Second quarter commentaries are now live!
This quarter, Sydney Van Vierzen discusses how we believe EdgePoint and our partners can benefit from artificial intelligence, while Steven Lo talks about how investing with a margin of safety helps us avoid permanent loss of capital.
This week in charts
Daily prices indices by country-of-origin
U.S. high-yield credit rating composition
Speculative trading indicator
S&P 500 Index stock participation
Special purpose acquisition company (SPAC) capital raised
U.S. housing market activity
U.S. housing construction
S&P 500 Index vs. U.S. 10-year bond correlation
Historical valuation percentile – equities vs. bond yields
Growth stock outperformance
Investors beware the dangers lurking in private credit
Back in 2007, just before the global financial crisis, Chuck Prince, then the ill-starred head of Citigroup, famously told the FT that “as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
Or in plain English: when an asset class is booming, competitive pressures force financiers to keep peddling deals — even if they fear the bubble will burst.
It is a mantra that might haunt Jamie Dimon, head of JPMorgan, right now. In recent months, Dimon has repeatedly warned about risks lurking in private credit, which has recently had such a “meteoric rise”, to cite the Boston Federal Reserve, that it has been one of the fastest-growing finance sectors.
Dimon has noted that while there are plenty of good deals, bad ones exist too — and credit ratings are so unreliable that the sector is creating a potential “recipe for a financial crisis”.
“I’ve seen a couple of these deals that were rated by a rating agency. And . . . it shocked me what they got rated,” he observed. “It reminds me a little bit of mortgages [before the GFC].” Then this month he doubled down, suggesting we “may have seen peak private credit”.
But this year JPMorgan has also raised its allocation to private credit from $10bn to $50bn The reason? Its rivals are rushing into this space, as US President Donald Trump seeks to open the asset class to pension funds and retail investors. The financial “dancing” is intensifying.
So what should investors conclude? The first point to stress is that there are sound reasons why some investors might want to diversify their portfolios into private credit, since it has historically been a well-performing asset class with fairly stable returns (albeit high fees).
There are also good reasons why the sector exists. Post-crisis regulatory reforms have curbed bank lending in the past decades, and tariff uncertainties have damped lending again this year. However, a decade of ultra-loose monetary policy has left the system awash with liquidity, some of which has gone to private capital funds.
It is thus no surprise that when Meta recently decided to raise finance for artificial intelligence investments it looked at private credit — even though it can easily issue bonds. “Push” and “pull” factors are both at work in this boom, which has driven the global sector to almost $2tn in size, of which roughly three-quarters is in North America.
However, what concerns some observers is that the sheer speed of this rise evokes nasty historical comparisons. After all, history is full of examples of new(ish) financial products that have expanded at breakneck speed, delivered big profits for early smart-money players, but then produced large losses when retail money or unsophisticated institutional investors finally rushed in.
However, there is another lesson from history that Wall Street should heed: when other sectors have been forced to clean up their standards in the past, this has almost invariably occurred after, not before, a big crisis hits. Painful losses are what usually sparks reform.
This week’s fun find
A WWII Tale of Parachuting Beavers
In 1948, Idaho faced a very unusual animal problem: beavers were taking over towns. The solution? One of the most bizarre and brilliant ideas in wildlife history. To protect these cute animals and restore balance, conservation officer Elmo Heter came up with a plan: parachute dozens of beavers into the remote backcountry using surplus WWII parachutes and wooden crates. What followed was a skydiving mission like no other. 76 beavers were dropped from the sky, led by one fearless test jumper named Geronimo. This true story isn't just a quirky moment in history; it's a story about creativity and the wild lengths humans will go to protect even the smallest, furriest members of the animal kingdom. Let's see how this archive footage shows us the kooky side of the 1940's for this history deep dive!
