Welcome to the week from Prop Media, where we break down what mattered and what it all means. I'm George Hahn and it's Friday, May 29th. This week, we take a look at why the bond market is panicking and why that panic has been a long time coming. War is pushing up oil prices, oil is feeding inflation fears, and inflation fears are pushing borrowing costs higher. Let's get into it.
Let's start where the news started. Iran, day 88 of the war. On Tuesday's Raging Moderates, Scott had a fitting analogy for where things stand.
Right after when I was at Morgan Stanley and I was going to do a third year, I called the MD at Morgan Stanley who ran the LA office and said, "I'm quitting." And I got a backpack and I went to Europe and I was traveling around Europe and I tracked down this woman who I was just enormously in love with and we spent about three weeks traveling around Europe and we were in Vienna and we thought, let's go to Hungary. There is a point here and I'll get to it in about two hours.
Um. I got all the time in the world for a backpacking love story. This is so much better than nuclear dust. This will date me, but I went to the American Express office and cashed traveler's checks.
I remember doing that with my parents. Yeah. And I had one of those fanny belts because we were also worried about having money stolen from us from these evil Europeans.
And I got literally a stack, a brick of Hungarian forints. And so we're headed to Budapest. And I'd heard some sort of rumors or murmurs of needing a visa. But we got on the train anyways. And they stop at the Hungarian border and they come and they say, "Visa?" And I'm like, "No." And she and I look at each other. I'm like, "No." And they pull us off the train in the middle of the Hungarian forest and say, "You're on your own." And there's one cab driver there driving a Lada, which is, you know, the Russian equivalent of a Yugo. And because clearly this happens, there's always a couple of dumb Americans who don't get the visa. We're in the middle of the forest. I'm thinking, "Okay, he's going to murder me and, you know, rape my girlfriend." One car and the guy and I see, I say, "How much?" And he says, "I don't know," whatever it was, like 100 bucks or something. And I'm like, "90." And he looks at me and just smiles because he recognized at that point in the middle of the Hungarian forest at 11 p.m. and there's one way out of the Hungarian forest.
I have no leverage. Trump is me in the Hungarian forest right now.
There we go. Closed loop.
There we go. Closed loop. Because he never bothered to consult Congress and offended them. Because he never even signed up or even briefed European allies. Because he did not in any way coordinate anything around intelligence around the Straits of Hormuz, getting expats out of the Gulf, figuring out, putting in place the right defense mechanisms. He has no cards. America wants him out. Iran knows America wants him out.
The reported framework of ceasefire extension, Hormuz reopening, and resumed Iranian oil sales may sound like progress. Markets certainly treated it that way. Oil prices fell this week on hopes that shipping through the Strait of Hormuz could normalize again, but the details remain murky and even the White House has disputed parts of this reporting. Scott and Jess call it like it is: an exit ramp dressed up as dealmaking. Trump declares a vague victory and leaves. Iran probably comes back stronger. And while the US is stuck in the forest, China has been inching closer and closer to Russia. Putin and Xi met in Beijing this month with new signs of energy and strategic cooperation. On China Decode, James King reminded us that America's rivals are not watching this war as bystanders. They're watching for leverage.
I think, you know, the big picture here is that what we're seeing is the axis of authoritarianism in action. This kind of bromance between Putin and Xi is really striking. And I've been looking at the fact that since Russia's invasion of Ukraine, we've seen these two big powers draw together much, much more closely. That includes diplomatically, economically, but also militarily. And that's why it really matters for the world. I would say actually that the sort of closeness that we've seen between Russia and China since the Russian invasion of Ukraine is probably the most consequential geopolitical shift that we've seen in the world over the last decade. I mean, I know there are several competitors for that title, but this one is really big. On the one hand, we have a superpower, China. On the other, a big power, Russia. Their combined population is about 1.55 billion people. Vast territories. It's the second and the ninth largest economy. And both of these countries are nuclear weapons powers.
It seems the markets are finally catching up to what the war has actually done to the economy. Last week, inflation fears sent bond yields to levels not seen since 2007, with the 30-year hitting 5.2%. The odds of a Fed rate hike before year end, which started the year below 10%, have now crossed 40%. The bond market is sounding an alarm that the stock market has been ignoring. On Monday's Prof G Markets, Scott discussed what the downstream effects may start to look like.
The bond market has stepped in and said, "Okay, with energy going up, we have greater inflation, which is pushing bond yields up and increases the odds that the Fed will raise rates." Typically, when the bond market goes up, it draws money out of the equity market because people can get a better yield with what they feel is a safer investment. And also, fewer deals get done because it gets more expensive to buy things. It gets more expensive. You know, everything in the economy, your auto loan, your mortgage, your credit card goes up. And the yield on the 10-year Treasury kind of sets the bar for interest rates across the economy, right? And higher yields also increase the cost of servicing our debt. In 2026, we'll spend a trillion dollars on interest payments. That's 88 billion a month, roughly what we spend on defense and education combined. And then the question is, could this trickle down to software and AI who've taken out private credit loans? Private credit loans are typically floating rate. So what happens when the AI shell companies that are built on debt, what happens when their debt service costs go up and then they hit a bump in the road where their capex continues to go up but the revenues don't scale in line with their capex, which according to the FT and every other analysis I've read says it'll be nearly impossible for revenues to keep up with capex at AI companies. So you could have shavings of shit on a shit salad here, right? You could have costs go up, so consumers take their spending down, and then the companies that are most levered or who have been tapping the credit markets see their costs explode while maybe registering a decline in revenue growth that can't, you know, there's no way they can live up to their expectations. So, you know, we keep saying the deficit doesn't matter until it matters. It feels like that mattering may be starting.
