The price of money is going up, and so it seems is everything else, including security and stability.
The Bank of Japan, the last major holdout in the monetary universe for dispensing cheap money, threw in the towel today on its long-standing tolerance for zero-percent financing. The BOJ’s policy board unanimously voted to raise the key overnight call money rate to 0.25% from zero.
While Japanese interest rates move off the floor, oil prices keep rising through the ceiling. The August crude oil futures contract briefly moved above $78 a barrel in New York yesterday, another all-time high. The immediate catalyst is the threat of a new regional war in the Middle East as Israel responded to cross-border raids by fighters of the Lebanon-based militant group Hezbollah. Oil supplies per se weren’t threatened, but it doesn’t take a Ph.D. in diplomacy to realize that new Israeli military campaign in Lebanon, which included attacking Beirut’s international airport and imposing a naval blockade on Lebanon, risks a wider conflict involving Syria and Iran.
Oil is nominally an economic commodity, but it also serves as an unofficial gauge of global tensions. No wonder, then, that the price of the world’s most valuable commodity continues to soar.
Helping fuel the latest run in oil prices is Israel’s reassertions that Syria and ultimately Iran are behind Hezbollah’s attacks. As a result, there are fears anew that Israel may attack Syria. Among those who think this is a possibility is Iran’s president, who reportedly felt compelled to respond to the perceived threat. “If the Zionist regime commits another stupid move and attacks Syria, this will be considered like attacking the whole Islamic world and this regime will receive a very fierce response,” Iran’s President Ahmadinejad was quoted as saying in a telephone conversation with Syrian President Bashar Assad, according to
The threat of a new war near and about the heart of the world’s largest oil reserves may still be a remote possibility, but traders are taking no chances. Given the history in the Persian Gulf region in the 21st century, no one should be surprised to learn that the pricing of oil is a business of erring on the side of caution.
The inclination to bid up oil on the first sign of trouble represents something of an evolution in the Mr. Market’s thinking in recent years. After the terrorist attacks of 9/11, the price of crude fell sharply in the remaining months of 2001. There was also a drop in oil prices after the start of the Iraq war in 2003. Don’t expect a repeat performance anytime soon. Oil supplies have since become pinched and global security appears more vulnerable.

Geopolitical threats are by themselves enough to promote discounting in the prices of paper assets, stocks in particular. Adding to the pressures on equities the world over is the rise in the price of money. The Federal Reserve continues to elevate interest rates in the United States, and the European Central Bank has started down the same path. China has been tightening as well. Now that Japan’s joined the trend, all the major economic centers on the planet are elevating rates.
To say the twin demons of rising interest rates and oil prices complicate investment strategy is an understatement. In theory, the two trends, if they have legs, will slow the global economy. That, in turn, will likely boost bond prices and hurt equities. Buying opportunities, as a result, may be in the offing. Timing, of course, is the great unknown. Meanwhile, for those with overweight position in bonds and stocks, these are trying times.
There are no easy answers in the capital markets these days. But there’s always cash, still the most attractive of the major asset classes in the eyes of some strategists.