Trump inherited a US economy with 3% growth, a 4% unemployment rate and near 0% recession risk a mere 6-weeks ago. His outrageous tariff threats, policy U-turns, DOGE cutbacks in government spending and mass deportations have ignited a global trade war as well as slashed economic growth, business/consumer confidence. A US recession has now begun as the Atlanta Fed’s GDP Now sees a -2.8% slump in the Q1. Its shock waves will be felt in the Gulf as the price of Brent crude oil has plunged from $82 to $69 since the Inauguration.
Gulf currencies are pegged to the US dollar, whose fall is now accelerating as the Euro has soared from 1.02 to 1.07 and sterling has risen from 1.22 to 1.28. The fall in the US dollar hits the purchasing power of Gulf investors at precisely the moment that budget deficits in all six GCC countries will rise sharply since the current Brent price is 30-$40 below their respective budget breakeven price.
Global stock markets are in free fall and the Volatility Index (VIX) has spiked to 23.6, 30% above its Biden era levels. The US Treasury bond market yield has fallen from 4.80% to 4.20% as Uncle Sam IOUs become a safe haven asset for risk capital whose macro pendulum has swung from greed to fear. Gold is above 2900 an ounce but Bitcoin/crypto, whose psychotic volatility (20X Auric’s) has proved a lousy hedge when Nasdaq tanks, as its savage 25% correction attests. POTUS-47 was the no brainer Crypto Pres but he turned out to be as fake as the Wizard of Oz.
Since the GCC currencies are pegged to the dollar, the burden of adjustment when the US cycle turns nasty, is felt in regional stock and property markets. In 2008, the Wall Street subprime crisis triggered a crash in Brent crude from $148 to $35 and forced Saudi Arabia to organise the biggest output cut (4.2-MBD) in the history of OPEC. This is not possible now, even though Saudi Arabia’s budget breakeven price is $35 above the current spot price, forcing the kingdom to become the biggest sovereign borrower in the world, replacing China.
Trump’s drill baby drill ethos and America’s new status as the global LNG superpower means that the US will replace Russia as the energy supplier to Germany as well as increase its market share in India, which imports 5.4-MBD. OPEC’s spare capacity is now 7-MBD and a glut is certain as offshore Brazil, Guyana, Venezuela, Canada and offshore West Africa add at least 1.5-MBD in new supply into a glutted market. If sanctions on Russian oil are removed, after Trump’s Ukraine deal, a showdown between Saudi Arabia, Russia and even OPEC+ exporters like Kazakhstan and Iraq for downstream market share in Asia becomes certain. In other words, a price war that could see oil prices plunge to $40, a level that I had argued 3-months ago.
An oil price crash means a deflation big chill in the Gulf’s property bubbles, which are highly likely to collapse, as we witnessed in 2008 and 2014. All the macro logic of asset flows, liquidity risk premia and speculative metrics, when off plan is two-thirds of sale and pieces of paper trade 30% higher than built property, the end of the bubble is certain. This was the hard lesson learnt by leveraged speculators in 2008 and 2014, when prices fell 50-60% and the property bear market lasted for 4-6 years. Risk is a four letter word but then so is ruin.
Also published on Medium.
