Juggling Dynamite

The US central bank cut its policy rate on Wednesday, and US mortgage rates rose.

Layoffs are surging, and loan delinquencies are driving a repo boom not seen since the 2009 recession. See, We Spent the Night Shift With the Repo Man, Who Is Busier Than Ever:

An estimated 1.73 million vehicles were repossessed last year, the most since recession-wracked 2009, according to automotive-service business Cox Automotive. There are signs the surge continues: This year’s repo volume at Cox’s Manheim auctions unit was up 12% through the end of September compared with the same period last year.

“It’s like history repeating itself,” said Detroit repossessor George Badeen, president of Allied Finance Adjusters, a trade group. Pandemic-era consumer protections left the repossession industry idling. Now, he said, companies are “making money because of the volume, it’s so big. You’re in a target-rich environment.”

The University of Michigan Consumer Sentiment Survey (below since 1975) is registering the gloomiest outlook since the pandemic and 2008, before that (shown below courtesy of Rosenberg Research).
Analysis finds that 82% of Americans live in a region experiencing economic contraction, the worst since the 2020 pandemic and the 2008 Great Financial Crisis (shown below since 2006).The housing market is dumping because it needs humans with sufficient incomes to buy and rent. Artificial Intelligence (AI) doesn’t need the homes, consumer goods or services that drive 70% of economic growth.

Forty-one companies in the AI space now make up nearly half (47%) of the S&P 500 market value–a new record (below since 2022, courtesy of Jim Bianco). Our collective chips are increasingly on this bet.We know that AI is costing a fortune, but how will it pay our bills?

Nearly 2 million Americans have been unemployed for 27 weeks or more, according to recent federal data, and layoffs are growing daily as companies look to slash overhead.

Amazon said this week it would cut 14,000 corporate jobs, with plans to eliminate up to 10% of its white-collar workforce. United Parcel Service said it had reduced its management workforce by about 14,000 over the past 22 months, and Target is to cut 1,800 corporate roles.

Earlier this month, Rivian Automotive, Molson Coors and General Motors all announced white-collar job cuts.

All of this is happening with financial conditions among the easiest in history, and corporate profits clocking record growth. Financial markets are expecting more central bank easing, but it’s unclear how that will stem the rising unemployment. See, Tens of thousands of white-collar jobs are disappearing as AI starts to bite:

Even as the economy grows, hiring has weakened, with economists expecting slower job-creation this fall. In such an environment, companies are becoming choosier—and both experienced white-collar workers and new college graduates seeking their first jobs are getting squeezed.

Mike Hoffman, chief executive of the growth advisory consulting firm SBI, said in the past six months he has cut his software-development team by 80% while productivity has surged. “We have someone managing clusters of agents that are doing coding,” he said. “Our AI writes its own Python.”

Investors are pressuring companies to streamline operations, Hoffman said, seeking head-count reductions as steep as 30%. Executives should ask themselves whether they can do so and whether it is the right thing to do, he said.

On Monday, the online-learning company Chegg said it would cut 388 jobs globally, about 45% of the workforce, as it pivots to an AI model that automatically answers students’ questions.

Meanwhile, opportunities for front-line, blue-collar or specialized workers are growing.

While pausing hiring for consultants and managers, laying off staff in retail and finance, and deploying AI to do work in accounting and fraud monitoring, companies describe shortages of trade, healthcare, hospitality and construction employees.

Manufacturing and processing are one thing; humanoid robots are a tougher nut to crack.

The 1X Neo can do the dishes, clean the kitchen, even fold laundry. WSJ’s Joanna Stern spent time with the humanoid—and its creator—to see what it can really do and how much still requires a human operator’s help. Here is a direct video link.

As banks blew up in 2008, they pulled back from high-risk lending. Private equity (PE) funds filled the void, raising capital from investors to buy all manner of companies, while private credit funded the companies that were acquired.

Today, some 70–80% of private credit loans are to PE-sponsored companies.

Both PE and private credit raise capital from the same types of limited partners (LPs): pension funds, insurance companies, endowments, and family offices.

Two recent bankruptcies, TriColor Holdings and First Brands Group, have reminded us that conventional lenders are also exposed.

Tricolor borrowed from banks like JPMorgan Chase, Fifth Third Bancorp, and Barclays under warehouse facilities–revolving credit lines that helped them fund new loans before packaging and selling them into the securitization market.

When Tricolor collapsed, the banks discovered that loan collateral was impaired or double-pledged (i.e., the same loans had been pledged to multiple lenders). That meant the collateral backing their credit lines was worth much less than expected.

First Brands, a U.S.-based auto-parts supply company that rapidly expanded by acquiring many smaller auto-parts makers over about a decade, is also reported to be unravelling under heavy, opaque debt and possible financial irregularities (double-pledged invoices, off-balance-sheet liabilities) tied to warehouse/asset-finance and private credit structures.

The complexity and opacity of these financing structures led to a collapse in collateral verification, allowing the same assets to be pledged to multiple creditors.

Different cycle, similar antics.

As JP Morgan CEO observed last week,  “When you see one cockroach, there are probably more … everyone should be forewarned on this one.” See A Private-Credit Winter is Coming:

Herein lies the real story, and it isn’t about fraud allegations: Private credit has grown so fast that verification and audit frameworks haven’t kept up, leading to structural weaknesses across modern credit markets. Lenders are discovering that their control mechanisms, designed for more transparent syndicated markets, don’t work in opaque financing ecosystems.

There’s no better leading indicator of market psychology than real-time covenant changes, which show where the smart money is quietly hedging. Right now, the smart money is fortifying against a downturn.

…Wall Street’s public narrative is that the economy is resilient, inflation is cooling, and consumer credit remains stable. That may all be true on the surface. But the legal architecture of the credit markets tells a different story. When lenders quietly rewrite the rules of engagement, or demand all-for-one consent before lien subordination, it signals a system steeling itself for impact.

We may not yet see distress in earnings reports, but the foundations of credit protection are shifting fast. When that happens, it’s never an accident. It’s the market whispering what headlines haven’t caught up to: The next phase of this credit cycle may have already begun.