War’s Second Order Effects Are Starting to Slam the Economy

Almost three weeks into the war on Iran, markets are starting to price in the second order effects of entropy spreading through the world’s energy system. Investors have been underestimating the commodity shock rippling through the economy. Now, some are forecasting a stock rout.

Take the knock-on effects from rising diesel fuel prices. Some truckers tell us they’re already adding a 5% transport surcharge to deliver consumer goods. That kind of inflationary activity has central bankers on edge and bond traders already forecasting a higher price on debt later in the year. It also raises the possibility of stagflation, as energy demand collides with physical shortages of feedstock and fuel.

To be sure, policy makers are trying to react. We’re told Italy is attempting to purchase more natural gas from Algeria. Spain approved a €5 billion ($5.8 billion) aid package to ease the economic effects of the war. Refineries are paying huge premiums so they can continue making critical products like fertilizer.