No Mercy / No Malice: Patient(s) Zero

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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 damage. 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 Han.

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 poison.

Currently global markets are pricing in the economic fallout of the US Israel war on Iran

and the near closure of the strait of Hormuz, a choke point for 21% of the world's oil and 20%

of global liquefied natural gas. Equity markets in the EU, India, Japan, South Korea,

and the UAE have declined 8% to 17% since February 28th. Oil hit 127 dollars a barrel.

The VIX spiked to 42, anything about 30 signals panic.

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 markets. 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 years.

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 metastasize.

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.

On the Paramount Plus show Landman, oil fixer Tommy Norris, Billy Bob Thornton,

describes the oil markets Goldilocks nature. You want oil to live above $60 a barrel

but below $90. Gas gets up over $3.50 a gallon. It starts to pinch.

Oil hits $100. Every product in America has to readjust its price.

US gas prices reached $3.70 per gallon this week, prompting fears of 1970 style stagflation

and anxiety among Republicans, as the party in power typically pays a political price in an

economic downturn. 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 expect. 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 fuel. 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

straight of hormones remaining constrained for a longer stretch and the market feeling the US

and its allies have a limited capacity to alter the dynamic. Some signs that risk may be under

appreciated? Last week the US and other international energy agency members released 400 million

barrels of oil from their reserves, the largest distribution in history. This week Trump asked

NATO, Japan, South Korea and even China to send their navies to help open the strait.

They declined. Turns out showing a total lack of respect for your allies, weekends and 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 world. If it sounds like Trump is flailing, trust your instincts.

Above 26,000 feet, the human body cannot acclimatize. It can only deteriorate.

The world's most fragile economies have been living in the financial equivalent of the death zone

for years, unstable debt, thin reserves and no margin for error. When oil prices spike,

energy-dependent emerging economies get hit from three directions at once. 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 math. 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 weaken.

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 surf and turf, and when the bill arrived, asked the server to split it

193 ways. 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 population. A week into the war, Egyptian president

Abdel Fatah LCC said his country is in a state of near-emergency. Domestic fuel prices have spiked

17%, the Egyptian pound has declined 11% against the dollar, and traders have sold an estimated

5 billion to 8 billion dollars 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 dollars

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 start, the Pakistani government raised fuel prices 20%

to stop hoarding. Meanwhile, the country carries external debt equal to 315% of its export revenue,

meaning for every dollar of value created abroad, it's already promised 3 to a foreign creditor.

That's not an economy. It's a pawn shop selling grandma's fillings.

Pakistan's equity markets are down 21% year to date while its dollar bonds are down 5%

since the start of the war. Exacerbating the problem, long-running border tensions with

Afghanistan erupted into war last month. As one analyst told Bloomberg, Pakistan is experiencing

the double shock of a military and an oil price surge. According to Pakistan's army chief,

the border war could end just as soon as the Taliban ceases to support militants.

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, having provided

24 bailouts since 1958. The 25th check may already be in the mail. Sri Lanka is the ghost of

Christmas future. It already completed the full cycle, dollar debt, energy dependence, currency collapse,

IMF bailout, political implosion, 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 year. Central bank governor Nandalawira Sinha 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 fuel.

Then there's Bangladesh, which imports 95% of its energy. The government lifted fuel restrictions

after nine days of rationing, not because the situation had improved, but to celebrate the end

of Ramadan. That doesn't make economic sense as Bangladesh risks blackouts and the collapse of

its garment industry, the source of 85% of its exports. But in a country fresh off a 2024

student led revolution that leveraged outrage over a previous financial crisis, the political

options are a choice between awful and worse. 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

demand. In 1997, the Thai bot collapsed. 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 70% and sending $80 billion in foreign capital fleeing the region. The pathogen

was fear. Banks didn't stop to calculate losses in each country. They chose instead to pull back

all at once. 13 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 zero. 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 Society General have limited exposure at less than 1% of revenue. 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. Dead 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 co-signer. The unknown unknowns aren't the emerging economies.

They're derivatives in Zurich, London, or New York that nobody stressed tested for $110 oil.

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. Where sweaters

instead of raising the thermostat? 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 sunset.

There were valid arguments for military strikes, but none for war.

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