Blain’s Morning Porridge, March 30th, 2026 – Stage 2 of American Divergence and the Risk of Global Stagflation
“Events dear boy, events…”
The global economy is inevitably slowing from the deepening Hormuz oil shock. The Americans intend to press on despite the rising costs. While the global economy burns, President Trump is mulling multiple plans to achieve his version of victory. The rest of the World is waking to the reality this war is damaging their economic interests, and wondering how to mitigate the effects.
Another interesting week’s play in prospect for the global financial markets…. What will happen next? Who knows….
The financial markets are never simple. You can’t simply define them in terms of the sentiment differential between optimists and the pessimists, or how deep or shallow real events will go. There are consequences and effects which make markets and consequences kind of multi-dimensional! Hah… that’s far too sci-fi for a Monday Morning, but I’m sure you get the drift.
However, there is now a new reality emerging.
It’s political realisation – call it Stage 2 of the Trump effect. Stage 1 was the realisation Trump holds the rest of the World in Contempt. Stage 2 is actively countering him.
Around the globe, Nations are now experiencing the negative consequences of Trump’s mis-adventurism on their economic interests. While Trump continues to hurl insults at nations that won’t support his war, there is a growing realisation its America’s actions that have triggered global slowdown and likely stagflation.
There was a time when the Western World would happily followed America into the mouth of hell – we did in Iraq and Afghanistan. That is no longer the case. To understand what follows next, let’s start by trying to work out where we are, and the unquantifiable ramifications of a pack of cards that’s been dropped on the global economy.
If you are at all concerned at the cost of the war on the US deficit, over the weekend the USA lost a venerable E-3 Sentry “Battlespace nerve centre”, taken out by a missile while on the ground. While Trump may dismiss it as old plane, there is nothing to replace it – the replacement E-7 Wedgetail is massively delayed and overbudget, costing $700mm plus. $1 bln is conservative estimate of the real replacement cost. Even more damaging is losses than may stem from a lost resource to control the battlespace – in the Gulf or elsewhere they may be needed.
To understand the consequences of the war… what is the damage? One of the best market commentaries I subscribe to is James Eagle’s Killer Charts which illustrates the world in a clear and insightful way. I’ve stolen his headline chart this morning – Ships Through the Strait of Hormuz. When 20% of global energy has literally been stopped for a month there are bound to be consequential problems. As James says: “It shows how global trade behaves under extreme stress. It does not bend. It disappears.”
It’s impossible to argue – as some in the US are doing – that stopping 20 million barrels of oil per day stopped is something the laws of economics can shrug off and ignore. Its’ not just oil – its every product that is derived from Oil and Gulf Gas – from jet fuel to fertilizer.
Did you fill the car up over the weekend? Nope. The £2 litre of Diesel is days away. The supply chain consequences are enormous. James makes the observation: Diesel is not just for powering your Range Rover. Diesel powers logistics, agriculture, industry and infrastructure – raise Diesel prices and the cost of transport rockets, feeding straight into inflation.
This morning the first headline I spotted says bond markets are staging a rally on the rising expectation of a global recession. I suspect global stagflation – rising inflation and falling economic activity is a far more likely outcome. Dealing with stagflation in the 1970s caused a lost decade across many economies despite relative political stability. Compare and contrast today’s massively more polarised and dysfunctional politics riven by fake news and populism – it’s a recipe for instability.
Another of James’s charts this morning shows that less than 4% of gulf oil production goes to Europe – it’s Asia that is set to struggle most with a complete shutdown in oil supplies, and some nations are already preparing for rationing. (Gas is Europe’s problem!) My fear here is someone may tell Donald Trump he’s missing a trick here. China takes nearly 40% of Gulf Oil – which we know is largely discounted as much of it is Iranian! What if Trump makes the connection and triggers an even deeper trade war? (Which past experience over rare earths reminds us he can’t possibly win.)
As I noted above, some of my American Chums don’t believe higher oil prices are a problem because the USA is net exporter of energy. Being Americans they are thinking of themselves, and how the US economy is largely isolated from the consequences of its actions – echoing a great piece in the Wall Street Journal yesterday: “Three Reasons the Stock Market Can Endure the War.”
The article points out that US company earnings predictions are still rising, and while some heavy oil dependent sectors like airlines, chemicals and cruise liners might struggle, the rest of the US is doing just dandy. The mood in the USA is in direct contrast to the increasing gloom elsewhere – a short, sharp war is seen as “fine”, not a destabilising catastrophe!
The article points out that despite the USA’s disappointing away-record in World Class Wars against military giants like Vietnam, Afghanistan, Iraq and others – military misadventures haven’t seemed to impact US stocks much since the 1930s! The US markets are apparently immune to its many un-won wars. A recent Deutsche Bank report says that due to the US economy never having been bombed, invaded (not since 1812!), or utterly destroyed as most of Europe and Asia were in the 1940s.
While European economies are genuinely concerned about the consequences of conflict with Russia, the Gulf is now trying to work out what increased regional instability from Iran will mean, and Asia is trying to work out the economic damage from oil price hikes…. the American’s consider energy shocks as something that happens to other people.
While they will react badly to unpleasantness, like a glut of returning body bags and higher petrol (gas) prices at the pump… as long as the stock market is booming and their 401k’s are thriving…
The rest of the world will look on and wonder. No one disagrees that Iran was a dangerous and destabilising state, but its looks politically awful to tumble the global economy into a stagflationary recession while the US suffers a minor inflationary hiccup from Trump’s war. Will the headlines, higher “gas” prices, and global disruption be consequential enough to see Trump effectively hog-tied by the mid-term elections?
Back in the real world… Europe and Asia face mounting disruption. How they start to respond is what we really should be looking at this week. Someone is going to figure this is not just an American War, but that its consequences are not in Europe or Asia’s interests.
Out of time and back to the day-job…
Author of the Morning Porridge
Advisor – Spitfire Strategic Capital
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The assumption seems to be that normality returns once the conflict ends. Iran will still control the Strait of Hormuz. If reparations aren’t paid directly, it’s hard to see how that leverage isn’t reflected in higher and more volatile oil prices.
How much more pain will the world tolerate from the political arsonists … Putin, Netanyahu, Trump … who’ve set the globe ablaze? Perhaps, their common disregard for greater consequences, desperate clutch on self-preservation, and the outsized influence they affect, will finally force the world to a solution for such madmen. Let’s hope you are right, that “someone” will figure this out.