Three dangerous market forces are converging: private credit stress, slowing GDP, and an oil shock tied to war with Iran.
KEY TAKEAWAYS
Three separate macro and financial developments are emerging simultaneously: stress in private credit markets, weakening economic growth, and a geopolitical oil shock. Their interaction creates a risk environment that is more dangerous than any one factor alone.
Private credit markets are facing redemption pressure and valuation stress across several major funds. Gates, redemption caps, and collateral markdowns are creating a feedback loop that can force asset sales and lower marks across similar loans.
Economic growth in the United States slowed sharply, with fourth-quarter GDP revised down to 0.7%. At the same time, inflation indicators such as the core PCE index remain elevated, raising concerns about stagflation dynamics.
Geopolitical escalation involving Iran has pushed crude oil prices above $100 and disrupted shipping through the Strait of Hormuz. Higher energy prices increase inflation pressure and raise costs across the global economy.
The convergence of these forces places the Federal Reserve in a difficult position. Lower rates could worsen inflation driven by energy prices, while holding rates high risks intensifying economic and credit stress.
MY HOT TAKES
Private credit markets are vulnerable to rapid deterioration when investor redemption pressure combines with falling collateral values. This dynamic can create forced sales that spread pricing declines across the broader credit ecosystem.
Economic data revisions reveal that growth was already slowing before the latest geopolitical escalation and oil price spike. This increases the probability that future economic data will reflect additional strain.
Higher energy prices act as both an inflation shock and a corporate margin shock. Rising input costs simultaneously pressure consumers and businesses, tightening financial conditions across the economy.
Monetary policy flexibility becomes constrained when inflation remains elevated during periods of slowing growth. In such conditions, central banks face difficult trade-offs between stabilizing prices and supporting economic activity.
Periods of extreme market stress often coincide with the emergence of long-term investment opportunities. Historical market cycles show that major buying opportunities frequently appear when uncertainty and volatility are highest.
You can quote me: “Right now, I am seeing three separate powerful weather patterns that have a…um, not low probability of converging into one big superstorm, that has the ability to cause true mayhem to financial markets, and ultimately, your portfolio.”
Superstorm. There are storms, and then there are STORMS–superstorms. Those happen when a series of disruptive weather patterns converge in a 1+1=3 scenario–the sum of the parts is greater than the individual parts. Now, that 1+1=3 math on Wall Street–especially in M&A–is typically a good thing. Bankers reserve a special place for it on the last slide of their pitch decks. Today, I want to focus on a developing storm in the financial market. I will just start by saying outright that it is not by any means a good thing for Wall Street.
Starting last year and as recently as last Friday, I felt compelled to write about the nasty weather pattern developing over the normally quiet private credit market. Not unlike most weathermen, I would rather report sunny skies and perfect temperatures. It’s important to note that I don’t control the weather, I simply report it and help you make sense of it. That said, I can also spin the way in which I describe it to make it seem optimistic. Like “it’s going to rain like hell–but the flowers are going to love it!” Or, “it’s gonna be a chilly one–time to get out those cozy warm sweaters!” But, sometimes, I just have to call it like I see. No spin, no hyperbole, just facts.
Right now, I am seeing three separate powerful weather patterns that have a…um, not low probability of converging into one big superstorm, that has the ability to cause true mayhem to financial markets, and ultimately, your portfolio. Similar to bad weather situations, you minimize danger by being prepared. Pay attention.
Weather pattern number one is the private credit crisis that I have been covering in detail. If you watched my video or read my blogpost / newsletter on Friday you already know the plumbing ( https://blog.siebert.com/the-cracks-are-becoming-fault-lines ). A $3.5 trillion market built on patient capital is now dealing with very impatient investors who want their money back. Morgan Stanley capped redemptions at its North Haven fund after investors tried to pull nearly 11% of shares. Blue Owl permanently shut the door on its OBDC II fund. BlackRock hit its quarterly gate. Cliffwater capped at 7% after investors tried to yank a record 14%. And JPMorgan–the largest bank in America–quietly marked down the collateral that private credit firms use to borrow against. That last part is the one that should worry you most because it sets off a chain reaction. Lower collateral values mean less borrowing capacity. Less borrowing capacity means forced sales. Forced sales create new pricing benchmarks that drag down every similar loan on every other fund’s books. It is a feedback loop, and it is already spinning.
Weather pattern number two landed on Friday morning with a thud. It’s OK if you missed it because so much is cluttering the financial news cycle right now, but here it is. The Bureau of Economic Analysis (BEA) revised fourth quarter GDP down to just 0.7%. That is not a typo. The US economy–the largest in the world–grew at less than one percent in the final three months of last year. Economists were expecting an unchanged 1.4% print, which was already disappointing. The revision cut that number in half.
Here is the breakdown. Consumer spending was revised down. Exports were revised down. Government spending took a hit from the October shutdown (nice work Washington DC). And the GDP deflator–the broadest measure of price changes in the economy–came in hot. On top of that, the January PCE reading showed core inflation running at 3.1% year over year. That is moving in the…er, wrong direction. The economy is decelerating while prices are accelerating. There is an old, ugly word for that combination and it starts with “stag.” I will let you finish the rest. That’s right, stagflation. That awful word comes around from time to time and you can expect it to be perched prominently atop of this week’s news feed. And it’s also important to remember that these numbers are backward looking–this was Q4 of last year, before the war in Iran and before the crude oil price spike. Speaking of that.
Weather pattern number three showed up over the weekend and it arrived with explosions. US forces struck 90 military targets on Iran’s Kharg Island Friday night–the tiny coral island responsible for roughly 90% of Iran’s crude exports. The administration said oil infrastructure was spared. The President then went on television Saturday and said the US might hit it again “just for fun.” Iran’s Revolutionary Guard responded with missile and drone strikes on three US bases and Israeli targets, calling it the first round of retaliation. Brent crude opened this morning above $104. WTI briefly traded over $100. The Strait of Hormuz remains effectively closed to commercial traffic. And the Fed meets this Tuesday and Wesdenesday with absolutely no good options on the table. Cut rates to help the slowing economy and you pour fuel on an inflation fire that is already being fed by $100 oil. Hold rates steady and you watch an economy that just printed 0.7% GDP continue to suffocate under the weight of high borrowing costs.
The Fed is stuck. And that is not a phrase you ever want to hear when a superstorm is forming on the horizon.
Now here is where these three weather patterns converge and the math starts to feel like 1+1+1 equals 5. Private credit firms lend to middle-market companies. Those companies need a functioning economy to make their interest payments. When GDP is running below one percent, revenue growth slows. When oil prices spike, input costs rise. When the Fed cannot cut rates, refinancing becomes more expensive. The stressed borrowers inside those private credit funds–the ones I described on Friday as being on life support, paying interest through PIK toggles and creative restructurings–are now being squeezed from every direction at once. The fund managers who were quietly hoping to work those credits out over time just lost the two things they needed most. Time and a cooperative economic backdrop. Meanwhile, the impatient investors who want out are watching oil prices surge and GDP collapse and thinking the same thing at the same time. Get me out! The redemption wave accelerates. The forced sales accelerate. The pricing benchmarks drop. The feedback loop I described on Friday does not just continue–it intensifies.
Any one of these three weather patterns–private credit stress, a sub-one-percent economy, or a hot war driving oil above $100–would be debilitating but manageable on its own. The market has dealt with each of those individually before. But when they converge–and they are converging right now–the resulting superstorm has the power to overwhelm the normal defenses. The Fed cannot ride to the rescue because inflation will not let it. The banks are already pulling back because JPMorgan just told you so. And the investors who funded this $3.5 trillion market are lining up at gates that are already closed.
Now, I want to leave you with this. Superstorms are not permanent. They are violent, they are disruptive, and they absolutely cause damage. But they pass. The sky does eventually clear. And when it does, the investors who stayed calm, who understood the weather, and who prepared their portfolios accordingly–they are the ones who find bargains in the wreckage. Historically, the greatest buying opportunities in markets have come not when the weather was perfect, but when everyone else was running for cover. This is not a call to panic and sell everything. This is a call to understand the forecast, batten down the hatches, and make sure your portfolio can weather the storm. Because when this one clears–and it will–you want to be standing, dry, and ready to move. Ultimately, your flowers will be happy. 😉
FRIDAY’S MARKETS
Stocks declined on Friday as investors confronted the very real reality of higher fuel costs at the pump, a weaker than expected GDP print, and crude oil above $100 again, in support of those high fuel prices. Safe spaces in the market are becoming increasingly hard to find, and Friday’s setup sent traders to exit doors.
NEXT UP
Empire Manufacturing (March) may have slipped to 2.9 from 7.1
Industrial Production (February) is expected to have climbed by 0.1% after a 0.7% gain in the prior period.
NAHB Housing Market Index (March) probably ticked higher to 37 from 36.
Later this week, we still have some important earnings to contend with along with more housing numbers, Durable Goods Orders, Producer Price Index / PPI, and Leading Economic Index. Download the attached calendars so you can be ready for the storm.