Is everything contained in the private credit market?

An affirmative ‘yes’ was the conclusion recently offered by Federal Reserve Chair Jerome Powell.

“We’re looking for connections to the banking system, and things that might, you know, result in contagion. We don’t see those right now. Interest rates are in a good place.”

Don’t mind the sudden appearance of restrictive redemption gates or the aggressive marking down of distressed collateral by the big banks behind closed doors. There’s supposedly nothing to see here.

Over the last decade, private credit was the ultimate speculative stretch for yield in a stubbornly low-yield world. It offered the seductive promise of higher reward, without the potential pain of higher risk. It became a fashionable place where wealthy investors could eke out a few additional percentage points of seemingly risk-free income and flatter their sophisticated egos in the process.

But now an eerie and familiar sense of impending déjà vu has settled over this shadow market. It’s a tragic movie we’ve already seen before. The one where localized and contained instability rapidly becomes systemic. Where financial contagion breaks out like a deadly virus through a crowded grade school classroom before anyone thinks to wash their hands. Continue reading →