, fantastic manifesto which says we will cut all rates, i.e. we will have no tax of local property and we will cut car tax, we will cut everything, we'll spend a fortune, we'll borrow our heads off. and the money ran through the country like a dose of salts because we're a small open economy. At the end of the day, we end up in 1979, 1980 with a huge and unsustainable foreign debt position. That is what characterizes all of the 1980s, the downside of which was mass unemployment where your brother ended up living in London and all the lads on our road end up living in London.

24:55David McWilliams: That is the story. But it all has its genesis in the oil crisis. Then, of course, just as you're getting off the canvas in about 1978, 79, we get the Iranian Revolution. The Iranian revolutionary position is we can squeeze the West again because we've just squeezed them in 73. We now know they're incredibly oil dependent. Let's do it again. They do it again. There is a global recession, 1980, 1981. And of course, this is all compounded, John, by the Iran-Iraq War, which starts in 1980 and again has the effect of massively reducing the supply of oil through our friends, the Straits of Hormuz. Can I ask you, Mike, just in the Iranian revolution of 1979, was the strategy there or part of the strategy there to actually squeeze the West with oil?

25:51Or was that just a byproduct of the revolution?

25:54David McWilliams: It was a combination of both. Good question. Combination of both. The Iranians understood, as they understand now, that the only thing the Americans respond to are gas prices and stock prices. right at the moment it is amazing donald trump seems to be predicating his entire war strategy on what happens at the end of the trading day in wall street if the stock markets go up he's happy if the stock markets go down he negotiates but he negotiates or he threatens to obliterate iran right so i think the first thing is the iranians wanted an increase in the price of oil anyway in 1979 to fund the revolution, to have the wherewithal to actually fund the revolution, because as I've always said, all revolutions start with revolutionaries and Marxists and religious fanatics and the end with accountants, right?

26:51David McWilliams: Because the revolutionary has to turn into an accountant to make sure the whole thing stabilizes. So that's the first thing. The second, It's true. It's true. The second thing is... Like an accountants get everywhere, don't they? Accountants get everywhere. They run the world. The first day you're on the barricades, the next day you're in the balance sheet. What the fuck happened? Right? It's true. It's true. Do you know what the Cubans made Che Guevara, the first thing? The governor of the central bank. That was his first job. Really? Oh, man. Yes. Anyway, let's go back. So the Iranians, one, they needed the money.

27:32David McWilliams: And then two, the Americans tried to destabilize the revolution by encouraging Saddam Hussein to open up a front against the Iranians in the north. That became the Iran-Iraq war. And of course, there you have two huge oil producers in a scrap. That scrap goes on for, I think, seven years before they get a piece. Yeah, seven or eight years, yeah. So it goes on for ages. So this is the sort of world we're in. Then another oil shock, John, is after Desert Storm. Desert Storm is 1990. And again, surprise, surprise, it's a war in that particular small area. I think we did it in the podcast recently.

28:18Saddam Hussein, again, not encouraged by, but at least given a sort of, not a green, but an amber light by the Americans to take out a little bit of Kuwait.

28:28David McWilliams: He asked the American ambassador, would you guys have a problem if we did this? They said, it's kind of up to you. But then once the Americans realized that Saddam Hussein's next port of call after Kuwait would be straight down the desert into Qatar, into Bahrain, into UEA, into Saudi Arabia, they said, hold on a second, we have to get rid of this guy. And then you've Operation Desert Storm. that creates a significant, significant increase in oil prices. Probably the most conspicuous casualty of that is George W. Bush's dad, George Herbert Bush, who wins the war quite comprehensively, having put together an amazing coalition of global powers ranging from Russia to lots of African countries, to all the Europeans, et cetera, does all this, has the victory parade, but all the while the price of gas and petrol is going up at the petrol pumps.

29:32David McWilliams: And a man called Bill Clinton comes in. He says, it's not the war that counts. It's the economy, stupid. Do you remember that? Yes. Yeah, yeah, yeah. And he wins the 1992 election on the back of an oil crisis. So that was your man, what's his face, the Raging Cajun or something, wasn't it? That was James Carville, the Raging Cajun, who was Bill Clinton's kind of advisor in everything. Yeah. And of course, that brings into the mid-1990s, John. Mid-1990s through to the mid-2000s, we get a oil glut. So oil prices are very low. Surprise, surprise, the global economy grows very strongly. The rate of inflation is very low.

30:19David McWilliams: People credited Alan Greenspan, the head of the Fed, with this extraordinary dexterity in management of policy. In actual fact, it was nothing except the fact there was a glut in the oil market. Why was there a glut? And the glut was very, very simple, John. It was because when oil prices rise, something bizarre happens. Demand goes down, but supply tends to increase. And why is that? It's because oil wells and oil regions that are inaccessible when the price of oil is low become profitable when the price of oil rises. So you get an increase in drilling in very inaccessible areas when the price of oil is high, as it was in the early 90s.

31:02David McWilliams: And what that tends to do is that stuff comes on stream a year or two later and it floods the market. So that's exactly what happened. Right. OK. Then in the mid-2000s, what we see is the big change, John, in the world. It's not a change in supply. It's a change in demand. And it is the emergence of China. And China begins to become this extraordinary consumer of all commodities. In fact, John, in fact, I'll give you, you're in a place called Port what? Port Ferry. Port Ferry. So if you were to look at the map of Australia and draw a diagonal line all the way across Australia to the north of Australia, you'll get to a place called Port Hedland.

31:39David McWilliams: And I have been in Port Hedland in 2007, John. And Port Hedland is the main port for the exportation of all the commodities of the Pilbara, which is that huge part of Western Australia. And all those commodities were going to China. So I saw what was happening, which was this amazing shift or pivot in the direction of trade. So in the early and mid-2000s, the Chinese begin to motor by 2007, 2008. They are consuming everything and the price of oil goes up to$140 a barrel, the highest it's ever been. And that is on the eve of the 2008 global financial crisis, which most of us still ascribe to lax monetary credit and financial policy.

32:30David McWilliams: But all the while, John, there was this also increase in the price of oil. And again, we know what happened in 2008. You get a world collapse. And so was it the oil price that tipped it over the edge? No, I think what it was, it was the oil price. And I come back to this idea. So you get that the worst combination, which is where we are now, is an increase in the price of oil allied to a period of excessively loose monetary policy preceding that increase in the price of oil, which is what happened in 2008. So you have a huge amount of debts that can only be paid if the economy is motoring along, if profit margins are strong, if the underlying cost of production is low.

33:16David McWilliams: If you ally a fear and a panic in financial markets with an increase in the price of oil, what you get is this slightly Armageddonist combination. And I feel that that's where we are now. Because what we've had since 2008 is almost a generation now of low interest rates, a generation now of a huge buildup of private debt all over the world and now public debt as well. Now, all of this is grand if the economy is motoring. But when you shock the system, as we've done in the last four weeks, with not just oil price shocks, but oil quantity shocks, but also, John, a recalibration of geopolitics in the region, then I'm not sure the global economy is sufficiently robust to deal with all that.

34:14David McWilliams: And that is where we are. Okay, let's just dig into that a little bit more after a bit of this.

34:45experts and voiced by real native speakers, Babbel is like having a private tutor in your pocket. Start speaking with Babbel today. Get up to 55 % off your Babbel subscription right now at babbel.com slash acast. Spelled B-A-B-B-E-L dot com slash acast. Rules and restrictions may apply. Every idea starts with a problem. Morby Parker's was simple. Glasses are too expensive. So they set out to change that. By designing glasses in-house and selling directly to customers, they're able to offer prescription eyewear that's expertly crafted and unexpectedly affordable. Warby Parker glasses are made from premium materials like impact-resistant polycarbonate and custom acetate, and they start at just$95, including prescription lenses.

35:34Get glasses made from the good stuff. Stop by a Warby Parker store near you. Shipping, billing, admin, payroll, marketing. You're managing all the things, So why waste time sending important documents the old-fashioned way? Mail and ship when you want, how you want with Stamps.com. Print postage on demand 24-7 and schedule pickups from your office or home. Save up to 90 % with automated rate shopping. That's why over 1 million small businesses trust Stamps.com. Go to Stamps.com and use code PODCAST to try Stamps.com risk-free for 60 days.

36:11So Mike, the war in Iran, major shifts in geopolitics, and of course, an oil shock. Is the world ready for this? Is it able for this? What's going to happen? Well, I think the first thing to look at, John, is for buffs of economic history,

36:31David McWilliams: a parallel is the Suez Crisis in the 1950s. So the Suez crisis was all about keeping the Suez Canal open for trade by the French and the Brits who attacked the Egyptians in order to keep the Suez Canal open for trade. What happened? They lost and the Suez Canal was not only closed for trade, but the Egyptians put a toll on the Suez Canal, the money of which went to Egypt into perpetuity. And it also constituted the end of Britain's role as a major global power. The question is, are we at something similar here? The Ayatollah, the toll, right? I love this idea. The Ayatollah gate, okay? This is what the Iranians are negotiating now.

37:28David McWilliams: The thing about Iran, it's got two things on its side. It has time and it has geography. These are incredibly powerful allies to have in a war. The Americans don't have time on their side, not because they don't have the bombs and they don't have the military strategy, but the clock that is ticking is being set by the financial markets. And that's the clock that is ringing in Donny J's ear. So what you have now is you have a bizarre conflict in the head of Donald Trump between the chiefs of staff of his military, who are telling them what is possible militarily, and hedge fund short traders in the stock market who are spooking him, right?

38:10And then there's Bibi Netanyahu's holdover him as well, whatever that is.

38:15David McWilliams: The Bibi Netanyahu holdover him, which I think, again, this has been a complete and utter, for the Israelis, they thought, it's amazing the way things can change very quickly, right? Yeah. The Israelis thought that this would be the moment where American power and Israeli power were soldered together by a mutual enemy called Iran. But it's very clear now that the American people are saying, are we fighting this war for Israel? Yeah, yeah, yeah, yeah, yeah. You know, eventually our boys, we will be poor, brown, and Christian. and, of course, the white Scots-Irish sort of element of the American army are going to go fighting to keep these creeps in the West Bank attacking Palestinian kids.

39:07Yeah.

39:07David McWilliams: You know, this is the Tucker Carlson view. Yes. This is bullshit, you know. And gradually a lot of Americans are saying, the American dog has been wagged by the Israeli tail, all the while we're paying with higher gas prices and a stock market which is falling and our 401ks are falling and all that sort of stuff. So the whole geopolitical situation has changed profoundly. And of course, who is winning? Russia, because the price of oil is going up. So President Putin's getting his coffers sorted. And finally, you have China is going to be seen as, in the long run, a dependable ally, not an undependable ally.

39:51David McWilliams: But the Chinese are the ones who are going to suffer quite quickly because they are unbelievably, unbelievably attached to oil from the Gulf. So we have all this going on. But just look at what's happening. This is happening at a time when we've got tariffs, at a time when we've got inflation, at a time when we've got an increase in debt, at a time when the jobs market in the United States is already weakening. at a time when there's going to be a change at the top of the Fed. So all that policy credibility and who's the new guy, that's all up for grabs. And of course, what you have is the emergence of what Jamie Dimon called cockroaches.

40:36David McWilliams: Cockroaches are private equity firms that are going bust. The reason he calls them cockroaches is because the Americans will always say, if you find a cockroach in your kitchen, there isn't one of them. There's a hundred of them. OK, so they come in thousands, cockroaches. So all this is happening. And of course, the question then is, where is the road for peace? I mean, does the bond market and the stock market equate to peace? I mean, this sounds really bizarre, but this is what's going on in America, right? So when there's a drop in equity markets and a drop in bond markets, Donald Trump says, I'm negotiating.

41:17Yeah.

41:18David McWilliams: Right? The question is, is he negotiating because there's a drop in markets or is there a drop in markets because he's negotiating? Because all the while, the Iranians say, well, he's not negotiating with us. Yeah, yeah, yeah. He's talking to himself, right? I love that cartoon of Donald Trump lying on the psychiatrist's couch and the psychiatrist say to him, are those Iranians that you're talking to, are they in the room right now with us? Brilliant. So I will just leave it, John, because we're going to come back to it. But what we're going to do in the next two weeks or the next week, we're going to bring you, the listener, a fantastic, as the Americans say, deep dive forensic analysis into global house prices, house markets, what's happening all around the world.

42:10but I will leave it with

42:13David McWilliams: it's a hostage situation John and this is what has happened so the Iranians have taken the Straits of Hormuz hostage and the Straits of Hormuz is parenthesis for the global economy we've got into a strange situation they call asymmetrical wars where the country with the overwhelming firepower doesn't have the overwhelming advantage right and the country with the Underwhelming firepower has the overwhelming advantage. Why is that? Because of its time and geography on its hands. And the Iranians have said, look, we've got a hostage here. We've got two hostages, actually. One is a general hostage.

42:54We have the global economy, right? But the second set of hostages we have are the Gulf states,

43:04David McWilliams: which we can turn on and off as we want, because we can hit them with drones. We can hit them with missiles and you can't protect them. So suddenly what you have is the Gulf states are the hostages. At the beginning, the Gulf states wanted the Americans to do a job on the Iranians. They now find themselves that they are the hostages and the hostage takers of the Iranians and the Americans have to pay the ransom. What is the ransom? It's the Ayatollah, the toll on the straits. Now, what will happen in that case is the Iranians will rebuild their armaments. They'll become a regional power again.

43:41David McWilliams: And it could be seen as a catastrophic defeat for the Americans. Yeah. Because they can't do what they said they would do, which is control the world. And this, of course, is where we end this podcast. We have a global economy heading, if the past is anything to go by, into a recession. We have a global economy heading into a period of stagflation where the recession is combined with an increase in inflation, which means an increase in interest rates. An increase in interest rates means that all those accumulated debts of the last 12 years become harder to pay. They come harder to pay at a time when policy is being made on the hoof in the United States.

44:33David McWilliams: So in the United States, even since the 1990s, or maybe even the 1980s, John, the Americans have built up what I would call a credibility bank, right? The assumption was the United States is run by reasonably sensible people who have a reasonably good idea what they're doing, have a reasonable sense of proportion, and can be trusted to do the right thing. They are both competent, and they are well-intentioned. I am not too sure whether the United States administration is either competent anymore or well-intentioned. I mean, it looks as if Trump has surrounded himself with a bunch of insider traders.

45:09David McWilliams: There was an article this morning in the FT that says Hexeths was actually buying up defense stocks, etc. Right? Now, if this all comes to pass as being the truth, if this all comes to pass as being what's going on in Washington, that's a grifter's convention of insider traders, of people who are lining their own pockets, people are putting American lives at risk, people are putting the global economy at risk for their own instant gratification, then I think the notion of the United States being the world's leader in technology and economics and politics and finance and military doesn't so much go out the window, but is profoundly undermined.

45:51David McWilliams: Now, what that means in a very narrow sense, John, is the interest rate that the United States has to pay in all its debts rises that little bit more. And against a background of falling output and your Australian farmers as we opened this podcast saying, look, we're making a choice. Do we use a tractor? Do we fertilize this? All that will suggest that agricultural prices and food prices will rise over the course of the next while. So if I were you, I would take my Paul Hogan hat. I would find myself, I'd find myself a little she-bean on the side of the road or maybe a vineyard or two. And I would stay down under, miles away from the crisis because it's one of the places that you would be most safe.

46:41David McWilliams: The weather is good. The people are friendly. Yeah. And the wine is flowing. And you're miles away from the chaos. We'll talk to you on Tuesday.

47:18useful words and phrases to get you speaking quickly about the things you actually talk about in the real world. With lessons handcrafted by over 200 language experts and voiced by real native speakers, Babbel is like having a private tutor in your pocket. Start speaking with Babbel today. Get up to 55 % off your Babbel subscription right now at babbel.com slash acast. Spelled B-A-B-B-E-L rules and restrictions may apply shipping billing admin payroll marketing you're managing all the things so why waste time sending important documents the old-fashioned way mail and ship when you want how you want with stamps.com print postage on demand 24 7 and schedule pickups from your office or home save up to 90 percent with automated rate shopping that's why over 1 million small businesses trust stamps.com Go to stamps.com and use code podcast to try stamps.com risk-free for 60 days.