Hello and welcome to our latest video #MacroMemo. There's a lot to cover, with major geopolitical events, in particular, with regard to the U.S. and Israel and Iran. We'll talk about that war and its consequences on oil prices and likely trajectories from here.

We will also talk about artificial intelligence. And so, believe it or not, if you were to rewind a couple of weeks, the pressing market concern was not the price of oil, but rather the extent to which AI might be disrupting various sectors of the economy.

So we'll talk our way through some important scenarios there and where we think that might land as well. And gosh, if you were to rewind a week or two before that, you would have been focused on the Supreme Court’s overruling U.S. tariffs and all those implications. And so we'll tack that on to the conversation at the end.

Okay. Let's start with Iran. And so, not to rehash every minute detail, but broadly, a strike on Iran hadn't been expected for a period of several weeks. In fact, we had thought it was even more likely than the market was pricing. So that element did prove correct.

However, what proved a surprise to us, to the market, to almost everyone, was the breadth of this war and the intensity of the war, which has just been much greater than had been assumed.

So these are not the targeted strikes of June 2025. This is a full-scale war, it would appear. The U.S. and Israel have repeatedly struck Iran. In fact, the head of Iran and the head of the Revolutionary Guard have been killed. Iran has been not just retaliating but retaliating quite significantly. And, for that matter, not just targeting military infrastructure and not just targeting Israel – but targeting other Gulf states and their economic infrastructure as well, which is something of a game changer as well.

Not to get ahead of ourselves here. We'll talk about short-term economic implications and markets and a few other things. But I guess, just thinking forward to some sort of ceasefire or resolution at some point in the future. There have always been, you might say, three scenarios to this. And, the scenario that has

So of course, when the leadership in Iran has been killed, the chances of regime change are there. The U.S. has at times spoken of the desire for that. And so the odds of regime change have gone up, but they still aren't very strong.

In particular, if there's a reluctance to put so-called boots on the ground, it's difficult to imagine that actually happening – particularly given how difficult it was to sustain regime change in the likes of Iraq and Afghanistan, even with boots on the ground.

And so regime change is more likely than before and would be a positive if it happened. You could imagine a country that was not antagonistic toward the West and perhaps sanctions are lifted, and perhaps the country over time produces more oil and all sorts of other nice things. But again, still not that likely.

The other scenario that became more likely is just political dysfunction.

The idea being that there's a void at the top and many different groups vie for power. It's actually quite problematic and quite unpredictable – and also more likely not, I think, the most likely scenario. The most likely scenario, as much as it's become very confusingly less likely over the last few weeks, but still the most likely outcome is really just status quo.

It's the idea that there is still the same sort of theocratic leadership. We've seen Iran announce its new leader. It's the son of the old leader, so very consistent in that regard. And so most likely whenever a ceasefire or an end of the war occurs, it's a loosely similar Iran that is still at least somewhat antagonistic to the West, and similarly somewhat closed off and still subject to sanctions, probably, and so on.

That is, we think, the most likely end game. But in the meantime, there are all sorts of big questions. The price of oil, of course, is in particular focus. That tends to be the case when we're talking about events in the Middle East.

As I'm recording this, the price of both West Texas and Brent Oil are now over $100 a barrel, which is a fairly serious and pricey level, and much beyond the sort of $65 type of readings that prevailed until not long ago.

The concern, of course, is in part just Iranian oil production at risk and the 3 million barrels they produce.

But even more so, it’s the Strait of Hormuz. Twenty percent of the world's hydrocarbons transit through the Strait of Hormuz. It's not just Iran, it's many other Middle Eastern countries. And that is, at least temporarily, significantly blocked by the threat of and the reality of Iranian strikes and drone attacks and so on.

And so a big question here is $100 oil not good. It does damage. But the ultimate question is how long will that outage last – and how long, essentially, as an extension of that, will oil prices stay high? The market is assuming several months or more. And certainly that's a possibility. I don't think that's unreasonable.

I would say at this juncture, I would still take the under on that. I would think a couple of months does make sense, but there's a chance it could be a little bit faster and that might be the direction the risk lies. And that is a slightly constructive thought, if you're talking about the potential for markets to rebound or economic damage to be a bit less, and so on.

The reason for that thought is just that interests are very strongly aligned here to resolve this problem and get oil flowing. And it's not just that the U.S. doesn't like it, though that is certainly relevant. The U.S. really doesn't like it because of course it doesn't help with the midterm election approaching. It doesn't help when you've got to focus on pocketbook issues like the cost of energy.

It's also the case that China doesn't like it. China is, in theory, an ally of Iran. China is the biggest single consumer of the energy that flows through the Strait of Hormuz. And of course, it’s not much liking this at all. And it has a different inside track, you might say, to communicating with Iran and perhaps persuading Iran as well.

Europe doesn't like it. Natural gas is flowing less readily to Europe. And so again, the point being, most of the world is aligned here. This is not a good thing. And there is a lot of scrambling to try and overcome this. Gulf states don't like it either, by the way. It's also their energy production that's being interrupted.

And so that business model is being harmed. Simultaneously, this war is doubly bad for them because as Iran has attacked their civilian infrastructure, it's also very much harming their economic diversification strategy, which is to become these stable and secure bastions, low-tax havens, for companies to operate out of.

And so that that is in question when there is a level of physical danger there as well.

We are seeing efforts to resolve this, or at least to ameliorate it. The U.S. is saying it will insure ships to transit since the private insurers can't. Let's see if that plays out properly.

There are partial workarounds.

India is being allowed to buy some more Russian oil despite sanctions on Russia. China has huge oil reserves. It is now obviously tapping those. The G7, as I record this, is talking of a coordinated release of its strategic oil reserves. And so we think they will find a way to get oil flowing perhaps before that two plus month timeline.

That is currently being envisioned. Another reason is just Iran is being badly damaged. Its ability to continue launching attacks may be significantly degraded over time, both as it runs out of munitions and also as it is diminished.

From an economic standpoint, what does this mean? Well, first of all, there's a significant geographic divergence.

The oil flowing and the gas flowing from the Middle East is disproportionately destined for Asia and Europe. So they are hurt worse. North America is hurt much, much less. Loosely speaking, though, everyone does suffer an inflation increase. And so most developed countries are at $100-type oil or $40 increase-type level, about a 0.8% jump in inflation.

Maybe a hair more than that for North America, maybe double that for Europe, though, simply because the natural gas element is also a driver and that was just the oil math.

From an economic standpoint, it's not clear the U.S. economy slows a lot. I think in practice I would assume it, but models would say not, because the U.S. is an energy powerhouse.

Europe about 0.4% slower on oil. Maybe it's double that in terms of the impact including natural gas.

Canada is theoretically positive. We'll see if that actually proves to be true. And maybe we won't see the level of business investment since there's not a confidence that oil prices stay this high. So maybe it's a more minor positive.

But there are actually positive elements to the Canadian economy.

From a central bank perspective, in theory, models say central banks should cut rates, not hike rates. They should focus more on the economic weakness, not the one-time price level shock. In practice, I'm not sure they hike. I'm not sure they cut or hike, to be honest.

I think they sit on their hands and they watch very carefully for the moment. And I should emphasize, those economic assumptions are if oil is permanently $40 a barrel higher. We think it's not permanent. And so there's reason to think that the ultimate damage should be somewhat less than that.

So you look at markets and the dollar is up on a safe-haven bid.

Bond yields are higher on inflation and central bank concerns, more than risk aversion flows. Stocks are down but varying a lot by market. As I record this, the U.S. is down 3%. Japan's down 10%. It's more reliant on that imported oil.

Just to explain that, historically, geopolitical events have had a fairly small and short-lived effect on markets.

This is one of the bigger events, and so I wouldn't want to understate that. Nevertheless, I would say we are eyeing markets at these lower valuations and paying attention to that historical trend.

Okay. Let's pivot from Iran. Let's talk about artificial intelligence. And so to give you the big picture here, in general there's a lot to like and to be hopeful about. Computer chip makers are making lots of money.

CapEx is rising at an astonishing rate, supporting the economy. We do think there's more productivity growth in the future. We think, in fact, it may even be visible in the numbers in 2026.

So that's the good news in a very brief nutshell. There are though, very new concerns about AI. The software sector has very much underperformed on concerns.

It might be the first sector to be significantly disrupted by the amazing things that AI can do. I can say that worker displacement is now happening at least at a small scale. Some recent graduate software developers and so on are clearly doing worse in the job market than they might have.

And then there are big concerns, dystopian concerns about a race to the bottom – the idea being that all the workers get displaced and everything is terrible at that point.

Just to evaluate these possibilities, we made several scenarios: three main scenarios and then a number of sub-scenarios for the most extreme one. So let's just briefly talk to those. In all of them AI is important.

Scenario 1: AI becomes a minor general-purpose technology. It's like the laser or the lithium battery.

It's a big deal. It's used by lots of people. It's important but doesn't radically re-envision the world. And so you get a little more productivity growth, a little more economic growth. The makers of AI models lose a lot of money because it's not as big a deal as they'd hoped. Business users are helped a bit.

Households aren't that radically affected. So that's scenario one.

Scenario 2: We think, is the most likely. Here AI is a major general-purpose technology, but really operates within the confines of past general-purpose technologies. There was a golden era of growth and productivity picks up nicely, and some jobs are lost. But in general, the economy is able to make other jobs elsewhere that people are able to migrate towards.

And so labour is not too much worse off. In the end, the economy again is somewhat further ahead. And it's more good than bad. In fact, it's primarily good.

Scenario 3: This is the scenario that everyone is nervous about and watching. It’s what I would call the massive disruptor scenario. The idea being that this is a totally new, unprecedented type of technological change, and it's coming so fast and it's relevant to so many sectors all at once, and it's so capable of taking the good jobs – not just taking the bad jobs as many prior technologies did – that it's maybe not practical to think that workers can do better as opposed to worse.

And so, we need to think through this. Ultimately, we found actually there are a number of ways the massive disruptor scenario could go.

Scenario 3A: This is the dystopian one. So this is just awful. Every company finds it can lay off 10% of its workforce. And they all do. And it makes sense individually.

But collectively, the economy suddenly has a 10% hole in it, and lots of unemployed people aren't spending. And it's just this circling the drain sort of situation where it's an economic disaster. And so it’s possible. We think not that likely. But not impossible.

Scenario 3B: This would be the very opposite utopian scenario. It’s one in which productivity growth is so astonishing that there is abundance and the economy is eight times bigger by 2050.

And there's plenty for everyone. And government coffers are full. And yes, a lot of workers are displaced, but they can be fully compensated by the government. And life is very good indeed.

Scenario 3C: This is perhaps the most conceivable within this radical change set of options. And it's really a more mixed scenario. Basically it says, okay, maybe the economy does drift towards a dystopian outcome, but governments are going to say, wait a second, we don't want this to happen.

And so they would tax AI, tax compute, and in so doing make workers relatively more competitive and make AI relatively less competitive. Still plenty of AI, still worker displacement and so on, but at a less extreme scale. And the tax that they do on AI generates revenue and so you can retrain workers and at least partially compensate workers and so on.

It's not a great scenario. Businesses win. Workers are arguably on the net loss side, but not fully dystopian. And so, again, lots of scenarios, not really the forum for discussing all this at length. Take a look at our written #MacroMemo article. It has quite a long section on this.

Bottom line is we think AI does boost productivity growth.

Most likely it does not permanently increase unemployment in a big way. It makes job losses. But people find jobs elsewhere. It's not a reason why unemployment needs to be higher forever. But there's a risk that it does if AI really is different than everything that came before. In that scenario, the key would be government intervention, and it could help to steer towards a less bad or maybe even a good outcome.

Okay, last very brief thought for me just on tariffs. IEFFA tariffs – the blanket tariffs, the tariffs that were implemented last summer – were overturned by the U.S. Supreme Court on February 20th. Some temporary tariffs have been put in their place. So it's not that tariffs are gone. Sector tariffs are still here.

But it has effectively lowered the tariff rate temporarily. Not so much for the UK which had a good deal before. Quite a bit for Asian countries. A little more mixed, slightly beneficial for Europe and Japan and some others. And so ultimately a slight boost to the economy.

Another court has now ordered those tariff charges be repaid.

We hadn't thought that would happen. Betting markets had suggested it wouldn't. But it's happening. It would seem there's nearly $200 billion that needs to be sent from the government out to largely businesses.

This actually is economic stimulus, if inadvertent. It does also increase the fiscal burden by about 10%, which isn't great. So that yin yang, as always. And so ultimately a bit of economic support coming from this action.

Interestingly, current temporary tariffs might be illegal.

They also are set to expire in 150 days. It might take a little longer than that to get the next set of permanent tariffs lined up. And so it could be that tariffs even go a little bit lower at some point over the summer or something like that.

In the end though, if you fast forward a year or beyond, there are other mechanisms that let the White House put tariffs on.

We would think unless the opinion changes at the White House, we would think they end up with tariffs that actually aren't that different than what we were at a few weeks ago. But maybe there's a year of reprieve, you might say.

Okay, I'll stop there. Sorry for going long. Thanks so much for your time. Hope you found this useful and interesting, and please consider tuning in again next time.