Invisible private credit freeze threatens US growth
A silent credit crunch in the middle-market sector, driven by a halt in private credit origination, poses a severe recession risk that markets have not yet priced in.
The argument
The guest argued that while alternative asset managers stepped in to fund mid-market companies post-GFC, this origination and securitization machine has ground to a halt. Because these companies are private, the lack of credit access remains invisible to the public market, but will eventually lead to zombie companies and a nasty recession.
The thesis, stress-tested
✓ What validates it
- ✓An increase in middle-market defaults or sponsor-led key handovers
- ✓A visible slowdown in US GDP or employment data reflecting mid-market contraction
▸ Risks discussed
- ▸Alternative asset managers with captive insurance arms may still be able to fund some loans
- ▸The absolute size and leverage of private credit are smaller than residential mortgage-backed securities during the GFC
Hear it yourself
"You got me all thrown off of my game here. Brent Donnelly, who had that line about bear markets and down markets require successive bad news. So it's bad news on top of bad news on top of bad like, you get no respite in a real bear market. And I think what's wild here ever since he said that, it's we have another event. We have another economic number. We have another piece that hurts, and then it's like, oh, blowout earnings. Oh, strong, not so bad employment data based on the headline interpretation even though we know that's probably not right."
AFFILIATE LINK · ZORTIX MAY EARN A COMMISSION · NEVER A RECOMMENDATION TO TRADE