Patient Zero and Potential Global Contagion

The world moves fast. Your workday? Even faster. Pitching products, drafting reports, analyzing data. Microsoft 365 Copilot is your AI assistant for work, built into Word, Excel, PowerPoint, and other Microsoft 365 apps you use, helping you quickly write, analyze, create, and summarize. So you can cut through clutter and clear a path to your best work. Learn more at Microsoft.com slash N365 co-pil ot. Megan Rapino here. This week on a touchmore, our Captain America Hillary Knight is joining us to talk about her storybook career. And the March Madness bracket is out, and we have thoughts and predictions to share. Plus, we're also taking a look at the NWSL's Blockbuster opening weekend. Check out the latest episode of A Touch More wherever you get your podcasts and on YouTube . Mormons are having a moment, but some in the church wonder if that's actually a good thing. I'm not so concerned about Mormonism kind of being wrapped. I'm actually more concerned about it becoming so obsessed with assimilation that it kind of loses sight of what it it actually is. What happens when faith goes mainstream? That's this week on Explain It To Me. Find new episodes Sundays wherever you get your podcast s. I'm Scott Galloway, and this is No Mercy, No Malice. The things you aren't thinking about are the things that cause the most dam age. I believe emerging markets, specifically Bangladesh, Egypt, Pakistan, and Sri Lanka could be patience zero for the next market collapse. Patience zero, as read by George Ha hn Sometimes the canary in the coal mine is an early warning system. Other times a dead canary is a false positive that causes panicked miners to stampede to the surface, crushing each other in the rush for air that was never poisoned. The panic is the po ison. Currently, global markets are pricing in the economic fallout of the US Israel war on Iran and the near-w Equity markets in the EU, India, Japan, South Korea, and the UAE have declined 8% to 17% since February 28 th. Oil hit 1$27 a barrel. The VIX spiked to $42. Anything above 30 signals pan ic. Former Defense Secretary Don Rumsfeld would have called this a known known. We saw it coming, we just didn't stop it . But known knowns don't kill market s. Unknown unknowns do. September 11th wasn't on anyone's risk model. The 2008 subprime mortgage crisis was contained to subprime until Lehman collapsed and nearly took the global financial system with it. COVID 19 was just a flu until we shut down the world economy for two ye ars. The pattern is always the same. We're staring at the obvious threat oil prices, inflation, recession, while the real contagion is hiding in plain sight, waiting to metastasi ze. So let's talk about the market collapse scenario nobody's pricing in. The one that doesn't show up in Bloomberg terminals or Goldman Sachs reports until it's already eating the global financial system from the inside out of the way. On the Paramount Plus show Landman, oil fixer Tommy Norris, Billy Bob Thornton, describes the oil market's Goldilocks nat ure. You want oil to live above sixty dollars a barrel, but below ninety dollars. Gas gets up over three dollars and fifty cents a gallon, it starts to pin ch. Oil hits a hundred dollars, every product in America has to readjust its price . And anxiety among Republicans, as the party in power typically pays a political price in an economic downt urn. Neither of these outcomes is likely to lead to additional economic shocks as the markets have already priced in these scenarios . American leadership looks out the window and sees itself and a world that reacts as we'd hope or ex pect. First off, the Trump administration is just so incredibly incompetent as to not recognize in war the enemy gets a say . Another blind spot? A the rest of the world, specifically emerging economies where governments are already rationing fu el. The question isn't where oil prices peak, but how long they remain elevated? As one analyst told Bloomberg, the biggest risk in the market is the Strait of Hormuz remaining constrained for a longer stretch and the market feeling the U.S and. its allies have a limited capacity to alter the dynam ic. Some signs that risk may be underappreciated? Last week, the U.S. and other International Energy Agency members released 400 million barrels of oil from their reserves, the largest distribution in hist ory. China to send their navies to help open the strait. They declined, turns out showing a total lack of respect for your allies weakens an alliance. Meanwhile, Trump added shavings of shit to his shit salad by suspending sanctions on Russian oil, undermining Ukraine's war effort. Finally, Treasury Secretary Scott Bessent told CNBC the US is letting Iran continue to ship its oil via the strait to supply the rest of the wor ld. If it sounds like Trump is flail ing, trust your instincts . Above 26,000 feet, the human body cannot acclimatize. It can only deterior ate. The world's most fragile economies have been living in the financial equivalent of the death zone for ye ars. Unstable debt, thin reserves, and no margin for er ror. When oil prices spike, energy-dependent emerging economies get hit from three directions at on ce. The cost of importing energy rises, their currencies weaken against the dollar, oil is priced in dollars and everyone needs more of them, and the investors who lent the money start doing the mat h. That last part is the killer, as dollar denominated debt is a hidden oil bet. When a country borrows in dollars, it's implicitly betting that its local currency won't weak en. Oil price spikes strengthen the dollar and crush local currencies simultaneously, making the country's debt more expensive to service at exactly the moment it's least able to pay it. That's not one problem, it's the same problem expressed twice . Since the war began, oil has spiked and the dollar has hit a 10-month high. Essentially, Trump ordered the surfing turf, and when the bill arrived, ask the server to split it 193 wa ys. It's often said that when America sneezes, the world catches a cold. For Bangladesh, Egypt, Pakistan, and Sri Lanka, this war is the equivalent of RFK Jr. dictating health policy to an unvaccinated popul ation. A week into the war, Egyptian President Abdelfatah El Sisi said his country is in a state of near emergen cy. Domestic fuel prices have spiked seventeen percent. The Egyptian pound has declined eleven percent against the dollar, and traders have sold an estimated $5 billion to $8 billion in Egyptian bonds . A Goldman Sachs analyst told Bloomberg that Egypt is exposed but more resilient than in previous crises, citing the country's $52 billion in currency reserves. But according to Khalid Azim at the Atlantic Council, Egypt holds enough economic and geopolitical importance that if financing conditions tighten or external shocks intensify, stress in Egypt could, serve as an early signal that broader financial instability is beginning to emerge across the region. Pakistan may be the most symptomatic patient on the ward. Just six days after the war's start, the Pakistani government raised fuel prices twenty percent to stop hoard ing. equal to 315% of its export revenue, meaning for every dollar of value created abroad, it's already promised three to a foreign cred itor. That's not an economy. It's a pawn shop selling grandma's fill ings. Pakistan's equity markets are down twenty one percent year to date, while its dollar bonds are down five percent since the start of the war Exacerbating the problem, long-running border tensions with Afghanistan erupted into war last mont h. As one analyst told Bloomberg, Pakistan is experiencing the double shock of a military and an oil price sur ge. According to Pakistan's Army chief, the border war could end just as soon as the Taliban ceases to support milit ants. Good luck with that. None of this is new for Pakistan, however. The IMF is less a lender of last resort to the country than a permanent fixture of its financial architecture Sri Lanka is the ghost of Christmas future. It already completed the full cycle: dollar debt, energy dependence, currency collapse, IMF bailout, political implos ion. And is being asked to absorb another generational shock before it's recovered from the last one. The island nation is also recovering from a 2025 cyclone that caused $3.5 billion in damage. On the positive side, Sri Lanka has 1% to 2% inflation and is predicted to see GDP grow by 5% this ye ar. Central bank governor Nandalal Weira Singha told Bloomberg, Sri Lanka is in a good position to absorb price shocks from the Middle East war, assuming the conflict ends in five or six weeks. In the meantime, the country is rationing fu el. Then there's Bangladesh, which imports 95% of its ener gy. The government lifted fuel restrictions after nine days of rationing, not because the situation had improved, but to celebrate the end of Ramad an. That doesn't make economic sense as Bangladesh risks blackouts and the collapse of its garment industry, the source of eighty-five percent of its exports. But in a country fresh off a twenty twenty four student-led revolution that leveraged outrage over a previous financial crisis, the political options are a choice between awful It can use the military to guard fuel depots or placate the population and hope the crisis in Iran ends before the summer heat spikes energy dem and. In nineteen ninety seven, the Thai bought collapse. On its face, Thailand's economic meltdown was containable. Until it wasn 't. Within months the crisis had spread across Asia, wiping out equities by seventy percent and sending eighty billion dollars in foreign capital fleeing the region. The pathogen was fe ar. Banks didn't stop to calculate losses in each country. They chose instead to pull back all at once . Thirteen years later, Greece, representing just 2% of Eurozone GDP, threatened the entire European economy, not because it was too big to fail, but because European banks had pledged Greek debt as collateral, packaged it with other assets, and built a financial architecture that had no firewall once the first bond was written down . The question markets asked wasn't how much Greek debt does Deutsche Bank hold? It was what else is on their balance sheet that we don't know about ? I believe Bangladesh, Egypt, Pakistan, and Sri Lanka each have the potential to be patient z ero. Among European banks, HSBC and Standard Chartered are most exposed. The Middle East accounts for 9% of HSBC's revenue and 12% of Standard Chartered's profit before tax. Different metrics, same direction of risk . Barclays, BNP Paribas, Deutsche Bank, ING, and Societe General have limited exposure at less than one percent of reven ue. The danger, however, is one the markets can't see. The IMF's Global Financial Stability Report, published just months before the war began, warned explicitly about limited visibility into balance sheets and the interconnectedness of non bank financial institutions . Debt crises share a common feature. The threat isn't the institution or nation that defaults first, but the opaque financial instruments that make everyone else an unwitting cosig ner. The unknown unknowns aren't the emerging economies. They're derivatives in Zurich, London, or New York that nobody stress tested for $110 o il. I was a teenager during the two major oil shocks of the 1970s. Those shocks weren't abstract basis points. They upended my mother's household math. Take the bus versus the car, wear sweaters instead of raising the thermost at. There are hundreds of millions of mothers in Bangladesh, Egypt, Pakistan, and Sri Lanka doing the same math right now . The bankers in London and New York will be fine, but for millions of kids in emerging markets, studying will cease at suns et. There were valid arguments for military strikes , but n one for war. Life is so ri ch. So you want to start a business. You might think you need a team of people and fancy tech skills, but you don't. GoDaddy Arrow uses AI to create everything you need to grow a business. It'll make you a unique logo, it'll create a custom website, it'll write social posts for you and even set you up with a social media calendar. Get started at GoDaddy.com slash arrow. That's Godaddy.com slash A-I-R-O.