TAG Talks: Israel/Gaza War Global Economic Impacts

Good afternoon TAG Talks Faithful,

I don’t think I’ve ever attempted to write on a more difficult subject than the Israel/Hamas war. On one side, we feel that it is important to inform you of economic implications, and on the other side we fully appreciate the strong visceral feelings caused by the entire Israel/Palestine subject. Bear with us as we briefly discuss what we think we know about the economic implications for you as an investor. 

Israel & Palestine’s Economies

In energy markets, both Israel & Palestine are very small players, and any potential impacts to global energy markets are expected to be quite small from this war. Since the start of the war on October 7th, oil prices have largely ignored the state of the conflict, and only moved in response to news of production cuts by OPEC or broader global economic activity expectations. 

Israel’s primary exports as reported in 2021 are cut diamonds, tech hardware, and medical instruments, among other items. From their $64 billion reported export trade, just under $3 billion came from refined petroleum products.

Palestine’s economy is substantially smaller, only measuring $1.45 billion worth of exports. Most of it, $1.1 billion, is building materials and manufactured goods which are traded with Israel.

Iran Sanctions Possible, Broader War Unlikely

Hamas’ main financial and military equipment supporter over time has been Iran. At the outset of the war Hamas attempted to implicate Iran as a major resource in helping them plan the initial attack on Israel, but the international community has roundly rejected those accusations. It seems like the status quo will continue to be an uneasy global standoff between The West, other Arab nations, and Iran. The appetite for active foreign military intervention (as compared to just being present in the region) appears very muted.

If the conflict is fomented further by Iran, or if politics here in the U.S. have one of their sticky moments, then stricter sanctions could be imposed on Iran’s energy trade. They produce 1.4 million barrels of oil per day, which would have a less efficient way of getting to global markets under new sanctions. When compared to the sanctions supply shocks of Russia’s 11+ million barrels per day at the outset of the Ukraine war, specific geographies are not as reliant or impacted by Iran’s meager contribution to energy markets.

Military Costs to The American People

The United States Federal Government spent $6.13 trillion (with a “t”, you read that right) in 2022. The House of Representatives passed an Israel support bill that comes in at just over $14 billion, of which a substantial amount will be used at replenishing Israel’s missile defense systems. It’s certainly a big number, but in the broader picture of the total federal budget it’s a drop in the bucket. The legislation still needs to be sorted out in the Senate, and right now no new funds have been appropriated at the time of this TAG Talks.

Bottom Line

Our view on the U.S. and broader world economy has not changed. The major concerns that are still front of mind are taming inflation and achieving the oft-mentioned “soft landing” of our economy in the process. After a year and a half into Jerome Powell’s aggressive rate hiking efforts, we are making progress at lowering inflation towards the long term 2% annual target. The Consumer Price Index has gone from a high point of 9.1% in June of 2022 to a current 3.7% trailing 12-month annual level as of September 2023. We remain confident that a deliberate investor who buckles their metaphorical seatbelt will be rewarded for their patience over multi-year/decade economic cycles. Every portfolio we construct for clients is specifically tailored to their individual needs.