As headlines and pundits squabble about price moves in gold and silver, many “experts,” as usual, are missing the bigger picture of a historically unprecedented convergence of debt, credit, banking and currency risk hiding right behind the curtains.
In this tragi-comical theater of a global financial system held together by fancy scripts hiding appallingly bad math, we can look to yet another symptom of bad-acting and bad actors performing center stage.
By this, I am referring to the otherwise mis-understood and under-reported theatrics of a dangerously over-rated private credit market.
This motely cast of private credit actors and their banking under-studies points to yet another bad review for banks, markets and currencies, yet a standing ovation for gold as we approach the final act of a global financial system running out of trust, liquidity or happy endings.
Banks, How Do I Loath Thee?
Over the years, I have had some fun misquoting familiar sonnets to shed serious (but hopefully simple) light on THE key theme which historically and universally impacts our wealth.
Specifically, I have twisted Shakespear’s infamous “the play is the thing” (Hamlet) into my oft-repeated declaration that “the bond market is the thing” in order to make it perfectly clear that debt is the foundation of every failing system.
But there can be no discussion of debt –and hence modern credit markets–without an equally and poetic homage to banks and bankers.
And so, I now turn from twisting Shakespear on bonds to twisting another infamous English poet, Elizabeth Barrett Browning (Sonnet 43) on banks– of which me and many of my colleagues know all too well, as former bankers ourselves.
This is because we know how the banking sausage is made, having spent considerable time in their various kitchens. Net result? We have a problem with banks.
And so, I say, “Banks…[h]ow do I loathe thee? Let me count the ways…”
A History of Banking Dangerously
My/our problem with banks has been no secret, whether perennially chastising the central banks in monetary policy, or mocking commercial banks in everything from their derivative madness and mismanagement of gold storage to their open criminal price fixing schemes and COMEX games to big-ticket precious metal fines (think UBS, JP Morgan, Barclays or Morgan Stanley).
In short, banks always take us from boom to bust.
Whether draped in togas, French ruffles, or Armani grey, there has always been (and always will be) a banker hiding in some corner whenever an over-levered and over-indebted financial system implodes.
In good times, the bankers are seen center-stage as guides possessing a secret vernacular and talent; in bad times, they are pointing fingers at “extraneous events” or “black swans” while anxiously waiting for a bailout or bail-in.
We saw the most recent version of this pattern, of course, in the 2008 sub-prime debacle in which a handful of banks brought an entire economy to its knees.
Private Credit, Just Another Uh-Oh Hiding in Plain Sight
But what many are not seeing today is the pattern recognition in private credit—and commercial banks—which is eerily similar to 2008.
Then, as now, no one is seeing the lava beginning to emerge from a percolating volcano of debt gone wrong.
This is very bad for banks and risk assets. And very good, of course, for gold.
But rather than just say this. Let me show you.
In many interviews, I have singled out private credit (as well as sub-prime and AI) as among the greatest of time bombs ticking beneath our economies and markets.
I have also argued that private equity sits on the “dark side of the force.”
Some may say this is mere gold-bug sensationalism, but even the bond king, Jeffrey Gundlach, has singled out private credit pools as today’s newest “weapon of mass destruction.”
So, What Is “Private Credit”?
In a nutshell, the multi-trillion-dollar private credit market is an amalgam of PE, VC, SPV, money-market and hedge-fund actors using leverage to make risky loans to a predominantly unknown class of borrowers. Red Flag 1.
These private lenders do so with none of the capital requirements, deposit insurance or direct Fed access otherwise characteristic of “safer” and more “regulated” commercial banks. Red Flag 2.
These lenders, moreover, are seeing default rates creeping up from borrowers like Tri-Color, First Brands Group and other sub-prime players at alarming rates reminiscent of those first defaulting sub-prime mortgage pools in the pre-08 days. Red Flag 3.
Borrowers to these private creditors, unable to make their interest payments, are desperately offering “equity” instead of cash to cover their obligations. Red Flag 4.
Such “payment in kind” (or “PIK”) trends are ominous signals of more defaults ahead.
Enter Bankers and Banking Risk
But what do any of these private creditors (and private credits) have to do with commercial banks?
Well, where do you think the hedge funds and other shadow-banking players in this rotten theater get the money to make their private loans?
You guessed it: From the commercial banks.
In other words, by directly funding the shadow-bankers, commercial banks are indirectly exposing themselves to the default risk of the private, non-bank creditors.
And if you think these private lenders aren’t stupidly risk-exposed, think again.
BlackRock, the largest and so-called smartest “death star” of the global asset management galaxy, has its own massive private credit fund—the TCP Capital Fund.
What some may not know, however, is that the TCP Capital Fund just lost 1/5 of its value in the last 90 days.
That’s a BIG Red (or Black?) Flag.
As both large and small players in the unregulated, hidden and grotesquely default-exposed private credit market start tumbling one domino at a time, the commercial banks who seeded these private creditors will once again experience a 08-like moment of credit defaults from failed underwriting and reckless mal-investment.
Nothing New Under the Sun
But then again, banks acting badly is nothing new. The recent “Silver Friday” (and entirely engineered bank bailout) was a classic symptom of banks investing badly.
Having gone levered-short in a rising silver market, the not-so-savvy “big banks” were about to get fatally squeezed.
The CME then temporarily rescued them by raising margin costs on levered silver, which forced levered long silver players (i.e., hedge funds) to sell silver, thereby engineering a price fall to reduce pressure on the silver noose which the banks had placed around their own necks.
This was not a moment of falling silver demand, but a neon-flashing sign of cash-poor banks trapped on the wrong side of a trade they were too illiquid to face.
As I warned weeks before Silver Friday, signs from the repo markets were already telling us that the commercial banks were dangerously illiquid and risk-heavy.
If you therefore combine the warning signs from the repo markets and the engineered silver bailout with the now percolating private credit exposure on bank balance sheets, you see all the signs of yet another banking crisis, and hence market and economic crisis, rising to center stage.
See why it’s so easy “to count the ways” to loath banks?
All Roads Back to Gold
For years, we have warned of banking, market and hence currency risk as critical reasons to own physical precious metals outside of the commercial banking system.
As credit-risky banks and top-heavy (grossly over-valued) markets crawl slowly yet steadily toward yet another global financial crisis, investors will once again realize that flows into hard assets in general and precious metals in particular will be a far safer direction and choice.
Meanwhile, the too-dumb-to-apologize and too-big-to-fail banks will once again take zero accountability for their own mistakes as we head toward yet another banking crisis.
They will then turn immediately toward their rich Uncle Fed to mouse-click trillions in ever-more fake liquidity to bail them out of yet another self-made fiasco.
This “solution,” of course, just adds more water to an already embarrassingly debased (and wealth-destroying) dollar and hence more tailwinds to an infinitely more honest (and wealth-preserving) ounce of gold.
Blue Owl seems to be the first domino to fall.
Great stuff Matthew, as always