Blain’s Morning Porridge Oct 20^th 2025 – Mutant Credit Cockroaches? Whatever next?

“Smart men go broke three ways: ladies, liquor and leverage.”

Markets feel increasingly nervous. Although someone has cranked up the party music to 11, and the euphoria is still pouring, concerns about banking and loan exposures are rising. If there is a wobble, then it’s likely to be leverage on leverage that sees a bunch of private credit lenders in trouble.

What will this week hold for markets? Trade wars? Peace deals? Inflation (maybe not as the US Govt is still in Shutdown)? A bank run? An invasion of mutant credit cockroaches? Who knows, who can tell..? This is heaven, this is hell… Reading through the financial press, it now feels there are more negative outlooks than positive.. Every financial market scribbler is predicting some kind of shocking sell-off in overpriced markets. Whateva…

If I am going to remain a contrarian… I may have to go out and find something positive to write about?

How about gold? According to reports, Global Banks now hold more gold than US Treasuries. That is not because of the “Great Debasement Trade” all the crypto-shills keep screaming in our faces as they seek to justify buttcon as the only alternative to fiat currencies which are “tools of financial repression by evil governments”. Strait out of Libertarian Money 101, and utter bollchocks.

Nobody has a greater belief in fiat currencies than Central Banks, but they are holding more gold because they are acutely aware of the current ructions in global markets, and they know the dollar’s role is global trade is evolving (ie devaluing and will lessen), and gold is a store of value. Simple as. Fiat money works. Simple as. Nothing in life is perfect – but some things work because they work. Central banks are holding gold because they know uncertainty and instability may roil markets – and they are being brutally realistic about how the world order is changing, and changing fast.

However, if there is one thing I am sure about, it is the street is not listening to dull, boring, predictable central bankers.. they should, but seldom do. What does get the market’s attention as dramatic moments of hi-drama and plunging red lines on the charts – by which time it’s definitionally too late!

In times of rising uncertainty, the big issue that scares the smarter minds in markets most are consequences. If one thing breaks… what else will fail in its wake?

For example, it is not the price of a bond (issued by a company that lent $20k to a sub-prime minimum-wage gardener to buy a truck in Los Angeles before he has was bundled into the back of a ICE van), tumbling to cents on the dollar that is panicking markets, but just how many times that bond was levered, cut, sliced, diced and turned into something fruitier in the CDO/CLO sausage making machine… that’s the kind of thing that should be causing the market some worries.

Consequences, consequences… Suddenly, last week we saw the beginnings of a confidence flubble around US regional banks’ loan exposures as the credit cockroaches emerged.

Banks are probably not the problem – although they are highly visible. Their vulnerability is because banks are all about confidence – when a bank says its losses on bad lending aren’t a problem as they are fully provisioned, or it emerges they failed to properly due diligence a loan to a dodgy over-leveraged firm that was triple-counting invoices… then that’s absolutely a rising confidence problem. As we saw oh so clearly in 2008, and again at Credit Suisse and through the tumult at Silicon Valley Bank a few years back, when banks hit lending problems and their LIQUIDITY becomes an issue… they die swiftly.

However, the real issue for credit markets is not banks. Since the global financial crisis of 2008, banks have become a far smaller less significant part of the “complex” lending market. Even before crisis the “originate and repackage” approach to bank assets had become established. Since the GFC bank lending has been regulated to such an extent risk taking is not what banks do. It was a swathe of bank assets in the forms of corporate credit, consumer loans and mortgages that were packaged into collateralised obligations that triggered the 2008 crisis when everyone came to fear how they would be repaid. Leverage on leverage magnified the problem.

Now we have an even more complex lending market to consider. The private capital markets that have emerged since the 2008 GFC are responsible for over $3 trillion of financial origination. Even larger amounts of debt have been issued by corporates which has been used to pay dividends to the PE owners.

The debt and equity these funds directly originate and hold are entirely outside the banking sector – subject to more limited regulation and with little transparency on how these deals are performing. That is not necessarily a problem – until suddenly it is.

When banks die because confidence in them collapses and they can’t keep refinancing their fractional lending… In contrast, losses in investment funds only become visible when folk start to ask for their money back. For large insurance and pension funds, that will be years down the road.. by which time its entirely likely deals which apparently failed have actually recovered most of their losses.

That is certainly true of simple discrete assets like repacked mortgages or credit card debt where we can model and predict losses easily. But what happens when Zombie firms simply can’t repay higher debt costs, or you get complex indiscrete assets, like a loan backed by chips, or specialised aviation assets, where the value depends on a very limited number of potential users and how economically healthy they are. That complexity issue is going to figure prominently if there is a credit bust in the Private Credit Markets.

The lesson of the 2008 GFC was that collateralised obligations actually performed as expected – there were losses, but recoveries on defaulted lending and the fact most companies still repaid their loans and most folk pay off their credit cards and mortgages, eventually, meant these deals had greater value than the distressed prices we saw in markets. Recoveries and repayment are a factor of time. Investment funds have the time that banks don’t have to make good on their investments.

Of course, that is a very general rule. Where an investment fund or private capital manager is forced to shutter redemptions on a fund, that will have serious reputational and pricing risks. And if these funds have effectively made themselves banks by leveraging their lending… then they become vulnerable to exactly the same refinancing liquidity risk that kills banks!

That’s what’s going to be really interesting to watch in coming months: which private capital market funds become default statistics? If we see a number of highly leveraged alternative funds hit the skids, we could get a more general crisis as the market starts to factor in a flood of failing complex assets – which will be extremely illiquid, unless you know exactly where to look, or can show their long-term value is likely to remain high.

Another factor that increasingly concerns me in this late-stage bubble market is where risk is going. We know that Blackrock, the largest single investment fund, just pulled in record amounts from retail over the last quarter – nearly $1 trillion – which is now invested in US stocks via ETFs and Indices, further pushing MAG7 AI hopes. At the same time we know professional investors are flat to short the same assets. We also know how hard every professional investment sector is lobbying to sell everything form highly risky AT1 capital deals, Private Credit and Repackaged PE to retail investors.

The game in financial markets is about selling risk to the next greater fool… and ultimately that’s the buyer who knows the least, which is usually retail.

Caveat emptor..

Out of time, and back to the day job…

Bill Blain

CEO – Windshift Capital

Author – The Morning Porridge

Partner – Shard Capital