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Dear Readers,

It’s happening exactly as I predicted.

The reason is in fact why I’ve written to you about this multiple times recently.

But I’m no savant. I simply know my history. And history repeats.

So, you better get ready for me to bring you similar news like today repeatedly. Because you are looking at THE match that lights the biggest financial collapse in history.

Slowly but surely, it is all beginning to unravel before your eyes.
Source – Financial Times

Yes. It’s our old friends in private credit and equity.

From the above article.

Wall Street lenders are scrambling to understand the extent of losses on billions of pounds they lent to a UK-based mortgage provider that collapsed suddenly amid fraud allegations, reigniting fears of poor underwriting standards in the booming market for asset-backed lending.

You must be across such news. I guarantee it won’t get the widespread mass media coverage it should, given the other things happening globally right now taking attention.

Let’s review now the latest crack appearing in the global credit machine.

All at the very worst time for it to occur.
Quick math

Reviewing the role of credit during the very late stages of the real estate cycle is akin to doing a very simple piece of arithmetic.

Credit conditions get looser the longer the cycle goes on. It provides a tonne of liquidity and allows for more borrowing. However, this starts to unwind when credit conditions get tight and interest rates begin to rise to combat inflation.

And as the ongoing conflicts in Ukraine and now Iran show, inflationary pressures are coming to energy markets having already been reflected in financial assets and commodities. Central banks across the world are slowly leaning into tightening policies designed to head off this inflation even as political pressure to ease financial conditions ramps up.

No one has a bigger role to play in the setting of short-term interest rates globally than the US Federal Reserve (they make changes to the Fed Funds Rate, which in turn influences US bond yields, and these are the benchmark for yields everywhere).

This has a bearing on how loose or tight financial conditions are.  Let’s look at a chart of such provided by the Chicago branch of the Federal Reserve:
Source – FRED

This chart goes back forty years, and thus handily for us covers two completed real estate cycles. The grey vertical lines represent US recessions. The blue line is the financial conditions measure which basket of indicators including interest rates.

The black line at zero represents the average value of financial conditions over the period. Below zero means that conditions are looser than average, while above zero points to tighter conditions. Please look now at the two grey vertical lines in 1990 and 2008.

These represent the recessions associated with the ultimate peaks of the 1974 to 1993 and the 1994 to 2012 real estate cycles. Note how financial conditions were already tightening prior to each recession (the blue line moves above the black zero line).

Of interest is the fact that, for now, in the present cycle we have the opposite effect occurring. The blue curve is below the black zero line indicating loose financial conditions.

It is my contention to you today that this is on the precipice of changing.

One vital clue is the sudden level of ‘hawkishness’ amongst the voting members of the US Federal Reserve. President Trump will get his wish in replacing current Chairperson Jerome Powell, but he cannot replace all voting members.

Recently released minutes show several members are concerned the conflict with Iran will spur inflation in the country and may therefore necessitate a rise in interest rate instead. If this inflationary pressure forces the Federal Reserve’s hand, then financial conditions will start to tighten.

The second vital clue, however, is what’s occurring with these private credit funds.
It all works right up to the time it doesn’t.

I alluded to in a recent newsletter about the collapse earlier this year of First Brands and Tricolor Holdings. I won’t belabour the point but basically it involved both companies going insolvent after the CEOs of each were accused of fraudulently obtaining billions of dollars from lenders and enriching themselves while the company failed.

Ancient history now, everyone has moved on. But it did pique my interest, and I have been keeping an eye out for similar news.

London-based Market Financial Solutions (MFS) collapsed into administration earlier this week after entities tied to the group filed a court application that cited “real and serious concerns about mismanagement” of the business, “serious irregularities in the management of the key bank accounts” and “a significant shortfall” in collateral that they said could amount to £238 million.

Amber Bridging Limited and Zircon Bridging Limited, the two MFS group entities that filed the application and which have £1 billion outstanding, are both in administration. TPG, the US private equity firm, and Avenue Capital, the distressed debt specialist, along with UK Barclays bank who have at least £600mn in exposed loans to the group.

Here’s a quote from the above article to further explain the web involved here.

MFS financed its business with debt from some of Wall Street’s largest financial institutions, pledging the loans it made to customers as collateral to its own lenders.

Banks including Barclays, Jefferies, Santander, and Wells Fargo, as well as private credit firms Atlas and Castlelake, all chipped in to provide the family-owned and run mortgage lender billions of pounds.

According to its 2024 accounts, MFS secured £1.3bn in “new institutional funding to support increased lending demand”, on top of £1.1bn it had already received from lenders.

This passage neatly sums up the enduring and systemic problem of private equity. The global financial system is less about credit and more about having the collateral available to refinance that debt. If the collateral pledged is sound, that debt can be refinanced and around we go.

That is why, worldwide, real estate is the best form of collateral for traditional banks to lend against. That is the exact opposite of what appears to be going on in private credit circles.

MFS instead pledged earlier loans it had made as collateral for even more loans! Sounds crazy but this is the type of behaviour these funds display to make outsized gains.

And it works right up until it doesn’t, which brings us to today.

How do you call in your collateral to recover losses when the collateral itself is a loan? Actions speak louder than words.
Source – Financial Times

A large credit fund managed by KKR tumbled on Thursday after reporting a jump in troubled loans and lower investment income, highlighting the mounting strains in private markets.

KKR’s FSK fund oversees a $13bn portfolio of loans to other private equity backed companies. Deal activity for the FSK fund hit a peak in 2021 and 2022 at the end of an era of historically low interest rates that quickly reversed the following year, causing an industry-wide crunch.

Private equity firms are sitting on a growing $4tn logjam of unsold deals, according to consultancy Bain & Co, with many facing an unclear path to exit these holdings. Many of these companies have high levels of debt and some are falling into distress.

And this is apparently still the calm before the storm. Please relook at the above FRED chart once again. Bear that in mind when I say this to you.

I am trying to get you and your family ahead of the curve here.

You must now heed the warning signs that are appearing. You must ensure you have a plan for what to do once we reach the ultimate peak of this cycle. And how to protect yourself when the bust comes.

If any of that isn’t crystal clear to you, then consider becoming our newest Boom Bust Bulletin (BBB) member. Learn now the secrets of the 18.6-year Real Estate Cycle and why it continues to repeat to this very day after over 220 years.

Your timing for when to be in and then out of the markets is the absolute key to both profit and protect and that is what knowledge of the land markets can give you.

No doubt we are at a critical juncture now. You must focus on the news that ‘really’ matters, not most of the nonsense the media loves to force down your throat.

Do you think that things in the private credit sector are simply going to get better from here? History remains undefeated here in its judgment of this type of behaviour at this time of the cycle.

Be on the right side of that history today.

Sign up now.
Best wishes,
Darren J Wilson
and your Property Sharemarket Economics Team

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