War, Oil Prices, and the Rise of a New Credit Cycle

Markets Are No Longer Driven by Fundamentals

Right now, traditional investing frameworks are breaking down.

Instead of analyzing earnings, valuations, or growth projections, markets are reacting almost entirely to geopolitical uncertainty—specifically the war involving Iran.

Oil prices have surged above $100, and that single variable is now driving:

• Equity market declines

• Rising bond yields

• Inflation expectations

• Global economic risk

The S&P 500 and NASDAQ are both down, while volatility is being dictated by headlines rather than fundamentals.

Oil Prices Are the Core Risk

Oil is not just another commodity—it is a systemic input into the global economy.

When oil rises sharply, it cascades through multiple sectors:

• Plastics and manufacturing → higher input costs

• Food production → fertilizer prices surge

• Air travel → higher fuel costs passed to consumers

In fact, fertilizer prices have already jumped significantly—from $700 to $1,000 per ton, a 43% increase.

This is a clear signal: inflation pressure is building.

Inflation Depends on One Variable: Duration of War

The economic outcome hinges on a single factor—how long the conflict lasts.

• Short-term conflict (weeks):
  Minimal long-term inflation impact

• Extended conflict (months):
  Sustained inflation + rising expectations

If the war continues, inflation becomes embedded, and central banks lose flexibility.

Why Bonds Are Falling Instead of Rising

In times of crisis, investors typically move into U.S. Treasuries, pushing yields down.

This time, the opposite is happening.

• 10-year yields rose from 4.0% to 4.3%

• Investors are selling both stocks and bonds

This signals something deeper:

Markets are not just pricing risk—they are pricing inflation risk.

The Bigger Structural Risk: A Credit Cycle Is Emerging

Beyond geopolitics, a more structural risk is forming:

The return of a credit cycle.

The U.S. has not experienced a true credit cycle since the 2008 financial crisis.

Many analysts now believe:

We are overdue.

Understanding Private Credit

Private credit has quietly become one of the largest financial markets.

• Size today: $1.8 trillion

• Size 10 years ago: $300 billion

That growth is massive.

What is private credit?

It refers to non-bank lending, where institutions lend directly to companies.

Key segments include:

1. Direct lending
   Loans to companies, often backed by private equity

2. Asset-backed finance
   Loans secured by assets like mortgages, receivables

3. Distressed/opportunistic lending
   Capital for struggling or restructuring companies

The Structural Problem: Illiquidity + Retail Money

Historically, private credit was funded by institutional investors.

Now, firms are raising money from:

• Retail investors

• 401(k) plans

• Brokerage clients

This creates a mismatch:

• The assets are illiquid

• But investors expect liquidity

To manage this, funds cap withdrawals at 5–7% per quarter

When redemption requests exceed this:

• Withdrawals are restricted

• Investors get stuck

This is already happening.

Early Warning Signs Are Appearing

Recent developments suggest stress is building:

• Redemption requests exceeding limits

• Funds honoring only partial withdrawals

• Large firms stepping in to cover gaps

At the same time:

• Loan valuations are being marked down

• Especially in software sector exposure

Why Software Is the Weak Link

Private credit is heavily exposed to software companies.

• Estimated ~25% of loans tied to software

Many of these companies were acquired:

• Between 2018–2022

• At high valuations

• Under low interest rates

Now the risks are compounding:

1. AI disruption
   Cheaper alternatives threatening incumbents

2. Refinancing risk

   • 11% of loans need refinancing by 2027

   • 20% by 2028

3. Higher interest rates
   New debt will be significantly more expensive

The key question:

Who will refinance these companies if performance deteriorates?

The Circular Risk in Private Equity

There is also a structural loop:

• Private equity firms buy companies

• Their own credit arms finance those purchases

This creates:

• Circular capital flows

• Concentrated risk

If one side weakens, the entire system is exposed.

Why This Matters: Where Growth Happens, Risk Builds

Historically, credit crises emerge where lending grows fastest.

Examples:

• 2008 → subprime mortgages

• Today → private credit

Since the financial crisis:

• Banks slowed lending

• Private credit filled the gap

This makes it the primary risk center today.

Is This a Real Crisis or Just a Narrative?

There is an important distinction:

• Credit cycle (real deterioration)

• News cycle (fear-driven narratives)

Right now, we are early.

Problems are emerging—but not yet systemic.

However, the trajectory is clear:

Losses are beginning to surface.

AI Spending: The Other Major Risk

Parallel to credit markets, another macro question remains:

Will AI justify its massive investment?

Despite skepticism:

• Spending continues aggressively

• NVIDIA expects $1 trillion in AI chip demand by 2027

There are two competing views:

1. Bull case: AI transforms industries

2. Bear case: Returns won’t justify capital

So far, markets are still betting on the bull case.

Final Synthesis

There are three overlapping forces shaping markets right now:

1. Geopolitical Risk

War is driving oil → oil is driving inflation → inflation is driving markets

2. Structural Financial Risk

Private credit expansion is now facing its first real stress test

3. Technological Bet

AI investment is massive—but returns remain uncertain

The Real Takeaway

The most important shift is this:

Markets are transitioning from a liquidity-driven environment to a risk-aware environment.

If the war is prolonged and credit stress accelerates:

• Inflation rises

• Rates stay high

• Weak balance sheets break

That’s how cycles begin.

Not suddenly—but gradually, then all at once.

Thanks for reading this week’s wrap.
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This post is for informational purposes only and does not constitute investment advice. Please consult a licensed financial adviser before making investment decisions.