The Wiz

 By BabylonBros

Guns still going strong

 I don't know who drew this.  If you do, let me know on Mastodon or Bluesky.

New interest rate upcycle

By tradition, the rate at which central banks (the Fed, the Bank of England, the Reserve Bank of Australia etc.) lend to banks is called the discount rate.  Each country has their own nomenclature, so it is a convenient general term.

The chart below shows the GDP-weighted average of world discount rates, covering 83% of the world economy, and the median discount rate for those same economies.  The point where half the countries have a discount rate above and half below is the median.  It's useful because it isn't dominated by the large economies, but it also isn't distorted by countries with high inflation, which tend to have higher interest rates.

Like long-dated bonds, short-term rates have started to rise.  And that rise is likely to continue until oil prices start to fall.  And that will only happen if the Iran war ends, and then not quickly because of the damage to infrastructure, or when demand destruction reduces the market price.   Demand destruction refers to the physical reduction of demand caused by a decline in economic activity, or conversely, a decline in activity due to the shortage of oil and gas, for example because of rationing or economic collapse.  In this oil crisis, demand destruction is happening because of a brand-new factor:  the roll-out of renewables and EVs, which will reduce the economic slow-down needed to bring supply and demand into balance.  But it's still going to be nasty, and things will get worse before they get better.

Off the charts

I have had to increase the tops of the scales of this chart several times in the last two weeks.  Bond yields still going up.

I reiterate: credit is tightening.  Dodgy loans (private credit, for example) will have ballooning yields.  The banks are supposedly safe (they've learnt their lesson after the GFC, of course they have!) but loans are hidden in special purpose vehicles, that is, specific legal entities for every questionable loan, so that they can be kept off balance sheet.   The AI boom depends upon cheap credit from gullible investors.  That is drying up.   

The Iran war is not over.   The Iranian regime understands Trump and his parade of half-witted clowns much better than they understand Iran.   They want the Republican regime to implode.  And that means that the oil price is not going to fall.  Plus there is no point in signing a peace treaty with a regime which continually breaks its word.

Central Banks believe that inflation is too high, and that it is rising.   And they're right.  They do not want high inflation to become embedded in expectations.  They will go on raising discount rates until the elastic snaps.  Which will puncture the AI bubble, and bring on a recession.  I leave it to you to imagine what might happen to share prices if this happens.

Loving communists

 By BabylonBros (Mark Espinoza)

Another big jump in bond yields

 Another big jump in US bond yields overnight (Ozzie time).    The sell-off continues.

10-years back to 2002 levels, 30-years to 2004 (lower chart)

Very not good.

US bond sell-off intensifies

Bonds had a brief rally (i.e., yields fell) when the Fed raised the fed funds rate (the Central Bank discount rate).  The fear in the markets had been that the Fed was going to become Trump's creature and go soft on inflation.  The rise in the fed funds rate reduced that fear, and long-dated bond yields fell.  That lasted just 2 days, and yields have now moved to new highs.  Why?  The same reasons as before.  In particular, it's clear that the Iran war is not over, inflation is higher than targets, and recent data suggest that world economies are strengthening, meaning that there will be further rises in C.B. discount rates.  

Tightening credit tends to cause economic slowdowns.  And right now, the US economy is propped up by spending on AI, which is funded by venture capital and private credit, both of which rely on loose general credit markets.   This developing credit crunch is not good for shares or the economy.  Take care out there, people.