ECONOMIC OUTLOOK
Elliot Eisenberg, Ph.D. is an internationally acclaimed economist and public speaker specializing in making economics fun, relevant and educational. Dr. Eisenberg earned a B.A. in economics with first class honors from McGill University in Montreal, as well as a Master and Ph.D. in public administration from Syracuse University. Eisenberg is the Chief Economist for GraphsandLaughs, LLC, a Miami-based economic consultancy that serves a variety of clients across the United States. He writes a syndicated column and authors a daily 70-word commentary on the economy that is available at www.econ70.com.
Petrol Price
Due to the Iran War, global oil supply is down about 10%. Given that the short-run price elasticity of demand for oil is about 0.15, meaning a 1% change in the price of oil leads to a 0.15% change in the quantity demanded, to reduce demand by 10% will require a 70% rise in price. Pre-war Brent was $70/bbl. A 70% hike brings Brent to $119/bbl.
China’s Checking
Beijing is closely watching the current war. They are watching our tactics/strategy, naval power, how much we are running down our ordinance stocks, and critically, how much pain we (think gas prices) are willing to tolerate. If we buckle and end the war without severely damaging the regime and regaining control of the Strait of Hormuz due political pressure ($5/gallon gas), Beijing will know they can attack and take Taiwan.
Remarkable Resilience
The US economy has shown remarkable resilience despite tariff shocks, the rise of AI and minimal job growth, reduced population growth due to immigration policies, weak consumer sentiment and a prolonged government shutdown. Despite all this, real GDP is growing at 2%/year. Now the economy faces higher oil prices and inflation, deteriorating conditions in private equity/debt markets, and the prospect of no rate cuts. I’m optimistic but reasonably concerned.
Mortgage Movement
Since the start of the Iran engagement, 30-year mortgage rates have meaningfully risen. Surging oil prices and uncertainty about the duration/ramifications of the hostilities on inflation/growth/unemployment etc. have put upward pressure on overall interest rates and have also significantly increased interest rate volatility. Higher interest rate volatility generally causes mortgage-backed securities (MBS) to rise relative to Treasuries because of the embedded prepayment option in the mortgages backing MBS.
Fed Funk
The Federal Reserve is finding itself in an increasingly unpleasant spot. Their preferred measure of inflation, Core PCE, rang in at 3.1% Y-o-Y in January, up from 3% in December, well above the Fed 2% target and pre-Iran conflict inflationary impacts. Subduing inflation calls for raising rates. However, the labor market is steadily softening which calls for lowering rates. As such, the Fed will keep rates unchanged this week.
Insurance Increase
Homeowners in the bottom 20% of the credit score distribution (think FICO) pay 25% more for homeowner’s insurance than the top 20%. The higher prices aren’t the result of deferred maintenance or disputed claims. Rather, insurers expect lower-credit homeowners to be more likely to file claims after insured losses. This increase in housing costs is equal to the increase these lower rated households experience through higher mortgage interest rates.
Stagflation Scare
While talk of stagflation, high inflation and high unemployment, is suddenly pervasive after last week’s lousy jobs report and rising oil prices, I remain skeptical. Oil futures for 3/27 are trading at $68/bbl. Last month, 3/27 contracts were trading at $62/bbl. Investors aren’t of the view this recent spike in the spot prices is going to last. Moreover, a quiescent Iran should result in reduced volatility and lower oil prices.
Fantastic Felines
We know falling cats seem to always land feet first, but why? Physicists and cat-falling researchers find that the feline spine is extremely flexible in the upper thoracic vertebrae, but stiffer and heavier in the lower lumbar vertebrae. Cats first turn their front legs, and then their lower legs. The upper vertebrae can rotate an astounding 360 degrees. They also appear to have a right-side (paw) bias.
