The markets are a sea of red this morning as the world begins to realize that:
The situation in Iran will likely not be over quickly.
Private credit markets are imploding, suggesting the credit cycle has turned.
A top, if not THE top is in for this bull market.
Regarding #1, as I noted yesterday, stocks initially responded as though the conflict in Iran would be over relatively quickly with minimal fall-out. That perspective has now changed as the Trump administration continues strikes on Iran and President Trump has refused to rule out sending troops “if necessary.”
Put simply door is open to a prolonged conflict. And stocks don’t like it.
Which brings us to issue #2: private credit.
Private credit is when non-bank lenders — like asset managers (Blackstone (BX), Apollo (APO), Ares (ARES)) — lend money directly to companies, typically mid-sized businesses that either can’t access or prefer to avoid public debt markets. In exchange for that capital, borrowers pay a floating interest rate that historically runs 2-4% above what public markets offer, compensating lenders for the illiquidity and complexity. The loans are pooled into funds that institutional investors (and increasingly retail investors) buy into, earning yield from the interest payments.
If this sounds familiar, it’s basically a rehash of the same issues that caused the subprime mortgage meltdown in 2007 (illiquid debt instruments being packaged up as securities that are sold throughout the financial system). The only difference this time is that the debt is backed by companies instead of real estate.
Much of these loans were made to software companies. And the software industry is currently imploding due to concerns that AI technology will render many of these firms obsolete.
The software ETF is down 35% peak to trough.
Blue Owl Capital (OWL) a key player in the private credit space has shut the gates on one of its funds and is now selling assets. OWL shares are down 27% year to date: a clear signal that all is not well in the space.
Again, private credit is signaling that the credit cycle is turning. This is a kind of “canary in the coal mine” for the debt markets. And it’s starting to look pretty sick.
Which brings us to #3 in our list: a top, if not THE top is likely in for this bull market.
Market leaders (big tech) are collapsing, defensive sectors (Industrials, Consumer Staples, Energy) have been ripping higher, and the $USD is bottoming. All of these are major signals that a top, possibly THE top for this bull market is already in.
The below chart shows what’s coming…
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