Could Private Credit Lending Trigger a Stock Market Sell-Off?

The old expression in the stock market is that no one rings a bell at the top.

That is true, but there are generally a lot of reliable indicators that something is amiss when stock valuations are wildly out of any reasonable or historic norm.

There are several candidates that could trigger a plunge in stocks from today’s stratospheric levels.  Japan’s stock market is down 8.3 percent  from its June high,  and Korea’s stock market has suffered a huge hit of more than 30 percent.  If Japan has suffered a correction, Korea has crashed.  These appear to be warnings about the AI bubble in which case they are harbingers of things that will spread to equity markets elsewhere.

John Rubino

Climbing interest rates make stocks less attractive.  The key 10-year U.S. Treasury rate has been almost straight up for five months.  

But here’s another candidate that we wrote about a few months ago:  the warning signal coming from the private, non-bank credit markets.  Investors in private credit institutions are running into trouble and even if you are not one of them, you should not ignore the warning.  

Some of the biggest private credit institutions have had insufficient liquidity to meet withdrawals.  It reflects stress in the credit system at large, a system that makes the entire economy go around.  It has added significance since bank loans to private credit institutions,  graphed here as “Nondepository Financial Institutions,”  have been the fastest growing sector of  bank loans since the 2008 financial crisis.

Now market veteran John Rubino writes on his Substack, “Private Credit Bubble Threatens the Mega-Banks”:

It turns out that mainstream banks have also been feasting on those fat private credit fees and high loan rates. And now they’re reaping that particular whirlwind….

Most of the recent shadow bank lending has been to “hyperscalers,” companies like Amazon, Alphabet, and Meta that are racing to build AI data centers. And that market has taken a sudden turn for the worse.

The borrowing for AI infrastructure has been unprecedented.The spending among Hyperscalers, companies such as Amazon, Microsoft, Alphabet, Meta, and Oracle has reached extraordinary levels.

A sharp correction in these markets is already underway. A crash in the AI markets will take down shadow private credit lenders, and threaten enormous damage to the larger banks, the so-called “too big to fail banks” that have been funding the shadow lenders. Rubino says, “To say this might cause a recession grossly understates the current risk.”

They don’t ring a bell at the stock market top, but valuations are sky-high and cracks are widening in the economy.

Gold is the world’s preferred safe-haven in financial crises. If you have stock profits that you would like to lock in before trouble hits, we recommend you move them into gold, especially with gold at today’s bargain prices.