Jim Bianco Private Credit Scare or the Next Subprime

What about bonds? What do you make of the 10 year? And what are bonds telling us? So I think there's two drivers in the 10 year. There was this fear that we were going to have a war in the Middle East. Again, if you wanna know the opinion on any of this stuff, just go to your local PolyMarket or Calsy website, it'll tell you. And so you saw that yields were declining on that. There's also another thing that's been pushing yields down, that what they're actually very correlated with, I'm talking about the US 10 year yield. If you look at a chart of it over the last six months, it looks exactly like a chart of business development companies or BDC companies. These are the private credit companies that make out loans that have been struggling, headlined by Blue Owl and Apollo and Aries and all of those. Those companies as a stock index look exactly like the 10 year now. So as those companies have been struggling, it seems like the bond market has been saying, I'm worried that this is a systemic event. Now it is an event for private credit companies and the investors in private, in business development company or BDC funds, they've got a problem they have to deal with. But the question is, for the rest of us that don't buy these companies or don't have exposure to these investments, should we care? And the bond market has been lately saying, maybe we should, and then we've also had war. But now that we've taken war off the table, yields are going up. If we were to take BDCs off the table too, meaning this is a problem for the private credit companies and their investors, not for everybody else. It's not systemic. I think yields could go up a lot. And my suspect is that that's what's gonna happen, is we're gonna start to realize these BDC company problems are BDC company problems. And those are for the investors, not for everybody else. And yields could bounce back and go up a lot as we move forward. You sort of left it open that the bond market was worried it's systemic. Why, I think that there's so much concern that this is gonna be a repeat of sort of subprime, right? When we're looking at this, what would give us confidence that this stays ring fenced in the private sector? How do we know where the counterparty risk is? That's always the question. And you sort of, this is why it keeps bubbling up. Right, and I would argue to you that everybody says this is gonna be subprime. And I will remind everybody that we have seen this movie multiple times since 2009. Look at, anytime we see something in the private credit space, and let's remember what we're talking about here. We're talking about illiquid investments that they give you one time a quarter to withdraw your money or add money. And the companies, the private credit firms will value your investment. They'll say as of December 31st or March 30th, it was worth this much. And you can either withdraw or add more. And the problem is, is that when people all wanna withdraw all at once, these illiquid investments, they can't sell them or get loans against them to meet the redemption. So they gate the investments. That means you can't get out, is what they put the metaphor of a gate. Now, every time that happens, we always scream, it's 2007 again with subprime. The problem is, in 2009, we saw this happen with a lot of hedge funds highlighted by Citadel. They gated their investors for almost a year in 2009. And it turned out to not be a systemic event. It turned out to be a hedge fund event. And they eventually got past that. In 2016, we saw this with a bunch of property funds after Brexit. Dozens of property funds in the UK had to gate because after the UK voted for Brexit, everybody wanted to run out of those property funds in London, they gated them. We thought it was a systemic event. It turned out to not be. We saw this in 2020 following the financial, following COVID shutdown. A bunch of illiquid private funds gated then too. And it turned out to not be systemic. And we saw this again in 2022 with a bunch of real estate funds around no one returning to the office, highlighted by the Blackstone Real Estate Fund known as BRII. It gated too. It didn't involve investments. It did involve being systemic. In other words, what we're seeing is we're seeing private credit funds gating investors. We've got over 100 examples of this happening since 2009 through hedge funds, property funds, COVID, real estate funds, and now private credit. And none of them turned out to be that canary in the coal mine or that problem that was systemic for the larger economy. And so I'm thinking that this is gonna be more of the same. This is a problem for private credit funds. This is a problem for people that are invested in those funds. It is not a problem for the rest of us. I don't think it's a big enough or deep enough problem to impact the economy. And we've got plenty of experience since then. Yes, we all go, we all love SpinalTap. We all go to 11. We all say that this is a repeat of the private credit or the subprime problem in 2007. And there's always that risk it could be. But there's many examples in the last 15 years where this has happened with these private credit funds, these private funds that gate. And it turns out to be a problem for them, but not for everybody. Jim, I love this. And this is why we love catching up with you because you're, you know, I think helping us separate the noise and headlines from what we need to be focused on. And remember, if you want, you can get a free portfolio review by hitting the link in the description. Thanks, everybody. We'll see you again soon.