It's the Economy, Stupid!

"It's the economy, stupid!" This phrase comes from Bill Clinton’s 1992 US presidential campaign.


At that time, President George H.W. Bush enjoyed high approval for winning the Gulf War, but the US economy had slipped into recession. Clinton’s strategist, James Carville, zeroed in on this vulnerability, posting the slogan "It's the economy, stupid!" on the campaign headquarters wall. It mocked the idea that no matter how dazzling a candidate’s foreign policy victories, voters ultimately cared most about their economic well-being—what was on their dinner table.


Trump ignited this Middle East conflict, which is now spiraling out of control, and once again, the underlying problem remains the economy.

An Energy War

First, an energy war. On March 18, Israel struck Iran’s South Pars gas field, triggering a major blaze and severe damage. The Iranian Revolutionary Guard quickly issued an urgent warning, declaring five oil and gas facilities across Saudi Arabia, the United Arab Emirates, and Qatar as legitimate targets. It threatened attacks within hours and urged civilians in the region to evacuate.

Iran soon launched large-scale missile strikes on Qatar’s Ras Laffan Industrial City oil and gas facilities. According to Qatar, Iran fired five missiles, with their defense systems intercepting four; one landed and caused a significant fire. Qatar condemned Iran’s attack on this industrial hub as a serious escalation.


The Iranian Revolutionary Guard released a statement calling the operation a direct and equal retaliation for earlier attacks on Iran’s energy infrastructure. The stated goal was to target “you (the US) and your allies' energy infrastructure”.

The Guard emphasized Iran initially sought to avoid expanding the war into the energy sector or harming neighboring economies, but provocations forced the conflict into a “new phase.” Their statement warned if attacks persist, Iran will widen strikes to all energy infrastructure belonging to US and Israel allies until they are completely destroyed.


Trump clearly understands the gravity of the situation. US officials say he was warned in advance about Israel’s planned attack on Iran’s South Pars gas field and expressed support, aiming to send a message to Iran in response to its blockade of the Strait of Hormuz. But these officials add that Trump believes Iran has already received the message, so he currently opposes Israel continuing attacks on Iran’s energy infrastructure.


Trump appears powerless against Iran’s blockade of the Strait of Hormuz, while Israel has seized the moment to escalate the conflict. When Iran retaliated similarly against Qatar’s gas fields, Trump resisted further escalation, fearing widespread panic.


In fact, the crisis already threatens multiple Middle Eastern economies. On March 18, the UAE Central Bank launched a massive liquidity injection, approving a plan to stabilize its banking sector with funds totaling 1 trillion UAE dirhams—an enormous $270 billion bailout. This reveals how seriously the UAE views the risks as the crisis deepens.


An Economic War

Second, an economic war is underway. Militarily, Iran ranks as a third-tier power, so it fights the US by pushing up oil prices to strike back economically. Its blockade of the Strait of Hormuz sent international oil prices soaring, with US oil futures hitting a high of $99, driving US inflation higher.

As expected, the Federal Reserve held interest rates steady at its March 18 meeting, but markets now focus on the Fed’s outlook for rate cuts this year. The Fed’s dot plot forecast remains unchanged, projecting one cut in 2026 and another in 2027. Although the forecast is stable, the market had expected two cuts in 2024, possibly starting as soon as June—expectations now seem very unlikely.


The Fed raised its inflation forecast for 2026 from 2.4% to 2.7%, expecting it to ease to 2.2% in 2027. After the meeting, many financial institutions adjusted their outlooks, pushing back the anticipated date of the first rate cut from June to September or October, predicting only one cut this year. Analysts believe the ongoing US-Israel-Iran conflict, pushing oil prices higher and stoking inflation fears, is forcing the Fed to adopt a more cautious monetary policy. The chances of US rate cuts are fading, with global economic repercussions that extend to Hong Kong

Since last year, Hong Kong's property market has bounced back from its low point. Without the outbreak of the Iran war and if the Federal Reserve had started cutting interest rates as early as June, Hong Kong would likely have followed with rate cuts, potentially driving property prices even higher. Now, with the odds of rate cuts diminished, the property market faces renewed pressure.

Trump has launched a conflict in Iran that he cannot control. Does this fool still fail to see that the problem lies squarely in the economy? Even George H.W. Bush, who triumphed in the 1991 Iraq War, confronted such a dilemma—how much more difficult for the blundering Trump?


Lo Wing-hung

Bastille Commentary

** The blog article is the sole responsibility of the author and does not represent the position of our company. **

US President Trump’s decision to launch a war against Iran has set off a financial crisis spreading relentlessly, much like a virus.

On March 18, Israel attacked Iran’s South Pars gas field, sparking a massive fire. Iran swiftly retaliated by striking Qatar’s Ras Laffan industrial gas field with a missile, hitting key facilities.

The damage was far worse than anticipated. Qatar’s Energy Minister and CEO of Qatar Energy, Saad al-Kaabi, revealed the strike crippled 17% of Qatar’s liquefied natural gas export capacity, projecting annual revenue losses of $20 billion. This threatens energy supplies to Europe and Asia, with full repairs estimated to take 3 to 5 years.

The fallout rattled Trump, who immediately declared he would no longer target Iran’s energy infrastructure. What began as a missile exchange triggered consequences expected to last years, while the risk of the conflict spilling over continues to grow.

Private Credit Market Under Strain

The United States now faces another looming financial explosion: the private credit market. Recent turbulence has sent shockwaves through Wall Street, rattling private credit funds. Major US banks have begun tightening lending to these funds, while anxious investors scramble to redeem their stakes. The rapid withdrawal of capital has forced fund managers to impose redemption limits.

On March 16, Morgan Stanley restricted redemptions after investors sought to pull nearly 11% of shares from one of its private credit funds. Other firms like BlackRock, Blackstone, and Blue Owl Capital have also clamped down on investor withdrawals, sending anxiety through the market.


Private credit funds have surged in prominence in the US in recent years, though the concept itself is not new. Private credit generally means loans made to companies by non-bank lenders. It’s essentially equivalent to Hong Kong’s “money lenders” market, which has long existed. But after the 2008 US financial crisis, banks faced stricter regulation and gradually exited high-risk lending markets. Private credit then capitalized on that void and expanded rapidly.

Private Credit's Hidden Risks

As private credit expands, investment banks spot profit opportunities in the middle, running funds that attract capital with high interest rates and then lending to private companies. These private credit funds typically offer annualized returns of 8 to 10%, drawing many yield-hungry investors. But buying private credit funds carries greater risk than junk bonds. These funds depend solely on the fund managers’ judgment of loan risks, with little transparency. When capital floods in rapidly, managers often end up extending credit recklessly.

In September last year, auto-related firms Tricolor and First Brands both filed for bankruptcy, causing their private loans to default entirely and raising market alarm over private credit risks. At that time, JPMorgan Chase CEO Jamie Dimon warned that the problems surfacing in private credit are not isolated incidents. Spotting one cockroach usually means there are many more lurking.

Growing Scale and Warning Signs

The private credit market has ballooned to an enormous scale, but it is riddled with "cockroaches"—signs of underlying risks. Federal Reserve data shows outstanding loans to non-depository financial institutions hit $1.14 trillion last year, much of it bank lending to private credit funds. JPMorgan Chase revealed in January that its loans to non-bank financial institutions are projected to rise to $160 billion by 2025, a steep increase from about $50 billion in 2018.

When a high-risk investment market faces a credit squeeze, it often foreshadows a meltdown. Smoke starts rising from the bomb, cockroaches scatter everywhere, and disaster warning signs appear—though collapse is not guaranteed. The crucial question is whether top national leaders, particularly US President Trump, have the resolve to act decisively and extinguish the blaze.

Iran War Fuels Financial Crisis

The Iran conflict is the key trigger behind current market tensions. The United States’ decision to enter this reckless war is dragging it deeper into trouble. If US President Trump fails to pull out promptly, he risks being the one to ignite a financial disaster.

Lo Wing-hung