Juggling Dynamite

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.

Tough to get a word in edge-wise with David, but this segment is rich in economic insight.

It’s easy to feel confused these days. With the stock market at all-time highs, some analysts predict this bull market has a lot longer to run as the business-friendly policies of the new Administration start adding tailwinds to the economy. Others see economic growth as imbalanced, at best, and worry that overall the trend for 2026 is downwards, risking recession and a material market correction. So, which is it? For guidance, we turn to highly-respected economist & award-winning researcher David Rosenberg, founder & president of Rosenberg Research. David concludes the market is in a major price bubble not unlike the DotCom era, and advises investors to build/maintain liquidity within (at least) part of their portfolio in order to weather the bubble’s bursting as well as to have dry powder to deploy at attractive valuations when it does. Here is a direct video link.

Investment sales Hoorang can be hard to resist, but self-preservation requires that we do. Never more than amid today’s everything bubble, where mania has ballooned the pricing of many assets all at once, from stocks to high-yield credit, private equity, credit funds, real estate, crypto, and precious metals.

I have long said that people should hold bullion if it makes them sleep better, but to keep the amount as a set ratio of other assets and remember that it’s a bet against the value of everything else we own. I offered all of my thoughts on the topic in this 2011 article: A Word to the Gold Bugs. And the points remain relevant today.

Humans have been vulnerable to outbreaks of precious metals fever throughout history, and we should never forget that those selling us the story are taking our (worthless?) cash in exchange.

Many, critical of central banks and their myopic foresight, have been simultaneously touting the idea that central banks adding to their gold reserves is a reason for individuals to do the same. Blindly follow the blind? Those aware of history will know that a similar notion helped fuel the gold rush of 1979-80, before prices collapsed.

In the latest iteration, belief in dollar debasement has helped propel bullion and related share prices in a self-fulfilling loop, where higher prices increase the perceived allocation, even though volume allocations have changed little.

Believers rarely let facts get in the way or see any reason to cash out wins. Still, Real Investment Advice principal Michael Lebowitz offers sober analysis for those who are open to it in Dollar Debasement: Reality or Dangerous Narrative? Here’s Michael:

Another popular but misleading argument is that foreign central banks’ reserves in gold are increasing rapidly. That is true. However, as we share, central banks have barely added physical gold to their gold reserves. Instead, gold, as a percentage of reserves, has grown significantly because its price increases the value of the gold compared to other reserves.

Epic speculative fever is further evidenced in record levered bets in the space:

The chart below is courtesy of @SubuTrade. It shows that the volume of gold calls exceeds that of puts by the widest margin in the past 15 years. Call buyers are speculative traders who tend to follow narratives rather than fundamentals. The record call buying reflects the highly speculative enthusiasm in the gold market. 

We are always at risk of losing our collective heads before coming to our senses one at a time. It’s wise to keep in mind the timeless quote attributed to Mark Twain:

“It ain’t what you don’t know that gets you into trouble.
It’s what you know for sure that just ain’t so.”