Every credit cycle is different: they don’t repeat, but they do rhyme at the end.
Phase One: the Expansion
The credit cycle begins when intense speculation drives asset prices into bubble territory. This time around AI is the prime mover. AI stocks have clearly inflated, irrationally, and dangerously market averages. Nvidia’s market cap ($4.9 trillion) is larger than India’s annual GDP ($4.5 trillion).
As Barton Biggs, a mentor-of-sorts when I was at Morgan Stanley, said about the dot-com bubble, “things that cannot go on forever, don’t.”
That rule applies to the 10 Horsemen of the AI-pocalypse.
The bubble will deflate, jus not the way you think.
It won’t go “boom” and pop all of a sudden. As Kathleen Tyson, a commenter as qualified as any to opine on this market, notes, “credit bubbles collapse from the periphery toward the centre [just as empires do]. Always. Overextension creates a vulnerable, unstable margin at the extremes.”
The bubble is here and it’s collapsing from the outside, just like a balloon does. Wrap your hands around an imaginary balloon and feel it lose gas. You can see it now, yeah?
So what does this mean? Well, it means we’ve reached the end of the beginning of the first part of this credit cycle. Part two is up next and it’ll be a like a rodeo-clown getting gored by a ten-tonne bull.
Phase Two: The Big Unwind
Phase two of the credit cycle is the credit unwind, read credit destruction, linked to insolvency concerns, similar to what FSK KKR is undergoing:
“FSK’s portfolio was hit by large markdowns in the fourth quarter on debt extended to software companies. The fund’s holdings in debt tied to janitorial services groups, and so-called roll-ups of dental clinics, veterinarians groups and defence contractors also saw markdowns.”
Other private credit shops that have taken some heavy markdowns and/or halted redemptions, as I disucss below. But seriously, if you know the private-equity model, you should be appalled their taking over janitorial serivices, dental clinics and veterinarians. Mom and pop shops par excellence. And they are now having the profitable assets stripped and the rest is larder with tons of debt and left out in the world to go bankrupt. I have a cousin in private equity and I’ve lost all respect for him. It’s probably mutual. I’m no role model.
But I digress . . .
The real kicker is our Bearn Stearns moment: an analog to the precise moment the 2008 Financial Crisis became inevitable. Recall summer 2007 when two Bear Stearns hedge funds met the guillotine. Blue Owl and it’s recent woes are this crisis’ first canary in the coal mine. Blue Owl, essentially an SPE/SPV for AI-hyperscalers to offload debt from their balance sheet, is ground zero for Oracle’s recent woes. SPE/SPVs, for those of you who don’t remember, are what killed Enron and destroyed AIG. Blue Owl vis-a-vis Oracle signals the end of the inflating bubble and beginning of the credit unwind.
“So who’s unwinding and why, you ask?”
The first-comer was Blue Owl. They got a rude wake up call when investors demanded $1.4 bn in redemptions, which forced Blue Owl to sell assets to meet redemption needs, in essence a fire sale. Every trader on the street worth his salt knew who was selling and what. It was brutal, as I’ve heard it told from some old Wall Street pals of mine.
Then Blackstone gets hammered with $1.7bln in redemptions and halts all redemptions. Blue Owl is a shadow lending facility for corporations, not individuals. But the next examples affect the money of individuals, billionaires that is.
So here comes Blackrock, sideswiped by $1.2bn in redemption requests, of which they honored only half of them. Resulting in a bunch of high net worth investors got sucker punched.
This ongoing and accelerating unwind in private credit is canary number two of our next credit crunch/crisis all the while the Fed is, unsuccessfully trying to backstop the slippery-slide of private credit into insolvent credit: on February 17th they injected $17.8bn into the debt markets via overnight repos.
So a lot of credit destruction has to happen—and will—before we get to the third and final phase.
We are a closing in, accelerating for sure. In fact, the appraoching crisis, because the mass fuckery of private credit does not have to legally disclose holdings, will make 2008 look like a Roman Holiday. No candles included.
Added at 9:30 AM Central Time: Teachers’ Pension Reportedly Loses $7 Billion in Private Equity Bets in 2025
“Ontario Teachers’ Posts First Private Equity Loss Since 2009”
If you run a pension fund and you invest the funds money with private equity you are shit. You are giving money to the very people that are strip mining this country’s middle class businesses. Regardless, the contagion is on. This thing is getting perilously close to becoming uncontainable. Remember that catchphrase form 2007-08? “It’s contained!”
Phase Three: the grand finalé.
Where credit cycles rhyme, as I said above, are how they end: on the last two syllables. Can you say it with me: Ponzi? In the end the ponzi finance bubble always collapses.
I suspect Crypto will be the first big Ponzi unwind. And it will take a lot of suckers with it. Plus, a damn lot of fools who worked for investment, commercial banks and private credit/equity shops. Crypto is bullshit, wrapped in dead fish skin that’s been perfumed by Chanel. No matter how good it smells, it’s rotten to the core. Crypto is to this financial crisis as CDOs and synthetic CDOs were to 2008.
The AI-hyperscalers will suffer as well, during the Ponzi unwind.
Why?
They are in essence engaging in a similar sort of vendor financing like CISCO and Juniper Networks did in the dot-com bubble. Nvidia is giving chips to AI-hyperscalers as collateral for loans. Never mind the chips will depreciate long before the earnings are solid enough for the AI-hyperscalers to payback the “loans.”
Once the AI driving stock bubble bursts, all hell breaks loose. One or two investment banks will go bust this time around. Maybe Morgan Stanley? Maybe Goldman? (I doubt Goldman goes bust, they’re too politically well connected.)
Note, as I and Ian have both said, this will be the final financial crisis the Fed is willing to backstop. Broad political support for a bailout hasn’t eroded completely.
But the next one? It’ll be unstoppable. Not only will the political will have evaporated, but so will have the resources to do so.
As we say down here in Texas, cowboy up, ride’s about to get real.
Nota bene: Phase Two of this credit cycle is accelerating: JPMorgan Restricts Private Credit Lending After Loan Markdowns. (Hey, Dimon can be a putz, but he’s a careful, shrewd banker.)
Key takeaway from my post at X: “JPMorgan Chase & Co. is restricting some lending to private credit funds after marking down the value of certain loans in their portfolios, according to a person familiar with the matter, in the latest sign of stress in the $1.8 trillion industry.” Morgan took a $22 billion haircut.
And this: “L&G’s solvency ratio — a measure of its ability to meet long-term financial obligations — declined to 203 per cent for 2025, down from 232 per cent in the previous year and below a Visible Alpha consensus of 217 per cent.” h/t for both stories go to Ventzu.
That’s some special fuckery there, folks.
Nota bene, bene: Good Morning from Germany, where today’s 10y govt bond auction technically failed.
Nota benissima: Well fuck, Cliffwater is the next domino to fall. First, huge redemption demands-to the tune of $33bn–at Cliffwater, LLC, force the private equity shop into a firesale a lá Blue Owl. So Cliffwater, LLC is a twofer!
And JPMorgan is dealing with some collateral stress issues. Whatever the fuck that means. When banksters make up words, be careful, you’re about to get screwed.
Even PIMCO piles on saying that they see “a crisis in bad underwriting in private credit.” Christian Stracke, president of PIMCO reiterated the headline news, “[this news] is the result of years of sloppy underwriting standards in lending.” Basically calling out the private credit/shadow credit industry for engaging in the 2007 equivalent NINJA–No income, no job–loans to any company that want cash. He also added, “there is a reckoning going on right now. . . . It’s not just a crisis of confidence, it’s a crisis of really bad underwriting.” Makes one wonder just how many cockroaches are going to come out of the dark, dank Wall Street kitchen this time around once the lights come on?
Phase Two of the credit crisis has arrived, and it came heavy.
ventzu
Sean
The FT has a couple of headlines this morning:
– “JP Morgan marking down loan portfolios of private credit groups”
– “L&G’s capital buffer shrinks as insurer cuts asset values”
As I wrote previously, if oil stays elevated, the fragile economy can only slow further, and highly energy intensive bitcoin and AI will crack.
Damn shame.
Sean Paul Kelley
@Ventzu: yup, saw both stories. But they came too late as I have already posted. I might do a nota bene on them.
spud
here is the guy who made this all possible,
https://prospect.org/economy/cut-off-private-equitys-money-spigot/
Cut Off Private Equity’s Money Spigot
A variety of legislative and regulatory actions would make it hard for private equity to stay in business. That should be the goal.
by David Dayen
July 28, 2022
“PRIVATE EQUITY FIRMS RAISE funds from several different sources. But after the industry temporarily collapsed amid Michael Milken’s prosecution in the late 1980s, institutional investors like public pension funds and university endowments drove the return to prominence. That support can be traced to one law signed by President Bill Clinton. It’s called the National Securities Markets Improvement Act of 1996 (NSMIA), and its impact has been almost totally forgotten to history.
The Investment Company Act of 1940 required investment funds to register with the Securities and Exchange Commission, with regular reporting requirements, prohibitions on certain transactions, and restrictions on leverage (the use of large amounts of debt). Only investment firms that limited themselves to under 100 investors could avoid the 1940 Act restrictions.
The leverage restrictions alone—investment companies must carry asset coverage of $3 for every $1 of borrowing—would make the private equity business model largely impossible, so firms kept under 100 investors per fund.
But Section 209 of NSMIA allowed exceptions for funds with over 100 investors, as long as they were “qualified purchasers,” defined as either individuals with $5 million or more in investments or institutional investors with over $25 million in assets.
This opened a new funding base, which happily rushed in, seduced by the prospect of outsized returns. A decade later, in 2006, there was $375 billion in private equity acquisitions, 18 times the amount of just three years earlier.
The tools exist today to stop private equity, in a law written 82 years ago.
So the first way to reduce the involvement of private equity in every aspect of our lives would be to repeal Section 209 of NSMIA.
This would both reduce the amount of available capital in each fund and limit private equity’s more attractive options. For example, firms have sought to get their investments into 401(k) plans, offering themselves to small investors for the first time. The Department of Labor has tried to put a stop to this. But if PE funds fall under the 100-investor rule, it wouldn’t be worth it to them to tap retail investors.
The bigger deal here is it would kick most institutional investors out of the private equity game, leaving them much better off. Contrary to private equity’s claims, their long-term performance does not beat the public equity market, as a 2020 study by Ludovic Phalippou showed. The business is good at minting the billionaires who run private equity firms, but less so at enriching its partner investors.
Despite this, public pension fund exposure to alternative investments has risen to more than 30 percent. These are the retirement dollars of ordinary workers funding the decimation of ordinary workers. Saving pension funds from themselves should be a public-policy goal.”
—-
and hillary was going to nominate larry fink to run the treasury, because he was so smart!
the gold bugs might want to sell some gold and buy canned food.
you can only imagine how deep the tentacles of these parasites and leeches have gripped americas food supply.
Sean Paul Kelley
@spud: he also oversaw the repeal of the Glass-Steagall Act, and some very bad “reforms” of the CTFC. A great deal of all this fuckery can be laid at Clinton’s feet. He started us on the slippery slope.
Feral Finster
I have always thought that Hyman Minsky accurately described and predicted observable reality.
Anyway, SPK is correct, that much of what Clinton did exacerbated the Minsky Credit Cycle, made the upswings sharper and the crashes harder. Liberals and democrats still love The Fat Boy, however, especially as he made it okay for them to taste The Good Life and they quickly decided that they liked it.
Sean Paul Kelley
@Feral Finster: it’s gotta be snowing in hell. You agreed with me. I’m gobsmacked. 😉
marku
Thanks SPK. That saying is Stein’s Law “If a thing can’t go on forever , it will stop”
https://en.wikipedia.org/wiki/Herbert_Stein
The Brtis have a more honest phrase for it, they call it “Asset stripping”
Basically no more than theft. Woody Guthrie knew it. “Some men will rob you with a fountain pen.”
2026 has already been more than a year’s worth, and we are only 3 months in…….
Sean Paul Kelley
@Marku: cool. I had no idea where it originated, except that Barton said it frequently to we neophytes.
bruce wilder
Minsky is the only economist in history who could use “rehypothecation” correctly in a sentence, and that alone made him an order of magnitude more realistic back in the day. A Minsky credit cycle outline compares unfavorably with a Kindleberger credit cycle narrative in one potentially critical respect: in a Kindleberger credit cycle, the crisis propagates and reverberates thru the international system of trade and finance. Minsky, I think, would have his eye on crypto and private credit and the AI bubble; Kindleberger would be wondering about the fragility of international dollar liquidity.
Sean Paul Kelley
@Bruce Wilder: when I worked on the floor of the Amexa–I was an arbitrage clerk, not a trader–one of our traders rehypothecated client assets when to cover a naked short. He *luckily* came out flush. But he got axed anyway. Rehypothecation is a big no-no, or at least it was in 1995-96, back when we used fractions.
As for Kindelberger and the dollar: as I said in a post recently, dollar hegemony will not be the result of a credit crisis. Dollars will flock to NYC in the short term and create a strong dollar for a time. Dollar hegemony will be the result of internal policies, ie. national insolvency. It will be an endogenous shock, not an exogenous one, that will kill the dollar as the reserve currency.
marku
Larry johnson has a good peice on the impacts of closing the Straits, and how it will impact various countries. Notably horrible on Africa, Pakistan, India. On how one of the over looked export is urea, essential for fetilarzer. Comment that up to half of the nitrogen in a human body has been the Haber-Bosh process at least once.
https://sonar21.com/choke-point-the-global-economic-consequences-of-the-persian-gulf-shutdown/
So if this persists at all—and who sees any kind of early end to it–global famine is a very real guess to an outcome
Also looks to reduce CO2 into the atmosphere in a way that no one would have wished.
Probably a step down in John Micheal Greer’s Catabolic Theory of the end of industrial civilization. Huh. There is Stein’s Law again. Exponential growth on a finite planet.
marku
Gah “been through the Haber Bosh Process”
different clue
@ventzu,
( And anyone else too, really . . . ) What can we mere layfolk do, in our millions, to keep oil elevated and elevate it even more if we can? I already suggested as many millions of counter-Trumpers as possible buy and waste as much oil product as they possibly can, to deepen the shortage and lengthen its extent.
Any other ideas?
Feral Finster
@Marku:
Ain’t it rich how The Epstein Class so piteously bewailed how Ukrainian grain was so necessary to feed the world (and Russia even agreed to allow grain exports in another obvious sham) but barely a peep about how The War On Iran affected shipments of urea or fertilizers?
different clue
. . . ” Also looks to reduce CO2 into the atmosphere in a way that no one would have wished. ” . . .
” no one” ?
If the Global Overclass wants to kill 7 or so billion people over the next hundred years and make it look like an accident, or a series of accidents, or bunches of bad luck, or fate after fate after fate . . . how would they get it done? What processes would they facilitate to achieve their Operation Long Jackpot?
Remember, it can’t be too fast or all at once, or too many of “we the targets” will realize it all at the same time, and if a few billion people were to realize the same thing in one great big Pearl Harbor Moment, they would rush the various armies and security forces and guards standing between us and the Overclass faster than those armies and etc. could shoot us all down. Enough would get through to exterminate the Overclass and every single one of their family members and all their friends and supporters and all the family members of those people. Personal, up close and in detail.
The Overclass does not want the Long Jackpot to speed up so much that billions of meanstreamal normies get transformed into Overclass-focused cannibal masses all at the same time. And take the risks and do the things which I would never ever do or even imagine as long as I am in my meanstreamal normie state of existence.
That’s why the Overclass wants to do it slow, thorough and in a “deniable manner”.
So . . . how would they do it? Engineered famine through engineered fertilizer shortages? Other methods?
Feral Finster
@NTW: I think that the consensus agrees with me that, yes, Trump did talk about a ceasefire on Monday in an attempt to jawbone down oil prices.
marku
@ different clue
Well, no one sane….
different clue
@marku,
Do you think the Global Overclass is collectively sane? Do you think the people who are part of it are individually sane? Some of them? Any of them?
Are you willing to bet your life on that?
As long as I remain in my mainstreamal normie state of mind, violent action against the Overclass is not something I am capable of doing or even imagining. But I take it for granted as a Basic Truth that they want to kill most of us because they feel we smell up the joint and louse up their view.
But as long as they restrict themself to using methods like decreasing food supplies, reducing the nutriquality of food, increasing the rate of antibiotic immunity among superbugs, fostering the spread of diseases and carefully sabotaging efforts to control fortuitous disease outbreaks, raising the background levels of sterilogenic and carcinogenic pollution, etc., I will try to figure out how I might slip past or sneak around those “stochastic Darwin filters”.
But I accept that as being the future Them are designing for Us. If you don’t want to believe it, you don’t have to.
different clue
And of course, insanity is not limited to the Overclass. Whole groups of non-upper-class people wallow in entire cultures of pure cultural psychosis. Parkrose Permaculture has a video-talk about one such group.
“MAGA Christians want it to get MUCH worse. They think it will bring Jesus back. (part 2)”
https://www.youtube.com/watch?v=UknoJyQgIoE
MAJA! ( Make America Jackpot Again, eh?)
And lets remember, that the MAGA Christians being talked about here have people placed fairly high up in the Dept. of Defense, including the Secretary of Defense Hegseth his own self.
I think the MAGA Christian’s UL-ti-mate endgame for Israel is to transform it into a sheet of glass so holy it glows in the dark. I don’t think that’s what Netanyahu had/has in mind.
Feral Finster
@clue (the different one):
https://www.texasmonthly.com/news-politics/red-heifer-prophecy-texas-ranch-byron-stinson/
Keep in mind that these are not the Overclass.
different clue
@Feral Finster,
You are correct. I think my comment just above somewhat pre-anticipated your cautionary reminder. But the cautionary reminder is good just the same, and the detail about the Red Heiferists lends some depth to the rendering.
marku
@DC. Oh I believe it. I just think it makes them insane.
different clue
@ Sean Paul Kelley,
Here is a video which reminds me very much of the suppressed-panic Ben Bernanke talking-to-Congress video which I mentioned once as making me think something real bad was going to happen.
It is a video of SecTreas Bessent in an interview, pulled out of it in real time by MISter PRESident, and then coming back to resume being interviewed. His personal affect seems much different after as against before the pulled-out. Now, it seems to be literally about Scott Bessent’s darling offspring having volunteered for military service and about to get sent into Iran or something similar. But could there be an economic dimension to all this?
“Scott Bessent abruptly pulled away by Trump mid-interview and returns with shaken voice”
https://www.reddit.com/r/Fauxmoi/comments/1rsxqps/scott_bessent_abruptly_pulled_away_by_trump/
Is this a flashing siren? A blaring strobe-light? A twirling kazoo?
different clue
And how ’bout this? “Panicked Pentagon Sends Land Invasion Force to Middle East”
https://www.reddit.com/r/politics/comments/1rsux6s/panicked_pentagon_sends_land_invasion_force_to/
As the Iranian Foreign Minister said . . . ” Come on over whenever you like. We’ll keep a round in the chamber for you.”
Could this have a material impact on various different credit things and stuff?
different clue
Here is one of those reddit-offered ” I am a whatever — ask me anything” posts. In this case an Australian wholesale fuel trader.
“I’m an Australian Wholesale Fuel Trader – AMA”
https://www.reddit.com/r/australia/comments/1rt3kyh/im_an_australian_wholesale_fuel_trader_ama/
offered in case it brings value.