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Three key related factors dominate our discussion this week; Oil Shocks/Stagflation, midterm elections & Trump’s ‘offramps’.

Investors are getting increasingly concerned that oil at over $100 per Brent barrel is going to lead the global economy into Stagflation not too dissimilar to the oil shocks of the 1970’s post the Yom Kippur War of 1973. Whilst the key factor in fulfilling this investor prophesy is duration ie the longer the oil price remains elevated the more likely more of the price escalation seeps into the logistics infrastructure, other considerations play their roles too. None more so than, impact.

Impact refers to the role that oil now plays in a modern economy. In the case of the US, the amount of oil required to generate $1M of GDP growth has fallen by 70% since the 1970’s. Furthermore, oil in the energy mix in the US peaked at 48% in 1978 and is now down to less than 38%. In other words, it will take longer duration compared to the 1970’s for the oil price hike to seep into inflationary pressure.

This is where the mid term election issues kick in. President Trump is already significantly under water in terms of approval rating at below 40%. In this scenario, historically, the incumbent party in the House has generally lost its control. This is likely to be repeated again in this cycle. However, the administration could take succour in that of the 35 seats in the Senate up for grabs, 22 of those Republicans are defending and in the main, they are secure Red seats. However, the war with Iran and the subsequent effects on growth, interest rates and inflation, threaten at least four of those seats ie Maine, North Carolina, Texas and Ohio.

The longer the war continues, the more marginal these seats become. This would turn a 53-47 Republican Senate into a stalemate, taking into account the VP vote. It could get uglier for the Republicans if the next 4 seats begin to marginalise in Alaska, Iowa, Florida (Rubio’s former seat) and Montana.

For this reason, Trump’s administration is no doubt spending all its efforts looking for viable off ramps from this conflict. We list a number of potential ‘outs’:

1. The process has already begun in outlining met objectives that would allow for cessation of hostilities. Whether actually met or not, the very fact that the administration have said they’re met would be sufficient to allow for retracement.

2. Let Iran know that any re-armament or proxy financing would result in a re-visit of US military - this might create the conditions for a long term ‘forever’ war. Whether future administrations would agree to this is a moot point.

3. Regime change is now off the table, so this goes on the back burner as a condition for cessation.

4. Blame Congress and the Dems for not allowing the administration to conduct the war without the approval of the $200B defence package.

All in all, the TACO trade is not far away!

NVDIA announced a $1T pipeline of orders from the hyperscalers through 2027. The real spoiler here could be the reduction of Ad spend thanks to economic slowdown. Ad spend is at the heart of the cashflow story. The better the AI targeting process of customer spending habits, the better ROI for brands and advertisers, the more revenue to the giant digital advertisers that is getting used in funding the AI capex. Slowdown in this base cashflow generator and the AI story unwinds somewhat.

Always do your own research or seek the advice of your professional financial advisor.

You can find us on LinkedIn and YouTube, Money Matters, Ben Hakham CEO at Traderoutes Capital.