Good heavens the economic bad news is piling up like a bad car wreck. In that case, let’s do some serious rubberknecking, folks, because there is a lot of fucked up shit to observe.
We begin with widepsread reports of large institutional investors (hedge funds, investment banks, boutique investment firms) selling off services stocks like leisure, luxury, hotels, and some retail outlets, like Home Depot. That’s a lot of cash leaving equities. But for what safe harbor? It certainly isn’t private credit, like Blackrock which lost 100% on one investment. UBS also lost 100% on another private credit deal. Now, Blackrock lost $150 million on the deal, which for Blackrock is naught but a silly little rounding error, but as they say, $150 million here, a $150 million there and pretty soon you’re talking real money. That cash won’t go to US treasuries, that’s for damn sure. Seriously, who’d invest in US dollars? I wouldn’t fuck a US treasury with Magic Johnson’s dick. Yeah, I said it.
Want news even more ominous: JP Morgan Chase, Goldman Sachs and my alma mater (for full disclosure) Morgan Stanley were the lead underwriters of a $1 billion increase in AI firm Coreweave’s $2.5 billion revolving credit facility. The term sheet expands the maturity date from 2028 to 2029. Just a year? Did they attempt any due dililgence on Coreweave’s burn rate? It’s gotta be a fuckton fast. The equipment depreciates faster than the time between now and when the loan reaches maturity. No way Coreweave’s earning increase that rapidly. Apple Coreweave certainly is not. Apple’s so profitable it prints money. I mean, seriosuly, Christ on a popsicle stick. Where’s the due diligence? Where are the regulators? I know, I know.
But it gets worse: On Nov. 4, Meta agreed to an off-balance sheet $27 billion loan (also known as a Special Purpose Entity, henceforth SPE) from Blue Owl Capital (OBCD). This is financial shenanigans and identical to the accounting legerdemain that led to Enron’s ruin. Pay attention people. This is getting ugly. Enron butt-hurt ugly is how bad this is starting to look. Let me break this down for you, in case you forgot. An SPE is off-balance sheet. That means the company is under no obligation to report it on its SEC required filings. Get it now? Investors have absolutely no way of knowing how much off-balance sheet debt a particular company has. SPEs=bad ju-ju.
Moreover, Oracle now has a debt-to-equity ratio approaching 500% and that’s just what’s on the their balance sheet. There is literally no way to know if Oracle has any SPE loans outstanding. My bet: they do.
Speaking of: JP Morgan notes AI linked debt now accounts for 14% of its investment grade corporate index (CGI IG), and now surpasses US commercial banks as the dominant sector. Apparently this means that not only are AI firms taking on loads of traditionally financed debt, but they are also taking on unknown and UNREPORTED SPE debt to finance AI hyper-scaling. No wonder the main character of the (mostly) true movie, The Big Short, Michael Burry, is closing his fund. He shorted Palntir and Nvidia. Sadly, Burry forgot John Maynard Keynes keen paroemia (from the ancient Greek meaning maxim or proverb), when he lost all his money in the 1929 crash: “markets can remain irrational longer than you can remain solvent.”
Also: beware neologisms created on Wall Street. Today’s new phrase is ‘data center credit.’ Sounds positive, aye? It ain’t. It’s a bullshit phrase referring to debt financed for the AI sector by private credit shops. Tons and tons of bullshit, yes?
There is also news that insurers are placing more than 50% of assets needed to guarantee/backstop annuities and life insurance policies into private credit shops. This is a terrible idea. Annuities are insurance policies designed to pay out in the event you live too long. Life insurance is, well, insurance against not living long enough.
Oil prices are soft/down to flat. Texas rig counts are down again this month, rig counts are considered a leading economic indicator.
And most ominously of all, just this evening the head of the NY Fed convened an emergency meeting of bank heads to discuss one of the Feds key lending facilities. I’m almost certain this is in response to the rising private credit loses and how they resemble Bear Stearns blowing up two subprime hedge-funds in 2007, the precise moment the 2008 financial crisis began.
If you need links I will provide them, but it is just as easy to google everything I’ve written here. It’s all true, except for when I opine. And yes, when it comes to discussing economic news I have a seriosuly uncontrollable potty mouth. I got it while working on the floor of the AMEX as an arbitrage clerk back when we used fractions. Yup, I’m that fucking old.
Finally, a postitive thought, in a manner of speaking. The only thing the equity markets have going in their favor right now is this: the almost impossible to prevent or deny Christmas rally. It’s damn near as reliable as the Monsoons.
So, if the econ shit does hit the fan, it’ll happen after January 1.
mago
Lotsa turkeys being slaughtered and roasted between now and then.