The Private Credit Squeeze That Could Trap Retail Investors | Stephanie Pomboy
Summary
Oil Shock: The conversation highlights severe oil supply disruptions, limited efficacy of SPR releases, and risks that spill from energy into shipping, inflation, and growth.
Policy Response: Expect highly accommodative fiscal and monetary measures aimed at affordability and elections, including potential backdoor relief, even if direct control over oil prices is limited.
Private Credit: Significant liquidity mismatches emerge as funds gate redemptions, with retail and pension exposure raising the odds of policy intervention or bailouts.
Corporate Credit: The $5T BBB segment poses downgrade and forced-selling risks, with rising yields and repricing of risk potentially cascading into a broader credit event.
Gold: The guest remains strongly bullish, viewing pullbacks as buying opportunities and expecting long-term gains (targeting $6,000 by year-end) as policy runs hot and trust in financial assets erodes.
Central Bank Divergence: G7 policy paths are fragmenting (e.g., Japan post-YCC), but pressures may force convergence back to easing, reinforcing the case for gold.
US Treasuries: A notable lack of flight-to-safety bid and a rise in yields reflect fiscal concerns rather than inflation alone, signaling a reset in risk premia.
Market Risks: Hidden leverage, pension underfunding, and liquidity-driven selling could amplify volatility, with recession risk elevated if oil’s spike persists.
Transcript
Welcome back. I'm Jeremy Sappern. Markets are trying to calm down this morning. The S&P 500 is rebounding about 1%. Oil has pulled back from overnight panic highs and the US dollar is heading for its worst day in over a month as the pedrocurrency trade begins to cool. Now, separately, we're also seeing some fresh friction friction in the financial gears as the London Metal Exchange has halted trading across its electronic platform. now leaving dealers unable to place orders from everything from aluminum to zinc on Monday. And while traders celebrate small amounts of tankers getting through the straight of Hormuz, the IEA still warns that this is the biggest supply in oil disruption in history and private credit. Meanwhile, those investors are suddenly finding the exits much tighter than expected. And joining me to look past those headlines and into what's really happening in the market is Steph Pomboy, of course, founder of Macro Mavens. Thanks for joining us, Steph. Good to see you. Thanks so much for having me. Uh it seems like it's never dull. Every time we reconvene, it's just even more crazy than the last time. >> I know. I know. I go I go to uh plan the show and I I have to almost pull some and you know, we can't get to everything. We never have enough time. But, you know, I mean, today it's starting to feel or at least, you know, maybe this rally looks a little bit like a bet on normalization. We had Secretary Scott Besson signaling confidence this morning. You know, the market is encouraged by news that there's uh more oil that can be released if in the emergency reserves if needed, but you know, a few uh tankers is is not fully functioning energy artery here, Steph. So, if that choke point stays jammed, I mean, the this stops kind of being an oil story, more about shipping, inflation, and growth like you and I have talked about before. Um, are markets confusing, you know, this diplomatic headlines with maybe an operational fix? I mean, if the IEA says that the physical market still faces a massive gap, is is normalization the narrative, is that realistic right now? >> Well, I guess um everything depends on how much longer this war goes on and that's not a question that I can answer being uh far from a military or policy expert on on that score. Um, but I would say, you know, my operating framework coming into this year was to work backward from the conclusion that the administration would do anything and everything it took to shore up support for the midterms. Uh, you know, Trump's entire legacy basically depends on maintaining Congress and being able to continue with his full agenda rather than have it all repealed. Um and so my sense was that they would basically do whatever it takes to ensure that the economy is in a good place and that specifically they are on solid footing with regard to the affordability argument which has been the really the central issue um politically and economically. Um, and so that's sort of how I've analyzed the economy is that whatever we're seeing now in the way of headlines, um, the policy will be brought to bear to make sure that the worst case scenario doesn't happen. Um, now admittedly, when you're talking about a commodity that's traded globally, the administration doesn't really have a whole lot of power or control over that price. However, it can do a lot of other things on the back end as you're seeing. You know, I I was really surprised that Trump said on Thursday that they would release oil from the SPR um after they've just barely started replenishing it um after it was completely pillaged for 3 years under the prior administration. Uh and that seems like a highcost gambit that is likely to yield very little reward. I mean, the amount of oil that they have ready to release would have such a small and temporary impact on prices. It seemed like it wouldn't be worth um taking that that chance. Um but it's just another example of how determined they are to win this affordability argument. And therefore, again, I wouldn't underestimate the policy levels levers they'll pull. Now, uh, they may be able to do things on the back end, like let's say if oil prices remain this high, and I went to fill up my gas tank here in Florida. I paid $5 a gallon at the local gas station here, and I was shocked. Um, I think what the administration might do if this persists and it looks like this affordability story is really percolating back up as an issue is to try to do something on the back end. So even though they can't directly impact oil prices, they can provide relief to households in other ways like uh you know I don't know you maybe he does um an attempt to repay the the tariff revenue directly to individuals rather than to companies which right now is you know being litigated. Uh but they're they my point is you know just use your imagination to try to think of the things they might do. When the president came out at the beginning of the year or even at the end of last year and started talking about capping credit card rates at 10% having Fanny and Freddy buy 200 billion of mortgage back securities. Those were all examples to me of just how broadly they were going to think about tackling this affordability argument. So the longer this war drags on, the more uh dramatic policy response I would anticipate, which doesn't really help people trying to analyze the markets right now, other than to say expect policy to be wildly accommodative. You know, the worse the situation gets, the more dramatic the policy response, which as you and I have talked about forever, only bolsters the case in my view for gold because we're talking about an environment where both fiscal and monetary policy would have to be run hot to offset this economic headwind or tax on the economy in the form of higher oil prices. >> Yeah. Just to get it going. I mean, you know, are are we reaching the point where where policy response shifts from, you know, fighting inflation to cushioning voters? >> Well, I would think so. And I, you know, I believe the Fed has always had the hubris to imagine that they could have enough time should inflation really heat back up to rein it back in later. So the administration may say look if uh you know we pump money into household you know pump money at households and inflation picks up as long as they feel good until October then we can slam on the brakes you know after the midterm votes in November. So they may have that attitude that sort of thought process right now. The great concern for me and you kind of teased it in your preamble is that in the process as long as uh oil prices remain elevated >> correctly or not the markets are going to start to build in higher inflation expectations which means higher interest rates which compounds the problems we're already seeing percolating at private credit and risks that situation. devolving more broadly and we've seen it already that when you have private assets that are in lockdown and people need cash, they have no choice but to sell liquid publicly traded securities. So you're seeing all manner of assets that are actually safe relative to private credit which is the problem being dumped in this kind of fireale manner. Um, and interestingly, and I wrote it about wrote about it for clients this week, the more liquid and safe the asset, the more brutally it's being sold. Yeah. >> Uh so if you look at for example the performance of junk versus investment grade paper since this whole situation began uh junk has outperformed because it's less liquid and and just like private credit. You'd rather sell the things that you can get ready pricing and and real good liquidity in like investment grade treasuries, gold, etc. So, I think part of the problem, part of the uh decline we're seeing in gold prices is actually tied to private credit, right, >> in this need to raise cash. >> Interesting. Yeah, that liquidity, that kind of squeeze that we've talked about before, and I will get your take on on on gold. I mean, we got to talk about it. It is somewhat stable today, although it is under 5,000 for the first time in a while. But, I wanted to kind of get into what you were just talking about, because here's why this matters to the average investor. I mean a huge share of that supposedly, you know, safe corporate debt is only one downgrade away from junk. I mean, if that starts happening in size, I mean, institutions that are not allowed to hold junk have to dump it. I mean, I is is that the real risk here? Not not a 1% move in the S&P, but but a credit event where forelling starts to feed itself. Well, you must be reading over my shoulder because that's what I wrote about for my clients this week is that investment that tripleB slug that you're referring to the lowest segment of what's c called uh investment cre is a $5 trillion market. I mean that's mindboggling. Private credit you know the estimates range wildly but they're from like 1 and a.5 trillion to three trillion globally. US corporations that are triple B-rated are 5 trillion. So it's more easily more than double the size of this private credit situation. >> And as you mentioned, if those companies that are currently just d, you know, barely hanging on to that investment grade rating get downgraded, which they could very well do as they face higher oil prices, higher debt service related to the increase in interest rates. they go to junk and become off limits for any vehicle that has a ratings mandate. You know, a high quality or investment grade fund cannot fold that paper anymore. So, if we're talking about managers having to sell, you know, 5 trillion, obviously they wouldn't necessarily downgrade everything in that triple B swast, but some of these are very bigname companies. We're talking about GM, Boeing, Amgen, Oracle, which is plenty in the news right now, AT&T, Verizon. So these are companies that were they to be downgraded would have real uh ripple effects not just through the investment grade market but then throughout the entire corporate credit segment, >> right? Yeah. And I mean the you know the counter would obviously be that the there's still massive companies with real cash flow but but could this become a systemic problem instead of just a few isolated downgrades you know that the market can easily absorb? I mean it it seems like it's coming up in even headlines more these days. >> Well, this is what happens is you start out with the weakest link in the chain breaks >> and then people begin to worry and they begin to be a little less uh interested in taking risk. So rates go up even for those who are farther up the credit chain and they suddenly face higher borrowing costs because people are repricing risk broadly. So it starts out in the private credit space then you know people say okay well we're going to worry about junk and then it travels up to investment grade and then it travels up further up the chain from there AAA. So the increase in yields has in and of itself the possibility of creating a crisis because as you and I have spoken about in our prior conversations the corporate sector in general is massively levered. They're far more levered than they were going into the global financial crisis. And the quality of the balance sheets is so much worse. I mean, the tripleB rated segment of the investment grade universe, which is now, you know, more than half. It's 55% of what's considered investment grade, I think, was under 30% of investment grade back in 2007. Uh so that sort of weaker quality, credit quality, uh has become endemic in the corporate space and people don't realize it because they're so fixated on the mag seven companies that have all the cash on their balance sheets. But if you look at, for example, the S&P 500 companies, the top 10 companies in the S&P 500 have more cash than the bottom 400 companies combined. So, you know, people are deluded by these laws of averages. They look at the cash of S&P companies at 2.7 trillion and they say corporate balance sheets are healthy. Well, no. 10 companies have a lot of cash. Everyone else is, you know, sifting through the sofa cushions to find some spare change. So that will be revealed as they face higher debt service and struggle to find the money with which to service that debt um as rates move higher. So I in answer to your question absolutely this could very easily devolve into a full-blown credit crisis and the fact that the risk premium in this market has been essentially zero. you know, junk spreads have been the lowest they've been since the global financial crisis in the face of the largest corporate bankruptcy cycle, etc. Um, so there's no room for error and error seems highly likely to occur. >> Yeah. Yeah. And I mean it it's it's affecting private credit too. I mean there there's a huge amount of hidden leverage that's gone. And obviously while stocks are kind of bouncing today, investors in private credit are finding that those exits are much tighter than they expected. I mean, who did we we had Morgan Stanley, Black Rockck, Cliff Water kind of gate their funds, restricting how much money people could take out? Uh Steph, I mean, was was private credit mistaken for for safety simply because the the the marks didn't move every day? I mean, now that investors are testing the exits and finding that it's much tighter, I are we discovering that these were liquidity promises backed by illquid assets. >> Yeah. Well, absolutely. And I think uh I would say this was the most predictable, least predicted crisis ever. U you know, when you can, as my friend Graham Williams described it, when you can grade your own paper, um you you got to believe that there's some monkey business going on there. Uh but also you didn't have to be uh too discerning to figure out when they started doing things like secondaries and continuation funds and then the private credit guys said you know what we really should let retail investors get a piece of this action. So let's unload all this stuff on the unwitting you know unwashed masses. it was clear that they were trying to find ways to effectively offload a lot of this risk uh onto the next pathy and this is sort of a bigger topic and with much more long-term implications but um here to before they you know created ETFs that allowed retail investors to get into this uh asset class it was all pensions and insurance companies um who were buying this private credit paper. You know, uh, pensions have substantially increased their exposure to so-called alternative assets, of which private credit uh, has been one of the most popular. And so what you're going to find out is that people who work, you know, on the uh assembly line at GM who think that they can retire with this nice pension are going to discover that, you know, their pension isn't there necessarily. Uh and this is going to be a rude awakening. um one which I expect will find uh policy makers rushing with some kind of bailout because you can't bail out the banks, you know, the Wall Street banks in 2007 and then say to Main Street, well screw you. Sorry, you bought into that your pension bought into that private credit stuff. Uh, so I I do anticipate, you know, a massive policy response being brought to bear to fix this private credit problem precisely because the ones holding the bag, they're not Wall Street, it's it's Main Street. >> Yeah. Yeah. I guess, you know, that's interesting. Is the real risk here, not redemptions, but but the pensions used private credit to manufacture, you know, income and stability, I guess, on paper and and now the paper doesn't match the exit price. That's what you mean? >> Yeah. and and these pensions were underfunded to begin with. I mean, we were looking at, I think, a$4 trillion dollar uh funding shortfall for the total US pension system, public and private. And the vast majority of that, you know, upwards of three maybe three and a half trillion of that was public. So, it's basically the state and local pensions uh are the ones that are most exposed here. Um, so again, just another rationale for a massive bailout, which then you won't be surprised to learn, just reinforces my bullishness on gold because there's no way they could come up with $4 trillion out of where I mean, we running a $2 trillion deficit. There is no $4 trillion. So, that money is going to have to be printed. >> Now, listen, our time always goes fast. But we also have this wave of of central bank meetings this week. The it seems like that that synchronized policy that we've seen for years is, you know, starting to shatter. I mean, we see bond managers doubling down on divergence, buying bonds in the UK, where growth is weak, while others stay kind of hawkish on Australia, Japan. Meanwhile, one sofa uh options trade I I think just reportedly made 10 million betting that the Fed won't blink. I mean, does the policy divergence tell you that the world is moving into a far messier regime where central banks are no longer moving as a pack and and markets lose the the one stabilizer that maybe they got after 2009? >> Well, I think it's a fascinating uh thing to watch. My sense is that those central banks at least in the developed world let's say the G7 central banks that are attempting to uh stand firm and have a stiff upper lip uh will find their upper lip quivering before long you know um generally if the US has a problem it's going to be exported to its uh G7 peers um and obviously if the US ends up being aggressively uh stimulative you get that figure thy neighbor policy response. Um, but to that end, one place I've really been looking for is Japan, which as you know, endeavored to shrink its balance sheet and reduce the whole yield curve control paradigm. And we saw what's happened there with yields, you know, shooting up in some faces to all-time records depending on what segment of the curve you're looking at. Um so the question is how much longer can they tolerate those high interest rates before they're forced to cry uncle and reverse course and and my sense is that uh you know the situation the US is in that I outlined with these you know massive uh pension obligations that are tied up in illquid toxic assets is not unique to the United States. Uh quite the contrary uh all the G7 economies in general are uh facing the same problem of attenable obligations to aging populations and have been you know really taking unourred risks to try to generate returns uh with which to pay that u and that game is just not going to last. So, you know, I'm not optimistic that there will be any central bank out there that's able to pursue monetary integrity um in the developed world. Certainly not in any of the major currencies. Um and again, that's you know, I hate to be a broken record, but this is why gold is the thing that I own almost exclusively. Well, I mean, if if trust is starting to prey or banks, private credit, even sovereign debt, I mean, I guess that helps explain why money keeps going towards gold, what what what is your expectation here? I mean, looking at that market, we had that huge run up. I hadn't talked to you since. Um, then we had a nice little sell off. I mean, here we are sitting here stable in a very unstable market around $5,000 on the spot side. What are your what's your outlook? Well, I do think that um it's going to be very interesting to see what the Fed does, not this week necessarily, but when Kevin Worsh comes in presumably as the next chairman in May, uh as someone who has long railed against QE um and argued, I think correctly, that it creates uh massive distortions in asset pricing that end up uh costing more than the benefit uh that you know people anticipate in near term. Um it's going to be interesting to see how long he can hold to that dogmatism before reality forces him to sort of capitulate or reality or a call from the White House. But um so I you know I guess uh my sense is that the the the question for gold is only what it does in the very near term you know uh how long this situation uh holds together here without devolving into a full-blown crisis. Um, but to me in the long term, and I'll say, you know, even if you want me to give you a forecast, let's say at the year end, >> I think 6,000 would be a no-brainer for gold. And from there, I think we're moving substantially higher. Um, I will confess that we got to 5,000 much faster than I thought we would. Um, we consolidated that and, you know, now I think we're setting up a base from which to move forward again. Um, I didn't feel particularly great when I was watching gold go up in hundred dollar increments because it felt frothy. Um, but now I feel like this idea that it's it's a bubble that has now burst and nobody needs to own it is just delightful. I I think it's just a great opportunity to step in and buy for all the reasons that, you know, I've touched on in our conversation here. Mhm. >> Uh so I remain dogmatically bullish as you could tell. Uh you know the last week has been has been peakful. >> Yeah. Yeah. Well, I mean all most of the asset price is just kind of in where do we go from here? The in between mode. Uh you know you brought up an interesting point about war. I mean you know he's argued for years that QE creates distortions, misprices risks and and and rewards kind of leverage over discipline. If if that view is right, I mean, does gold become the cleaner signal here because it it sits outside a system that keeps trying to solve every shock with more liquidity? >> Absolutely. And I guess um you know I wish I could be involved in those cabinet meetings because it's fascinating to think about the wars Bessant Ducken Miller connection. uh Bessant independent of that you know triumvirate uh has long been a gold bull. Stan has been a gold bull. Uh Worsh presumably being someone who's advocated for real monetary integrity would be someone who would you know at least appreciate the virtues of gold. Um, so one wonders if they don't have a backup plan that involves gold were things to really start to unravel. Um, I think the plan right now is basically to try to slow the growth of fiscal uh spending. You know, try to get Congress to kind of cool it off and restrain themselves and then ramp up growth in the economy to a point that you start to see that debt to GDP ratio start to come down. And I think their sense is that if they can get the debt to GDP ratio moving lower that people will take comfort that you know the fiscal situation in time will resolve itself and therefore any treasury risk premium that's currently being priced at there will come out of the market uh and that will sort of lay a foundation for long-term sustainable growth. I, as you won't be surprised to learn, am highly skeptical that they'll be able to thread that needle, but I I'll be watching intently to see how it all plays out. >> Yeah. Well, we both Well, finally, I mean, let's let's go to one of your your key truth tellers. Um, corporate tax receipts. I mean I mean, if if those are rolling over while Wall Street still expects strong earnings, something is not lining up. If you had to pick just one thing investors are still getting wrong right now, I mean, what is it and why? Well, corporate tax receipts unfortunately can't give you much of a signal now because of the tax cuts that we've had. So, you know, you see individual and corporate tax receipts roll over that are related more to policy than as a reflection of economic activity. I think corporate profits are a very important uh measure to look at. And in that, I think maybe we've talked about this in the past. Um, if you're going to look at the S&P earnings numbers, you have to be very discerning, uh, and make sure that you're not being duped by share buybacks, which tend to inflate the earnings per share metrics. Um, the government has in conjunction with its GDP report, a broader corporate profit measure that looks at all corporations, not just the top 500 companies in the country. And you won't be surprised to learn that they're growing at a much slower rate than the S&P 500 companies, which frankly, even within the S&P 500, all the growth is really in that top seven uh companies. And you're seeing far weaker uh earnings growth in a lot of the other segments and in consumer related segments especially. So I really tend to focus on that. Uh and as relates to the consumer, I happen to still believe that the sentiment numbers are uh important information uh because they actually tend to lead actual activity. I mean, presumably if you feel really bad about the job outlook or your real income outlook, you're not rushing out to take a vacation and and buy, you know, a fancy handbag. So, it does tend to actually have a good leading indicator of of activity. So watch that closely as well. >> Yeah, what a wild time. Uh I don't know if you saw Bessin this morning was coming out talking about how the US and the Treasury specifically hasn't intervened in energy derivatives. Um there was a lot of that discussion, you know, what happens if the Treasury comes in starts buying? Should investors take that, you know, is is confidence or is it an attempt to kind of steady expectations here? >> Well, I think what's he going to say? He he can't come out and have his hair on fire. He has to basically say everything is great. we've got it all under control. U but it is interesting because I did speculate that maybe they could come in and sell oil futures to try to depress the price. But like any of these tactics, they're really gimmicks that uh had very limited and short-term impact. But ultimately, you know, there's no fighting basic supply and demand. Um and that's the problem that they're facing right now. So that's why I I feel like where they cannot directly uh impose lower oil prices, they may end up doing backdoor relief in the form of fiscal policy to households just to make sure that this affordability argument isn't one that they're going to lose um ahead of the midterms. >> Yeah. Yeah. A huge one. And just because it's Monday uh and we're going to air this today, I mean the road map, are you just mostly watching straight of Haruse this week? Is there any uh are you anything else is kind of going the Fed? >> Well, I've really been watching the impact on interest rates, right? >> Both the Treasury and the corporate market. Uh and as I noted earlier, I've been, you know, specifically watching uh the interplay between what's perceived to be safe credit versus risky credit and how those two are performing. I will say uh that because again, you know, forecasting how high oil is going to go and how long it's going to stay there is not >> something I'm capable of doing, nor would I try. Uh I will say that when oil goes up in the speed and magnitude that it has, we've always had a recession. Um but that doesn't, you know, I'm not hanging up my hat saying we're going to have a recession uh uh tomorrow. Uh, but I do think what's happening in the bond market is really noteworthy and probably isn't getting nearly enough attention. People are focused on private credit and oil and they're missing not only what's happening in the investment grade market, which is very uh nerve-wracking or should be, but especially what's happening in treasuries with no flight to safety bid whatsoever to the Treasury market. Yields are up as of last Friday. They haven't, you know, obviously today is another story, but they had been up 34 basis points since the Iran action of which only 12 basis points was in uh explained by inflation. >> So, it's not that treasury yields aren't going up because people are worried that oil prices are going to lead to a sustainable increase in inflation. This is a reset of fiscal policy expectations that's being reflected in the Treasury yield. So, I continue to watch that closely and see how that plays out. So, I guess I'm not really as focused on oil just because uh again, I I think there's limited amount of things that can be done other than these short-term gimmick things. Um and so, we've got to figure out what the long-term plan is. And in that regard, I keep coming back to the same thing. More run it hot, more monetary, more fiscal, more cowbell. >> Yeah. And it feels like fewer levers to pull at any given moment as well. Okay. Well, Stephanie, always always great to have you on. I appreciate the insights. Uh if you see anything, let us know. Uh we always enjoy having you. >> I sure will. Thanks so much for having me, Charity. >> All right. And to our viewers, if you want us to keep breaking down the gap between what real markets are pricing and what the real economy is showing, make sure to subscribe to KCO News. Turn on your notifications. And on a final note, we're going to continue to monitor the London Metal Exchange, which has halted electronic trading this morning. We'll bring you updates on those base metals as they come in. I'm Jeremy Sappern. Thanks for watching. Heat. Heat.
The Private Credit Squeeze That Could Trap Retail Investors | Stephanie Pomboy
Summary
Transcript
Welcome back. I'm Jeremy Sappern. Markets are trying to calm down this morning. The S&P 500 is rebounding about 1%. Oil has pulled back from overnight panic highs and the US dollar is heading for its worst day in over a month as the pedrocurrency trade begins to cool. Now, separately, we're also seeing some fresh friction friction in the financial gears as the London Metal Exchange has halted trading across its electronic platform. now leaving dealers unable to place orders from everything from aluminum to zinc on Monday. And while traders celebrate small amounts of tankers getting through the straight of Hormuz, the IEA still warns that this is the biggest supply in oil disruption in history and private credit. Meanwhile, those investors are suddenly finding the exits much tighter than expected. And joining me to look past those headlines and into what's really happening in the market is Steph Pomboy, of course, founder of Macro Mavens. Thanks for joining us, Steph. Good to see you. Thanks so much for having me. Uh it seems like it's never dull. Every time we reconvene, it's just even more crazy than the last time. >> I know. I know. I go I go to uh plan the show and I I have to almost pull some and you know, we can't get to everything. We never have enough time. But, you know, I mean, today it's starting to feel or at least, you know, maybe this rally looks a little bit like a bet on normalization. We had Secretary Scott Besson signaling confidence this morning. You know, the market is encouraged by news that there's uh more oil that can be released if in the emergency reserves if needed, but you know, a few uh tankers is is not fully functioning energy artery here, Steph. So, if that choke point stays jammed, I mean, the this stops kind of being an oil story, more about shipping, inflation, and growth like you and I have talked about before. Um, are markets confusing, you know, this diplomatic headlines with maybe an operational fix? I mean, if the IEA says that the physical market still faces a massive gap, is is normalization the narrative, is that realistic right now? >> Well, I guess um everything depends on how much longer this war goes on and that's not a question that I can answer being uh far from a military or policy expert on on that score. Um, but I would say, you know, my operating framework coming into this year was to work backward from the conclusion that the administration would do anything and everything it took to shore up support for the midterms. Uh, you know, Trump's entire legacy basically depends on maintaining Congress and being able to continue with his full agenda rather than have it all repealed. Um and so my sense was that they would basically do whatever it takes to ensure that the economy is in a good place and that specifically they are on solid footing with regard to the affordability argument which has been the really the central issue um politically and economically. Um, and so that's sort of how I've analyzed the economy is that whatever we're seeing now in the way of headlines, um, the policy will be brought to bear to make sure that the worst case scenario doesn't happen. Um, now admittedly, when you're talking about a commodity that's traded globally, the administration doesn't really have a whole lot of power or control over that price. However, it can do a lot of other things on the back end as you're seeing. You know, I I was really surprised that Trump said on Thursday that they would release oil from the SPR um after they've just barely started replenishing it um after it was completely pillaged for 3 years under the prior administration. Uh and that seems like a highcost gambit that is likely to yield very little reward. I mean, the amount of oil that they have ready to release would have such a small and temporary impact on prices. It seemed like it wouldn't be worth um taking that that chance. Um but it's just another example of how determined they are to win this affordability argument. And therefore, again, I wouldn't underestimate the policy levels levers they'll pull. Now, uh, they may be able to do things on the back end, like let's say if oil prices remain this high, and I went to fill up my gas tank here in Florida. I paid $5 a gallon at the local gas station here, and I was shocked. Um, I think what the administration might do if this persists and it looks like this affordability story is really percolating back up as an issue is to try to do something on the back end. So even though they can't directly impact oil prices, they can provide relief to households in other ways like uh you know I don't know you maybe he does um an attempt to repay the the tariff revenue directly to individuals rather than to companies which right now is you know being litigated. Uh but they're they my point is you know just use your imagination to try to think of the things they might do. When the president came out at the beginning of the year or even at the end of last year and started talking about capping credit card rates at 10% having Fanny and Freddy buy 200 billion of mortgage back securities. Those were all examples to me of just how broadly they were going to think about tackling this affordability argument. So the longer this war drags on, the more uh dramatic policy response I would anticipate, which doesn't really help people trying to analyze the markets right now, other than to say expect policy to be wildly accommodative. You know, the worse the situation gets, the more dramatic the policy response, which as you and I have talked about forever, only bolsters the case in my view for gold because we're talking about an environment where both fiscal and monetary policy would have to be run hot to offset this economic headwind or tax on the economy in the form of higher oil prices. >> Yeah. Just to get it going. I mean, you know, are are we reaching the point where where policy response shifts from, you know, fighting inflation to cushioning voters? >> Well, I would think so. And I, you know, I believe the Fed has always had the hubris to imagine that they could have enough time should inflation really heat back up to rein it back in later. So the administration may say look if uh you know we pump money into household you know pump money at households and inflation picks up as long as they feel good until October then we can slam on the brakes you know after the midterm votes in November. So they may have that attitude that sort of thought process right now. The great concern for me and you kind of teased it in your preamble is that in the process as long as uh oil prices remain elevated >> correctly or not the markets are going to start to build in higher inflation expectations which means higher interest rates which compounds the problems we're already seeing percolating at private credit and risks that situation. devolving more broadly and we've seen it already that when you have private assets that are in lockdown and people need cash, they have no choice but to sell liquid publicly traded securities. So you're seeing all manner of assets that are actually safe relative to private credit which is the problem being dumped in this kind of fireale manner. Um, and interestingly, and I wrote it about wrote about it for clients this week, the more liquid and safe the asset, the more brutally it's being sold. Yeah. >> Uh so if you look at for example the performance of junk versus investment grade paper since this whole situation began uh junk has outperformed because it's less liquid and and just like private credit. You'd rather sell the things that you can get ready pricing and and real good liquidity in like investment grade treasuries, gold, etc. So, I think part of the problem, part of the uh decline we're seeing in gold prices is actually tied to private credit, right, >> in this need to raise cash. >> Interesting. Yeah, that liquidity, that kind of squeeze that we've talked about before, and I will get your take on on on gold. I mean, we got to talk about it. It is somewhat stable today, although it is under 5,000 for the first time in a while. But, I wanted to kind of get into what you were just talking about, because here's why this matters to the average investor. I mean a huge share of that supposedly, you know, safe corporate debt is only one downgrade away from junk. I mean, if that starts happening in size, I mean, institutions that are not allowed to hold junk have to dump it. I mean, I is is that the real risk here? Not not a 1% move in the S&P, but but a credit event where forelling starts to feed itself. Well, you must be reading over my shoulder because that's what I wrote about for my clients this week is that investment that tripleB slug that you're referring to the lowest segment of what's c called uh investment cre is a $5 trillion market. I mean that's mindboggling. Private credit you know the estimates range wildly but they're from like 1 and a.5 trillion to three trillion globally. US corporations that are triple B-rated are 5 trillion. So it's more easily more than double the size of this private credit situation. >> And as you mentioned, if those companies that are currently just d, you know, barely hanging on to that investment grade rating get downgraded, which they could very well do as they face higher oil prices, higher debt service related to the increase in interest rates. they go to junk and become off limits for any vehicle that has a ratings mandate. You know, a high quality or investment grade fund cannot fold that paper anymore. So, if we're talking about managers having to sell, you know, 5 trillion, obviously they wouldn't necessarily downgrade everything in that triple B swast, but some of these are very bigname companies. We're talking about GM, Boeing, Amgen, Oracle, which is plenty in the news right now, AT&T, Verizon. So these are companies that were they to be downgraded would have real uh ripple effects not just through the investment grade market but then throughout the entire corporate credit segment, >> right? Yeah. And I mean the you know the counter would obviously be that the there's still massive companies with real cash flow but but could this become a systemic problem instead of just a few isolated downgrades you know that the market can easily absorb? I mean it it seems like it's coming up in even headlines more these days. >> Well, this is what happens is you start out with the weakest link in the chain breaks >> and then people begin to worry and they begin to be a little less uh interested in taking risk. So rates go up even for those who are farther up the credit chain and they suddenly face higher borrowing costs because people are repricing risk broadly. So it starts out in the private credit space then you know people say okay well we're going to worry about junk and then it travels up to investment grade and then it travels up further up the chain from there AAA. So the increase in yields has in and of itself the possibility of creating a crisis because as you and I have spoken about in our prior conversations the corporate sector in general is massively levered. They're far more levered than they were going into the global financial crisis. And the quality of the balance sheets is so much worse. I mean, the tripleB rated segment of the investment grade universe, which is now, you know, more than half. It's 55% of what's considered investment grade, I think, was under 30% of investment grade back in 2007. Uh so that sort of weaker quality, credit quality, uh has become endemic in the corporate space and people don't realize it because they're so fixated on the mag seven companies that have all the cash on their balance sheets. But if you look at, for example, the S&P 500 companies, the top 10 companies in the S&P 500 have more cash than the bottom 400 companies combined. So, you know, people are deluded by these laws of averages. They look at the cash of S&P companies at 2.7 trillion and they say corporate balance sheets are healthy. Well, no. 10 companies have a lot of cash. Everyone else is, you know, sifting through the sofa cushions to find some spare change. So that will be revealed as they face higher debt service and struggle to find the money with which to service that debt um as rates move higher. So I in answer to your question absolutely this could very easily devolve into a full-blown credit crisis and the fact that the risk premium in this market has been essentially zero. you know, junk spreads have been the lowest they've been since the global financial crisis in the face of the largest corporate bankruptcy cycle, etc. Um, so there's no room for error and error seems highly likely to occur. >> Yeah. Yeah. And I mean it it's it's affecting private credit too. I mean there there's a huge amount of hidden leverage that's gone. And obviously while stocks are kind of bouncing today, investors in private credit are finding that those exits are much tighter than they expected. I mean, who did we we had Morgan Stanley, Black Rockck, Cliff Water kind of gate their funds, restricting how much money people could take out? Uh Steph, I mean, was was private credit mistaken for for safety simply because the the the marks didn't move every day? I mean, now that investors are testing the exits and finding that it's much tighter, I are we discovering that these were liquidity promises backed by illquid assets. >> Yeah. Well, absolutely. And I think uh I would say this was the most predictable, least predicted crisis ever. U you know, when you can, as my friend Graham Williams described it, when you can grade your own paper, um you you got to believe that there's some monkey business going on there. Uh but also you didn't have to be uh too discerning to figure out when they started doing things like secondaries and continuation funds and then the private credit guys said you know what we really should let retail investors get a piece of this action. So let's unload all this stuff on the unwitting you know unwashed masses. it was clear that they were trying to find ways to effectively offload a lot of this risk uh onto the next pathy and this is sort of a bigger topic and with much more long-term implications but um here to before they you know created ETFs that allowed retail investors to get into this uh asset class it was all pensions and insurance companies um who were buying this private credit paper. You know, uh, pensions have substantially increased their exposure to so-called alternative assets, of which private credit uh, has been one of the most popular. And so what you're going to find out is that people who work, you know, on the uh assembly line at GM who think that they can retire with this nice pension are going to discover that, you know, their pension isn't there necessarily. Uh and this is going to be a rude awakening. um one which I expect will find uh policy makers rushing with some kind of bailout because you can't bail out the banks, you know, the Wall Street banks in 2007 and then say to Main Street, well screw you. Sorry, you bought into that your pension bought into that private credit stuff. Uh, so I I do anticipate, you know, a massive policy response being brought to bear to fix this private credit problem precisely because the ones holding the bag, they're not Wall Street, it's it's Main Street. >> Yeah. Yeah. I guess, you know, that's interesting. Is the real risk here, not redemptions, but but the pensions used private credit to manufacture, you know, income and stability, I guess, on paper and and now the paper doesn't match the exit price. That's what you mean? >> Yeah. and and these pensions were underfunded to begin with. I mean, we were looking at, I think, a$4 trillion dollar uh funding shortfall for the total US pension system, public and private. And the vast majority of that, you know, upwards of three maybe three and a half trillion of that was public. So, it's basically the state and local pensions uh are the ones that are most exposed here. Um, so again, just another rationale for a massive bailout, which then you won't be surprised to learn, just reinforces my bullishness on gold because there's no way they could come up with $4 trillion out of where I mean, we running a $2 trillion deficit. There is no $4 trillion. So, that money is going to have to be printed. >> Now, listen, our time always goes fast. But we also have this wave of of central bank meetings this week. The it seems like that that synchronized policy that we've seen for years is, you know, starting to shatter. I mean, we see bond managers doubling down on divergence, buying bonds in the UK, where growth is weak, while others stay kind of hawkish on Australia, Japan. Meanwhile, one sofa uh options trade I I think just reportedly made 10 million betting that the Fed won't blink. I mean, does the policy divergence tell you that the world is moving into a far messier regime where central banks are no longer moving as a pack and and markets lose the the one stabilizer that maybe they got after 2009? >> Well, I think it's a fascinating uh thing to watch. My sense is that those central banks at least in the developed world let's say the G7 central banks that are attempting to uh stand firm and have a stiff upper lip uh will find their upper lip quivering before long you know um generally if the US has a problem it's going to be exported to its uh G7 peers um and obviously if the US ends up being aggressively uh stimulative you get that figure thy neighbor policy response. Um, but to that end, one place I've really been looking for is Japan, which as you know, endeavored to shrink its balance sheet and reduce the whole yield curve control paradigm. And we saw what's happened there with yields, you know, shooting up in some faces to all-time records depending on what segment of the curve you're looking at. Um so the question is how much longer can they tolerate those high interest rates before they're forced to cry uncle and reverse course and and my sense is that uh you know the situation the US is in that I outlined with these you know massive uh pension obligations that are tied up in illquid toxic assets is not unique to the United States. Uh quite the contrary uh all the G7 economies in general are uh facing the same problem of attenable obligations to aging populations and have been you know really taking unourred risks to try to generate returns uh with which to pay that u and that game is just not going to last. So, you know, I'm not optimistic that there will be any central bank out there that's able to pursue monetary integrity um in the developed world. Certainly not in any of the major currencies. Um and again, that's you know, I hate to be a broken record, but this is why gold is the thing that I own almost exclusively. Well, I mean, if if trust is starting to prey or banks, private credit, even sovereign debt, I mean, I guess that helps explain why money keeps going towards gold, what what what is your expectation here? I mean, looking at that market, we had that huge run up. I hadn't talked to you since. Um, then we had a nice little sell off. I mean, here we are sitting here stable in a very unstable market around $5,000 on the spot side. What are your what's your outlook? Well, I do think that um it's going to be very interesting to see what the Fed does, not this week necessarily, but when Kevin Worsh comes in presumably as the next chairman in May, uh as someone who has long railed against QE um and argued, I think correctly, that it creates uh massive distortions in asset pricing that end up uh costing more than the benefit uh that you know people anticipate in near term. Um it's going to be interesting to see how long he can hold to that dogmatism before reality forces him to sort of capitulate or reality or a call from the White House. But um so I you know I guess uh my sense is that the the the question for gold is only what it does in the very near term you know uh how long this situation uh holds together here without devolving into a full-blown crisis. Um, but to me in the long term, and I'll say, you know, even if you want me to give you a forecast, let's say at the year end, >> I think 6,000 would be a no-brainer for gold. And from there, I think we're moving substantially higher. Um, I will confess that we got to 5,000 much faster than I thought we would. Um, we consolidated that and, you know, now I think we're setting up a base from which to move forward again. Um, I didn't feel particularly great when I was watching gold go up in hundred dollar increments because it felt frothy. Um, but now I feel like this idea that it's it's a bubble that has now burst and nobody needs to own it is just delightful. I I think it's just a great opportunity to step in and buy for all the reasons that, you know, I've touched on in our conversation here. Mhm. >> Uh so I remain dogmatically bullish as you could tell. Uh you know the last week has been has been peakful. >> Yeah. Yeah. Well, I mean all most of the asset price is just kind of in where do we go from here? The in between mode. Uh you know you brought up an interesting point about war. I mean you know he's argued for years that QE creates distortions, misprices risks and and and rewards kind of leverage over discipline. If if that view is right, I mean, does gold become the cleaner signal here because it it sits outside a system that keeps trying to solve every shock with more liquidity? >> Absolutely. And I guess um you know I wish I could be involved in those cabinet meetings because it's fascinating to think about the wars Bessant Ducken Miller connection. uh Bessant independent of that you know triumvirate uh has long been a gold bull. Stan has been a gold bull. Uh Worsh presumably being someone who's advocated for real monetary integrity would be someone who would you know at least appreciate the virtues of gold. Um, so one wonders if they don't have a backup plan that involves gold were things to really start to unravel. Um, I think the plan right now is basically to try to slow the growth of fiscal uh spending. You know, try to get Congress to kind of cool it off and restrain themselves and then ramp up growth in the economy to a point that you start to see that debt to GDP ratio start to come down. And I think their sense is that if they can get the debt to GDP ratio moving lower that people will take comfort that you know the fiscal situation in time will resolve itself and therefore any treasury risk premium that's currently being priced at there will come out of the market uh and that will sort of lay a foundation for long-term sustainable growth. I, as you won't be surprised to learn, am highly skeptical that they'll be able to thread that needle, but I I'll be watching intently to see how it all plays out. >> Yeah. Well, we both Well, finally, I mean, let's let's go to one of your your key truth tellers. Um, corporate tax receipts. I mean I mean, if if those are rolling over while Wall Street still expects strong earnings, something is not lining up. If you had to pick just one thing investors are still getting wrong right now, I mean, what is it and why? Well, corporate tax receipts unfortunately can't give you much of a signal now because of the tax cuts that we've had. So, you know, you see individual and corporate tax receipts roll over that are related more to policy than as a reflection of economic activity. I think corporate profits are a very important uh measure to look at. And in that, I think maybe we've talked about this in the past. Um, if you're going to look at the S&P earnings numbers, you have to be very discerning, uh, and make sure that you're not being duped by share buybacks, which tend to inflate the earnings per share metrics. Um, the government has in conjunction with its GDP report, a broader corporate profit measure that looks at all corporations, not just the top 500 companies in the country. And you won't be surprised to learn that they're growing at a much slower rate than the S&P 500 companies, which frankly, even within the S&P 500, all the growth is really in that top seven uh companies. And you're seeing far weaker uh earnings growth in a lot of the other segments and in consumer related segments especially. So I really tend to focus on that. Uh and as relates to the consumer, I happen to still believe that the sentiment numbers are uh important information uh because they actually tend to lead actual activity. I mean, presumably if you feel really bad about the job outlook or your real income outlook, you're not rushing out to take a vacation and and buy, you know, a fancy handbag. So, it does tend to actually have a good leading indicator of of activity. So watch that closely as well. >> Yeah, what a wild time. Uh I don't know if you saw Bessin this morning was coming out talking about how the US and the Treasury specifically hasn't intervened in energy derivatives. Um there was a lot of that discussion, you know, what happens if the Treasury comes in starts buying? Should investors take that, you know, is is confidence or is it an attempt to kind of steady expectations here? >> Well, I think what's he going to say? He he can't come out and have his hair on fire. He has to basically say everything is great. we've got it all under control. U but it is interesting because I did speculate that maybe they could come in and sell oil futures to try to depress the price. But like any of these tactics, they're really gimmicks that uh had very limited and short-term impact. But ultimately, you know, there's no fighting basic supply and demand. Um and that's the problem that they're facing right now. So that's why I I feel like where they cannot directly uh impose lower oil prices, they may end up doing backdoor relief in the form of fiscal policy to households just to make sure that this affordability argument isn't one that they're going to lose um ahead of the midterms. >> Yeah. Yeah. A huge one. And just because it's Monday uh and we're going to air this today, I mean the road map, are you just mostly watching straight of Haruse this week? Is there any uh are you anything else is kind of going the Fed? >> Well, I've really been watching the impact on interest rates, right? >> Both the Treasury and the corporate market. Uh and as I noted earlier, I've been, you know, specifically watching uh the interplay between what's perceived to be safe credit versus risky credit and how those two are performing. I will say uh that because again, you know, forecasting how high oil is going to go and how long it's going to stay there is not >> something I'm capable of doing, nor would I try. Uh I will say that when oil goes up in the speed and magnitude that it has, we've always had a recession. Um but that doesn't, you know, I'm not hanging up my hat saying we're going to have a recession uh uh tomorrow. Uh, but I do think what's happening in the bond market is really noteworthy and probably isn't getting nearly enough attention. People are focused on private credit and oil and they're missing not only what's happening in the investment grade market, which is very uh nerve-wracking or should be, but especially what's happening in treasuries with no flight to safety bid whatsoever to the Treasury market. Yields are up as of last Friday. They haven't, you know, obviously today is another story, but they had been up 34 basis points since the Iran action of which only 12 basis points was in uh explained by inflation. >> So, it's not that treasury yields aren't going up because people are worried that oil prices are going to lead to a sustainable increase in inflation. This is a reset of fiscal policy expectations that's being reflected in the Treasury yield. So, I continue to watch that closely and see how that plays out. So, I guess I'm not really as focused on oil just because uh again, I I think there's limited amount of things that can be done other than these short-term gimmick things. Um and so, we've got to figure out what the long-term plan is. And in that regard, I keep coming back to the same thing. More run it hot, more monetary, more fiscal, more cowbell. >> Yeah. And it feels like fewer levers to pull at any given moment as well. Okay. Well, Stephanie, always always great to have you on. I appreciate the insights. Uh if you see anything, let us know. Uh we always enjoy having you. >> I sure will. Thanks so much for having me, Charity. >> All right. And to our viewers, if you want us to keep breaking down the gap between what real markets are pricing and what the real economy is showing, make sure to subscribe to KCO News. Turn on your notifications. And on a final note, we're going to continue to monitor the London Metal Exchange, which has halted electronic trading this morning. We'll bring you updates on those base metals as they come in. I'm Jeremy Sappern. Thanks for watching. Heat. Heat.