Good heavens, the economic bad news is piling up like a bad car wreck. So, let’s do some serious rubbernecking, folks, because there is a lot of fucked up shit to watch. Just don’t step in it, okay?
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 percent on one investment. UBS also lost 100 percent 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 into 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. It needed to be said.
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 — see, Americans can do metrics. FTW!
But really, you know that kind of high-tech equipment becomes obsolete and depreciates faster than that loan reaches maturity. There is zero, zilch, nada, niente, nyet, nein, no way Coreweave’s earning increases that rapidly. To quote Yoda, “Coreweave, Apple certainly not you are.”
Apple’s so profitable it prints money.
I mean, seriosuly, Christ on a popsicle stick: Where’s the due diligence? Do investment firms even have compliance departments any more? Where are the regulators?
Yeah, yeah, 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 juju.
To wit: Oracle has a debt-to-equity ratio approaching 500 percent, and that’s just what’s on the their balance sheet. Has Oracle borrowed any money where the debt is accounted for in an SPE?
Guess what, folks? There is literally no way to know if Oracle has any SPE loans outstanding.
My bet: They do.
Speaking of shit credit, or is it credit shit?
Whatever. Moving on.
JP Morgan notes AI-linked debt now accounts for 14 percent of its investment grade corporate index (CGI IG), surpassing US commercial banks as the dominant sector. Who the fuck knew US commercial banks have turned into stingy mozafukas? Can haz dolerz, puleeze?
“What does it mean?” you query, doing your best to ignore my increasingly insulting expletives.
“I know I’m right about the housing market,” he says, repeating it like a mantra.
Well, it means that not only are AI firms taking on loads of traditionally-financed debt, they are also bulking up with the anabolic steroid equivalent of debt: unknowable and NON-REPORTABLE SPE debt. They pump this iron to finance AI hyper-scaling. No wonder the main character of the (mostly) true movie, The Big Short, Michael Burry, is closing his fund. Dude shorted Palantir and Nvidia and got caught with his pants down. Sadly, Burry forgot John Maynard Keynes keen paroemia (from the ancient Greek, meaning maxim or proverb) from 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?
“Ha-ha,” he said. “Stupid, stupid!”
There is also news that insurers are placing more than 50 percent of the 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. This is stupid. Epic stupid and civilization-ending risky. It’s like giving the nuclear football to Beevis and Butthead stupid.
Oil prices are soft/down to flat. Texas rig counts are down again this month (rig counts are considered a leading economic indicator).
Now to news out of the Big Apple tonight, that absolutely shrivels me testes. Say it with me like a pirate! As my little sister used to say to me, “You are so not fun.”
Anywho: The head of the NY Fed convened an emergency meeting of bank heads to discuss one of the Fed’s key lending facilities. I’m almost certain this is in response to the rising private credit losses, and how they resemble Bear Stearns blowing up two subprime hedge-funds in 2007, the precise moment the 2008 financial crisis began.
Most distressing is today’s down volume high. It’s one like we’ve never seen before. The downward volume and amount of stocks closing on the downside blew out a 35 year high. This screams louder than Rob Halford singing “Victim of Changes” live at the US Festival in 1983. It’s also an indicator of deeper stresses affecting equity markets.
This is what we now call, in the algorithm-trade dominated age, a mechanical sell-off. All of Wall Street’s proprietary algorithms saw red and initiated the mother of all sell offs. This already spectacularly, terrifyingly narrow advance is getting narrower, and it is growing more brittle by the day. Why worry? Are markets worried about private credit shops lending to off-balance sheet AI SPEs? Is liquidity getting tighter? Risk limits getting ripped to shreds? Doesn’t really matter. It’s a big signal that should overpower the noise. But it won’t.
Wall Street’s useful idiots will do their duty and cheer until the real crisis begins to unravel. Sooner now, than later. You can bank on that. Just don’t do it in US dollars. That would be dumb. Epic-like dumb.
Piling the shit higher and higher: Sallie Mae off-loaded $6bn worth of student loans to KKR recently. How better to clean up a balance sheet than selling debt with a 10 percent non-performing rate? Makes sense to me, but I’m just some guy in pajamas.
More great economic news: Large corporate bankruptcy filings, as of mid-November, rise to a 15 year high. That’s higher than the COVID-19 crisis. To date, 655 public companies have filed for bankruptcy. Good times, aye?
Finally, a positive 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.
bruce wilder
I think of the Steve Carell character from the Big Short as being the moral center of the story. The Burry character is the guy who is right when every one else is wrong, because he is weird, out-of-step with convention and consensus, autistic maybe. But, the Steve Carell character is incredulous as he discovers what is going on, and what is going on is morally wrong — he’s the one who understands that this isn’t a story of “whocoodenode?”
2007-8, to me, marked turning to the dark side in economics or rather the Triumph of the Dark Side, since the turning had already happened in the 1990s. We could have realized our collective mistake in financial deregulation and staged a political correction. But, we didn’t and in service of the Powers that won that very brief struggle, we have been obscuring and denying reality ever since. What changed in 2007-8 was that we didn’t break up the banks because it wouldn’t end racism, to recall the eloquent words of Goldman Sachs Speaker, Hillary Clinton. We have been wandering in a political funhouse hall of mirrors ever since, unable to see ourselves or anything without distortion.
I really wonder how this crash will play out. The whole dollar financial system has “evolved” like a metastasizing cancer in the years since. I am pretty far removed from that world, but I have the impression that the Steve Carell characters have been removed from the stage, that this is all playing out with no voice on the inside articulating the case for a financial system serving a public good. There are always outside voices, powerless and strident, with no idea of how to make it work. So, when it breaks down, as it apparently will, who is going to staff the new Committee to Save the World? Anyone who is not an idiot or a demented demon?
Breakdowns on Wall Street are usually channeled to wipe out the widows and orphans first. “The Sky is Falling” will be the first cry and I imagine a chorus of, “Will No One Think of the Plight of the Billionaires?” will follow. But, then what?
Sean Paul Kelley
@Bruce Wilder: you ask, “I really wonder how this crash will play out?” I’m terryfied at how it will. Trump is already withholding crucial financial info. That’s a part of the stress in the system right now, winnowing away what confidence remains in American financial instituions. He seeks to deploy US armed forces troops, contrary to the Posse-Comitatus Act, in the hopes that average citizens will over-react during the looming crash and kill a soldier or two, but my real fear is some pissed of Central American immigrant whose family has been disappeeared by ICE buys a gun and takes one out, a lá how the first Iraqi insurgents did to US occupying troops in 2003. Then the clamp down really accelerates. The possibility for out and out urban warfare is real. No Gen-Z American males know how to organize an inusrgency. Sure, they can play the fuck out of Call Of Duty, but organizing independent insurgent cells? Nope. And anyways, most Gen-Z males lean hard right, and for damn good reason. The Democrats have utterly abandoned any pretense of speaking or representing the common man and the downtrodden. Fucking moral midgets. I fear a great deal of violence will break out when this crash arrives, as the value of the dollar will be cut in half and the shock to middle-class and lower-class Americans will resemble a nuclear airblast over an American city: catastrophic. But hey, I’m the optimist around here.
spud
staunch fiscal conservatives came to power in the 1990’s, who were anti new deal, anti-socialist, rugged individuals, who pulled themselves up by their own bootstraps with tax breaks for the rich, free trading away the countries wealth for extremely short term gain, as they get one after another socialist bailout, whilst quoting ayn rand, hayek and freidman.
by the time they are finally out of power, if its possible that is. ever see pics of german cities by may 1945? we will be well on our way to that, and they will be shocked that we are not thankful for all that they have done for us.
its all FDR’S fault/sarc.
bruce wilder
@Sean Paul Kelly
What crucial financial information is Trump withholding, further stressing the system?
Sean Paul Kelley
@Bruce Wilder: for starters Trump Admin has categorically stated the October BLS numbers will not be released. For starters.
KT Chong
“So, if the econ shit does hit the fan, it’ll happen after January 1.”
Just in time for the 2026 midterm. Let see how Trump and Republicans are gonna dig themselves out of this one.
elkern
Only thing in OP that I’d dispute is SPK’s optimism in the last sentence. Everybody who knows that the current Market is a Ponzi scheme also knows that the way to win is to get out [just] before the bubble pops. Some – like Burry – will guess early and lose, but that just makes other big players more jittery. I’m not so sure the Crash will wait for 2026.
Regarding the aftermath, I’m more worried about food than fascism. USA is now a *net food importer*, for the first time since, like, forever. And now ICE has been hunting down migrant Farm Workers; farmers will have trouble planting next Spring, so we’ll all have trouble eating next Fall.
But back to Finance. Writers over at Naked Capitalism keep saying that Dollar Hegemony prolly won’t end soon, yet SPK had some choice words (ew…) for T-Bills, which have been my backstop for where I keep my (meagre) 401k money.
Do folks here expect the AI Bubble Pop to kill the Dollar? Quickly?
Sean Paul Kelley
@elkern: the dollar is dying a death of a thousand cuts, the AI bubble is a symptom of that. The Fed has flooded the capital markets with trillions. That means it takes more dollars to buy stocks. What it doesn’t mean is that stock values are rising absolutely. They are only rising relatively in proportion to the biblical-sized volume of dollars deluging thet capital markets.
And yes, I worry about food. One particular reason: just in time delivery. No one keeps significant inventory any longer. Yes. I’m scared about food. Food leads to food riots, which often lead to revolution, e.g. Russia 1917.
Jack
Where do cryptocurrencies and, in particular, Bitcoin, fit into this analysis?
bruce wilder
I summoned the Ghost of Kindleberger and he advises me to look to China for intervention as a hegemonic stabilizer, but only after an indecent interval.
Seriously, once deflation of the American price level and the evaporation of conjured wealth starts in earnest, demolition will be the order of the day and night.
I don’t just despair of the Democratic Party ever again representing the poor, the working class or even the merely middle class, I look to the Democrats to take up the pointy sticks, aiming to slay the populist beast. The Democrats have been promoting themselves as the vehicle of the forces attempting to euthanize the populist revolt before it gets started in rivalry to the Republican Establishment. The Democrats may win the mid-terms on the strength of the financial collapse now underway, but they will do so on the basis of an agenda of cramming it down the throat of the corpse of the American Body Politic. Starmer is their model.
Sean Paul Kelley
@Jack: Where does Bitcoin fit in? Well, um, it just crashed. Right fucking now in real time. It’s down over 20% since its October high. It’s losing value right now. Today. This very moment and the results look like they are now cascading into the commercial banks. As Jeff Snider notes, “Banks with cash would rather sit on it than lend at ANY rate. When overnight lenders – the most conservative players in finance – won’t lend for 24 hours even at premium rates… What does that tell you about what’s coming?” https://x.com/JeffSnider_EDU/status/1989816883521229122
What’s arriving is that we’re going to be well and truly fucked soon.
GrimJim
“Just in time for the 2026 midterm. Let see how Trump and Republicans are gonna dig themselves out of this one.”
You can’t lose your power in midterm elections if midterm elections are cancelled “for the duration” while US cities are occupied by a masked army — if not a fully purged and indoctrinated White Supremacist actual army — loyal only to the President…