THE DILEMMA - SECRETS FROM WALL STREET

Welcome back listeners to Secrets on Wall Street. I am Elise. Today's newsletter will sketch a highly volatile panoramic picture where geopolitical risks are triggering chain reactions across global financial markets. From the blazing Strait of Hormuz to the complex hidden signals in the bond market and the dark shadow of the private credit market. Below is the detailed economic financial picture for One supply bottleneck and global energy inflation. WTI oil prices today have surpassed the $100 per barrel mark. Trade through the Strait of Hormuz dropped sharply with 80% of the rare oil tankers passing through the Strait in March belonging to Iran or countries with friendly relations with them. Air freight costs from Asia to the Middle East have skyrocketed by 95% to $8.60 per kilogram, threatening to break pandemic era records. In South Africa the government had to sacrifice 6 billion rand in revenue to cut taxes to subsidize skyrocketing fuel prices. The US-Iran war is not only a regional conflict but is creating a global supply shock. Shipping companies would rather bear the cost risks than dare to venture through Hormuz. The implication here is that cost push inflation is spreading but the division between the US and Europe is deepening. Spain has closed its airspace to US aircraft. Italy refused to allow aircraft to land in Sicily. ECB president Christine Lagarde also frankly dismissed the optimism of the US treasury secretary, warning that these economic consequences and disruptions will be prolonged. 2. Government bond market in a dilemma. Normally rising oil prices will lead to rising inflation and rising bond yields. But currently even though the WTI oil price has skyrocketed to over $100 per barrel, even touching $103 at times, the yield on the 10 year US treasury bond has unexpectedly reversed and fallen to 4.36%. This paradoxical event signals that the traditional correlation has been broken. This slight decline in the middle of a government bond yield hiking cycle needs a reasonable explanation. We believe that when energy costs are too expensive, the economy will break sharply. Instead of continuing to price and interest rate hikes, the market has changed course and begun to expect that the Fed will have to cut interest rates slightly by the end of this year to cope with economic damage much greater than inflation risks. Furthermore, since the pandemic, market thinking has changed. Investors believe that the main response to salvage growth will come from the government, not just from the central bank. The market is betting that the US government will have to launch fiscal stimulus packages to fill the deep hole in demand created by the energy shock. This trend has appeared in Europe when Spain proposed a VAT tax cut and Portugal imposed a ceiling price on electricity. Finally, US government bond yields are unlikely to continue to fall when central banks are selling large amounts of government bonds to handle short-term crises caused by energy prices and supply chain disruptions for the war. While waiting for the government to borrow more money to stimulate the economy, the market faces a massive sell-off risk. Countries such as Kuwait, Saudi Arabia and the UAE hold $313 billion in US bonds as of January. To finance defense amid the warfare context, foreign monetary authorities have sold about $58 billion in bonds. This sell-off pressure could push yield skyrocketing again at any time, pushing the market into an extremely dangerous dilemma. 3. The ticking time bomb of private credit DZ Bank, Germany's second-largest bank, has just issued a red alert. The $1.8 trillion private credit market is harboring the risk of creating a chain reaction that devastates the US economy. Many large credit funds have begun restricting investors from withdrawing money. When cheap money is gone, extravagant investments into AI and loose lending standards are beginning to reveal their fatal flaws. The lack of transparency in this market makes it a seed for systemic risk, forcing the European Central Bank, ECB, to prepare to inspect loan quality. The tightening of this capital flow will deal a heavy blow to small and medium enterprises that are depending on it for refinancing. 4. Practical consequences The debasement of German coins According to Reuters, the German government is deciding to reduce the amount of silver and increase the amount of copper for limited edition. Commemorative euro coins, denominations of 35 and 50 euros. Therefore, the total weight of these coins will also slightly decrease. For example, the 35-euro coin will have its silver content reduced by up to 46 percent, and its weight reduced from 18 grams to 17 grams. The story reminds me of ancient Roman times. The coin, when this empire collapsed after losing the battle with Persia, had a silver ratio of only 15 percent. When the ancient Roman empire was prosperous and kept its credibility, the silver ratio to the coin was 98 to 97 percent. Every coin goes from good and becomes bad like that until it is no longer prestigious and recognized. Usually, it is when the political institution behind it weakens and disintegrates. History repeats itself every few hundred years. Returning to the German silver coin, this move to dilute the silver ratio was made by the German Ministry of Finance to cope with the strong volatility of silver prices, while preventing speculation and avoiding the issuance of coins from violating budget limits. These coins are not used for daily transactions, but are only for special occasions. For example, the 35-euro coin to be launched next year is to commemorate the 150th birth anniversary of author Hermann Hesse. Silver prices have gone through a turbulent period. Thanks to demand from retail investors, geopolitical risks, and trade tensions, silver prices skyrocketed 147 percent in 2025 and reached a commemorative peak at $121.6 per ounce on January 29, currently around over $70 per ounce. Perhaps right after today, coin collectors who have German silver coins with high silver content will later exchange two bad coins, newly produced now, for one good coin produced earlier. This is exactly what Gresham's economic law describes to us. Bad money drives good money out of circulation. In this case, collectors will prefer to sell the bad coin and keep the good coin with a higher silver ratio to hoard. Although this money only has collectible significance, the story of decreasing the silver ratio and increasing the copper ratio evokes historical memories. It evokes the depreciation of today's fiat money. It evokes the image and manner in which empires decline. Conclusion for podcast. The global economic, financial market in general, and Wall Street in particular, are revealing increasingly bad signs. On one side is the risk of stagflation from the geopolitical war, on the other side is the ghost of crisis from the dark corners of private credit. The hidden messages from the bond market show that investors are holding their breath, waiting for fiscal rescue moves from the government, while still anxiously fearing a sell-off wave from the Middle East. Always keep a cool head and look deeper into the numbers. Elise says goodbye and see you in the next newsletter of secrets on Wall Street.