One cockroach, two …
Last fall’s implosions of First Brands, an auto parts supplier, and Tricolor Holdings, a subprime auto lender, raised concerns about the fragility of the private credit market, where non-bank lenders have lent trillions with minimal transparency and weak safeguards.
These events last fall and the recent investor restrictions imposed by Blue Owl have sent shockwaves through the financial markets, highlighting the growing risk of a credit crisis. As Jamie Dimon, CEO of JPMorgan Chase, aptly put it, “When you see one cockroach, there’s probably more”.
Dimon’s comments were a stark reminder of his concerns over lending standards, which he believes are becoming increasingly lax. The recent credit events, including the collapse of several high-profile lenders and the subsequent freeze in the commercial paper market, have only served to underscore his warnings.
The Blue Owl investor restrictions, which have effectively shut off access to funding for many lenders, have further exacerbated the situation. By limiting the ability of lenders to access capital, the restrictions have created a ripple effect throughout the financial system, making it increasingly difficult for businesses to access credit.
The consequences of a credit crisis are far-reaching and devastating. A sharp decline in credit availability can lead to a recession, as businesses struggle to access the capital they need to operate and grow. It can also lead to a sharp decline in asset values, as the value of collateral used to secure loans declines.
Dimon recently warned that his “anxiety is high” over the combination of high asset prices, questionable lending practices, and obvious signs of strain as illustrated by these financial strains, indicating ominously that they reminded him of conditions in the runup to 2008.
JPMorgan’s Dimon: ‘My anxiety is high’ over future credit cycle
Jamie Dimon Says His ‘Anxiety is High’ Over What Could Cause the Next Financial Crisis
Alas this reinforces our homegrown analysis. We’ve long fretted over the Fed’s premature surrender to inflation, the risks of easy money, high asset prices, and the yield curve inversion and uninversion. Gold prices haven’t been romping for no good reason. Rising oil prices are reminiscent of the first half of 2008, when they ultimately peaked at $147 a barrel, right before lurching into a deflationary plunge that would see them in the $30s by year end. Timing is yet to be determined, but Synthetic Systems has us on stock market watch, having penciled in an imminent correction as well as another later this year.
It should go without saying that when we see something that’s now giving even such respected mainstream figures as Jamie Dimon high “anxiety”, it’s something that should be on every investor’s radar screen.
So you could say I think there’s an elevated risk of a deflationary episode significant enough to position for. Yet doing so would also warrant being alert for the next shoe to drop …
Another Wall Street honcho weighs in:
I smell a crash coming, says former Goldman Sachs boss
“Lloyd Blankfein said the ‘horses are starting to whinny in the corral’”
The stock market downdraft predicted by Synthetic Systems has arrived. Based on its configuration, there is more to go. The macro backdrop is however conspicuously noisy and short term market movements even more difficult to anticipate than usual. Gold and treasuries are providing less than the hoped for ballast, though the gold selloff is likely to prove more transient in light of the larger trend and the likely policy response. For now, cash USD and commodities COMT are the primary beneficiaries.
One feature of market action so far this week comes as a surprise to me, and that is the extent to which US assets are outperforming the rest of the world’s. Notably the currency (USD) and stocks. There is a reflexive flight-to-safety element to it, but I would have expected that to be offset by the inflationary macro backdrop. The appearance of USD being treated as safer than gold is perplexing … but might yet turn out to be transient. It might be explained by just the kind of deflationary rush to USD we actually have been anticipating, but that wouldn’t explain stocks outperforming gold. Possibly gold still had some speculative fast money to be washed out. Buy the rumor sell the news? The answers may become clearer as the week wears on.
I am willing to off a guess on dollar strength. This flight to safety this time is sudden and fast, and driven by institutional investors. Those folks don’t normally park funds in gold for a few days, so the cleanest dirty shirt will do nicely in a pinch, until things stabilize. Just my guess.
Thanks, thrifty. Makes sense to me. That would also support the notion it’s a transient move and that the dollar decline will resume in due course. Timing remains to be determined … this private credit mess is brewing mostly in the background … like sweeping dirt under a rug, being temporarily eclipsed in the headlines doesn’t make it go away. At the risk of mixing metaphors, you may have momentarily switched off the lights. but the cockroaches are still there…
Zooming out on gold a bit, it’s clear that today’s decline merely reversed a mildly overbought state that had built up over recent days. It has not broken below the uptrend that was in force until the spike in the second half of January. Unless and until that happens, that trend remains in force. Finster’s First Law of Motion.
Along the same lines, despite the strong outperformance of US stocks relative to XS (rest of the world) stocks so far this week, it has not been enough to break the relative trend of underperformance. On a longer time frame, US stocks have been rolling over while the world at large continued higher. If SS is correct, XS is beginning to join the down trend.
Another factor contributing to this week’s countertrend outperformance of US stocks … some of the biggest non-US stock markets. such as Japan, Britain, China and India, are more dependent on imported oil.
Another credit crash coming? This stress indicator is hitting financial crisis levels.
Apparently this is also an issue at the consumer level.
It’s a very small sample to draw from, but it’s worth recalling that in 2008, as the credit crisis was bubbling up, oil prices hit $147 a barrel in the middle of the year, right around the end of June. That was also when the government mortgage giants cracked and were taken into conservatorship … the less well-remembered event that led to the infamous Lehman Bros implosion. That we’re now seeing crude bubbling up at the same time as trouble is brewing in private credit – while apparently consumer credit is feeling a little under the weather too – makes some worthy grist for our mill.
Some media analysts have framed the private credit issue as something expected to play out over the next 12-24 months, suggesting it’s not on the verge of erupting into a full blown crisis. Also that they didn’t see it spilling over into the public markets. On the other hand, we can recall people who should be in a position to know (like Fed Chair Ben Bernanke) saying that the 2008 crisis was “contained” to sub-prime, too. Let’s just say that it bears watching, especially if we see oil prices continue to rise.
These days markets can turn on a social media post, but just now the Nymex continuous contract hit $77.33, eclipsing the week’s previous high of $77.19, even as headlines trumpet oil’s earlier pullback. Not to be alarmist … I added a bit to my stock allocation on this morning’s plunge … but with eyes and ears on oil prices as well as credit. In any case, voices sounding an “all-clear” are premature at best.
US crude has just broken $80.
US assets continue to trounce ex-US assets since last week’s close. The USD is up 1.75% versus its foreign currency counterparts and US stocks are up 5.88% versus their XS peers, both huge moves for such a short period of time and reversals of previously established trends.
In dollar terms, it’s difficult to find winners. Stocks overall have underperformed dollars, and so has even gold. The only asset in our Model Portfolios that’s solidly up in dollar terms is the commodities fund COMT.
As always, reading long term implications into short term moves is not recommended.
In the bigger picture, markets are generally tracing out Synthetic Systems forecasts. We’ve seen a treasury rally and are seeing a stock selloff in progress. The notable exception is gold, whose selloff SS missed. While SS correctly forecast the 2025 Q4 gold correction, it did not foresee this 2026 Q1 volatility.
For the past few years the advisors we work with have been pushing private credit and private equity aggressively. We’ve politely declined. My limited experience with private issues was only when I was involved day-to-day in the business operation at a high enough level to see the company financials every week. I suspect many of the little fish like me have taken that bait and will be experiencing significant losses when the music stops for private credit and illiquid private equity. There are better quality and lesser quality of everything, and one suspects the big smart money has been shifting the sketchier private assets off their books and towards the retail end of the investor pool.
The same forces are probably behind the push to get private assets into 401(k)s. Personally I don’t get involved in them either. Not necesssrily because I think they’re intrinsically bad investments as a class, but because there’s already a vast menu of publicly traded assets and no need for yet more choices. You can eliminate the least transparent and least liquid without giving up anything meaningful.
If I have a single pet peeve in finance, it’s leverage. Virtually every financial disaster has involved leverage. If the people making the decisions were the only ones to suffer the consequences of risk gone bad, it wouldn’t be such a problem, but given the government’s and central bank’s pattern of bailing them out, it not only socializes the risk but subsidizes it. I haven’t dug into the details of recent private credit blowups, but as far I understand it, the same old culprit is exacerbating if not causing the danger. It’s really hard to go bankrupt without going into debt first.
Meantime China Preps new Flash charging battery tec-
https://insideevs.com/news/789094/byd-second-generation-blade-battery/
10-70% in 5 mins
We really gotta get global trade flowing again!
We are in the midst of a deflationary squall, with the dollar appreciating against virtually every other asset except oil and gas. Treasuries, US stocks, XS stocks, copper, gold … a whole range of things that have nothing in common except our use of the same pricing unit, have been falling in price. This is The Titanic Effect in reverse.
Tempting as it may be to attribute causal potency to recent headline drama, it’s more appropriate to view it as catalytic. The spark that sets the pile of tinder afire would have no effect without the tinder, but the tinder would eventually find another spark.
The tinder is thus true cause and in this case can be found merely by rewinding our minds a few weeks to when the “dollar debasement” trade was all the rage. Traders piled in with leverage, the trend got ahead of itself, and must be at least partially unwound.
From big deflations like 2008 to little ones, the cause is the preceding inflation. Inflation is springy. People become convinced that the only possible direction for dollars is down, they short them (borrow them), and a short squeeze eventually results. Inflation causes deflation.
How long will it last? This doesn’t tell us, but understanding it will help us recognize the sign posts along the road. Best advance guess is based on Synthetic Systems, suggesting at least this particular squall has a life expectancy numbered in days, at most weeks.
https://www.zerohedge.com/geopolitical/massive-wave-iranian-missiles-pummeled-israel-overnight-trump-hopes-quick-victory
“Treasury Expected To Announce Measure As Soon As Thursday To Combat Rising Energy Prices That Includes Using Oil Futures Market – Senior White House Official”
Let’s hope saner minds prevail. Price controls only transmute higher prices into shortages. They didn’t work in the seventies and they won’t in the twenties.
More generally, the chain of price discovery in free markets is the neural network that makes markets tick, and is an essential part of what gave rise to modern living standards. It’s what directs the production of goods and services people want most using the least resources. Government interference can only shortchange those living standards, just as having a central committee setting interest rates has.
It’s the financial equivalent of stuffing a penny in the fuse box. You might get the juice flowing again, but at the risk of burning down the house.
Something on Wall Street ‘Smells Like’ 2008, Says Former Goldman Sachs Chief. Here’s What It Is.
Both Goldman Sachs and Morgan Stanley seem to be in need of cash reserves as both of their retail banking operations are offering free money for depositing money with them for at least a certain amount of time. The annualized returns for those offers run from 9.65% up to 15.75%!
For Goldman Sachs, their Marcus bank is offering a $1,500 bonus for customers who deposit $100,000 with the bank for at least 90 days. At Morgan Stanley, they are offering a $1,500 bonus for customers who deposit $100,000 with the bank for at least 45 days and Morgan Stanley is also offering a guaranteed 3.75% rate of interest for six months.
I don’t think Goldman Sachs and Morgan Stanley are offering this free money out of some desire to help relatively small retail depositors. Something is rotten in Denmark and they are either raising liquidity in preparation to buy assets after a serious correction (I am highly doubtful of this possibility) or they are in trouble and are raising liquidity while they still can.
Definitely one of those things that make you go hmmm…
There’s too much smoke for there not to be fire smoldering away in some dark dank dungeon. The biggest challenge right now isn’t so much establishing the trouble but when it might affect the public markets. Normal market signals are being muddled with overt manipulation for example of oil prices. Not only via the aforementioned threats of futures interventions but also of government reserve releases.
As I mentioned earlier speculation is 12-24 months, a long time to be early. On the other hand the S&P is tracing out an obvious rolling over arc on a one year chart, and the escalator up elevator down metaphor didn’t enter the financial vocabulary for no good reason. With SS still on market watch and stocks historically overvalued, I’m maintaining a cash overweight versus a stock underweight. Figure if I’m wrong, at least I’m in good company, given Warren Buffett has rather famously been doing likewise. So much the better if a couple major Wall Street banks are raising cash too.
Loans to Nonbanks Threaten Banking Crisis
Are Investors Prepared for ‘More Violent and Frequent Shocks’ This Year?
>As I mentioned earlier speculation is 12-24 months, a long time to be early.
Perhaps there is a stickiness factor in that customers who take advantage of Goldman Sachs’ and Morgan Stanley’s offers will leave their money with those institutions after the required offer qualification period but GS only requires that the balance be maintained for 90 days (plus up to 10 days for the funding period) while MS only requires that the balance be maintained for 45 days (plus up to 30 days for the funding period). Based on the terms of those offers, it seems they are anticipating a need for liquidity this summer.
I was referring to the response of public markets; not necessarily on the same schedule as the private credit issues themselves. Along with the other evidence cited, it’s enough that GS and MS are seeking cash; I’m content to leave what’s going on inside their heads a black box matter;-)
Side note, would you sit in a car like this?
https://www.autocar.co.uk/car-news/new-cars/next-alpine-a110-get-ice-variant-alongside-incoming-ev
Fascinating. Those linked articles made me wander over to this report from the FDIC
https://www.fdic.gov/analysis/bank-lending-nondepository-financial-institutions.pdf
Last year the FDIC changed the way banks report their health. In the past, things were lumped into the “other loans” category. Now the FDIC requires banks to split out a component called “NDFI” ( non-depository financial institutions) which include loans to private credit and private equity companies. These are now more visible and are growing fast.
In the conclusions, the FDIC says this:
“…The growth in NDFIs that perform credit intermediation has been driven by a combination of factors, as NDFIs have stepped in to supply credit to companies and other borrowers in areas where banks may have retreated….”
Translation: One of the fastest growing segments for banks is third party loans so dodgy the banks hoped to avoid them. Banks have essentially been pulled back into risks they don’t want. Of course, the middle-man sitting at the conference table does not reduce risks at all. Defaulted loans hit the books the same regardless. Seems we’ve stopped using the old words “subprime” or “junk” and now instead we use the politically correct term “private”.
I love the old cartoon trope where three racoons stand on each other’s shoulders wearing a trench coat, hat, and sunglasses as a disguise. Today NDFI loans at banks are really just junk bonds, subprime loans, and bad mortgages wearing a trench coat and hat.
Dodgy credit, rising oil prices …
It’s that old time 2008 feeling …
Private credit risks could trigger prolonged economic downturn, supports higher gold price – Unicus Research