The Private Credit Domino Effect | George Gammon

The other thing about private credit to me, I'm curious to hear your take on this, like how contained is that? Well, it's not contained. So it falls in that category of like, you know, contagion risk, right? Like this is, if you have this asset class breaking down, the collateral damage is going to spill out into other areas versus like a more localized contained crisis. I'm thinking like commercial real estate, right? Like that was blood and guts in the streets, but didn't really have the impact that... Yeah, but it still is, there's no way he's talking about, like can you just do his presentation on that? How he's buying things at like 50 cents, based on the debt. I guess what I'm kind of always referencing back to the GFC, where you had like broad-based selling off all asset classes. But the initial kind of catalyst was subprime. That's kind of what I'm getting at, and I'm just curious to hear your take on that. Yeah, so a couple different ways to look at this. I think the wrong way to look at this is say, okay, mortgages were, whatever, you know, a $30 trillion market, and therefore you can't compare it to private credit because private credit's $2 trillion. That's the wrong way to look at it, because what we have to remember is that although it was a, let's just say a $20 or $30 trillion market, only, I mean, it was like 5% of the mortgages went into delinquency and then to default. Really? It was that low? Yeah, yeah. Wow. Okay. Yeah, see, it surprises you, right? Yeah. Like if I asked you, you'd probably say, well, 20 or 30%. It was actually a very, very small percentage. And most of the mortgage-backed securities actually made money, right? So how? What happened? It was really just psychological, because what you're doing is you're taking a monetary system that is dependent on not only the circulation of credit, but that circulation of credit is dependent on collateral. And the main two sources of collateral are mortgage-backed securities and treasuries. So if you have this much collateral, and overnight it goes to this much collateral, you've got a big, big problem. Right. Even if, and was it rational to take out all the mortgage-backed securities as far as collateral? It was probably rational, but it ended up only, you know, 5% of them blew up. Right. So you could have left 95% in there, and you still would have been fine, but no one wanted to do that, because you didn't want to touch mortgages with a 10-foot pole, because you didn't know how to price it. And meanwhile, everyone's just, you know, running to the exits. Yeah. So then what happens is the economy is all about the circulation of money and credit. So if you have a big scare like that, even if it's just all psychological, it doesn't matter. The net result's still the same. Right. And that if you have a frozen monetary system, the plumbing freezes, there's no circulation of money and credit, and everybody blows up, because there's no liquidity. And it was just a result of the psychological process that was triggered by, let's just say, 5% of the mortgages blowing up. So my point there is it doesn't really matter the size of the $2 trillion, you know, private credit $20 trillion. If the psychological impact is the same, the result will be the same. And so what do you think? Do you think private credit has the potential to have that same psychological impact? I think it does. I think it definitely has the potential, because you get a feedback loop, right? And people talk about private credit and software, but they didn't just invest in software. I talked to Kenny, and I'm like, where are all these guys getting the money to build at 350th square foot when they really shouldn't have been building at anything over 250th square foot? He's like, they got all from private credit. It's all private credit. So it's not like their balance sheet, other than software, is pristine. They've got subprime auto on their balance sheet. They got software on their balance sheet. They got multifamily on their balance sheet. It's having to be sold for $0.50 on the dollar. And we haven't even seen that surface. The only reason you know that is because I talk to guys in the trenches like Kenny, a big multifamily guy that runs $3 billion in multifamily. And you talk to guys with boots on the ground, and they sit there and tell you a much, much different story than you're hearing in the mainstream media, or those private credit guys that go on CNBC would lead you to believe. They're always like, oh, nothing to see here, nothing to see here. And they're like, oh, we're valuing the assets on our balance sheet at $0.98 on the dollar. And you're like, according to whom? They're like, well, us, our own models. And they say, well, look, we just took this loan, and we just sold it at $0.98 on the dollar. Like, really? Who was the buyer? They're like, oh, you know, just a subsidiary of ours. Oh, so it was you that bought it from you at $0.98 on the dollar. Now you're claiming it's actually worth $0.98 on the dollar. I see how this game is played. It's like a shell game. It's just like this. And they're just trying to kick the can down the road. And sooner or later, you get to the end of the line, and it's time to pay the fiddler. That raises the last question. We'll end with this one. So going back to GFC, everyone's rushing through the exits, flight to safety, flight to liquidity. Gold sells off. Yeah, yeah. They sell gold. It's another asset, high-quality asset, highly liquid. It's a way to get dollars. Just kind of gaming this out a little bit, if private credit collapsing takes a similar turn there. Does gold behave the same way? I don't know why it would. Is it as steep, or is it less? The question behind the question is, is the gold market today, is the flight to safety to gold as another safe haven asset? Has that changed materially in the last- No, no, no. Gold's still doing its job. The thing is, to your point, its job is to provide liquidity when there's no other liquidity. So that's why gold goes down during the GFC. That's why gold goes down during a two-week period during COVID, because you got to sell anything on your balance sheet, and no one's willing to buy anything except for the gold. Sure. So the gold is doing what it's supposed to do. It's the flight to safety. It's the no counterparty risk. It's in an emergency. You got to have something, and it's bailing you out, right? But the net result of that is the price goes down temporarily. And notice, I said temporarily, because then what happens is eventually you're going to come back. And usually, the way countries or governments come back is just through a Keynesian approach of just- Yeah, it's massive fiscal and all this nonsense. And then you look back at gold, and that's usually when it rips. I mean, I can't remember when gold tanked in 2008. I think it was probably after Bear Stearns or something like that. In the summer, it goes down. But then you look at it from December of 2008 to the middle of 2011, it just ripped. I mean, it just went absolutely parabolic. Within six months, it was already back in an uptrend, I'm pretty sure. And then it actually turned into a bubble. Right, right. And it ran really hot for a while, right? Yeah, yeah. But I would expect the exact same thing to happen if you have a blow-up in private credit that takes gold down with it. Like a similar V kind of shape. Yeah, so we're at 45 today. Figure it goes down to, let's call it 38. But then a year later, you're at 7,500. Okay. Well, that's as good a place as any to end. So I really appreciate you taking the time with us, George. Yeah, thanks for having me. Thank you so much.