Private Credit’s Slow-Death: Sending Banks Down & Gold Higher
Matthew Piepenburg

As headlines and pundits squabble about price moves in gold and silver, many “experts,” as usual, are missing the bigger picture of a historically unprecedented convergence of debt, credit, banking and currency risk hiding right behind the curtains.

In this tragi-comical theater of a global financial system held together by fancy scripts hiding appallingly bad math, we can look to yet another symptom of bad-acting and bad actors performing center stage. 

By this, I am referring to the otherwise mis-understood and under-reported theatrics of a dangerously over-rated private credit market.

This motely cast of private credit actors and their banking under-studies points to yet another bad review for banks, markets and currencies, yet a standing ovation for gold as we approach the final act of a global financial system running out of trust, liquidity or happy endings.

Banks, How Do I Loathe Thee?

Over the years, I have had some fun misquoting familiar sonnets to shed serious (but hopefully simple) light on THE key theme which historically and universally impacts our wealth.

Specifically, I have twisted Shakespeare’s infamous “the play is the thing” (Hamlet) into my oft-repeated declaration that “the bond market is the thing” in order to make it perfectly clear that debt is the foundation of every failing system.

But there can be no discussion of debt –and hence modern credit markets-without an equally as poetic homage to banks and bankers. 

And so, I now turn from twisting Shakespeare on bonds to twisting another infamous English poet, Elizabeth Barrett Browning (Sonnet 43) on banks, which me and many of my colleagues know all too well, as former bankers ourselves.

This is because we know how the banking sausage is made, having spent considerable time in their various kitchens. Net result? We have a problem with banks.

And so, I say, “Banks…[h]ow do I loathe thee? Let me count the ways…”

A History of Banking Dangerously

My/our problem with banks has been no secret, whether perennially chastising the central banks in monetary policy, or mocking commercial banks in everything from their derivative madness and mismanagement of gold storage to their open criminal price fixing schemes and COMEX games to big-ticket precious metal fines (think UBS, JP Morgan, Barclays or Morgan Stanley).  

In short, banks always take us from boom to bust. 

Whether draped in togas, French ruffles, or Armani grey, there has always been (and always will be) a banker hiding in some corner whenever an over-levered and over-indebted financial system implodes. 

In good times, the bankers are seen center-stage as guides possessing a secret vernacular and talent; in bad times, they are pointing fingers at “extraneous events” or “black swans” while anxiously waiting for a bailout or bail-in.

We saw the most recent version of this pattern, of course, in the 2008 sub-prime debacle in which a handful of banks brought an entire economy to its knees. 

Private Credit, Just Another Uh-Oh Hiding in Plain Sight

But what many are not seeing today is the pattern recognition in private credit—and commercial banks—which is eerily similar to 2008. 

Then, as now, no one is seeing the lava beginning to emerge from a percolating volcano of debt gone wrong.

This is very bad for banks and risk assets. And very good, of course, for gold.

But rather than just say this. Let me show you.

In many interviews, I have singled out private credit (as well as sub-prime and AI) as among the greatest of time bombs ticking beneath our economies and markets. 

I have also argued that private equity sits on the “dark side of the force.”

Some may say this is mere gold-bug sensationalism, but even the bond king, Jeffrey Gundlach, has singled out private credit pools as today’s newest “weapon of mass destruction.”

So, What Is “Private Credit”?

In a nutshell, the multi-trillion-dollar private credit market is an amalgam of PE, VC, SPV, money-market and hedge-fund actors using leverage to make risky loans to a predominantly unknown class of borrowers. Red Flag 1.

These private lenders do so with none of the capital requirements, deposit insurance or direct Fed access otherwise characteristic of “safer” and more “regulated” commercial banks. Red Flag 2.

These lenders, moreover, are seeing default rates creeping up from borrowers like Tri-Color, First Brands Group and other sub-prime players at alarming rates reminiscent of those first defaulting sub-prime mortgage pools in the pre-08 days. Red Flag 3.

Borrowers to these private creditors, unable to make their interest payments, are desperately offering “equity” instead of cash to cover their obligations. Red Flag 4.

Such “payment in kind” (or “PIK”) trends are ominous signals of more defaults ahead.

Enter Bankers and Banking Risk

But what do any of these private creditors (and private credits) have to do with commercial banks?

Well, where do you think the hedge funds and other shadow-banking players in this rotten theater get the money to make their private loans?

You guessed it: From the commercial banks.

In other words, by directly funding the shadow-bankers, commercial banks are indirectly exposing themselves to the default risk of the private, non-bank creditors.

And if you think these private lenders aren’t stupidly risk-exposed, think again.

BlackRock, the largest and so-called smartest “death star” of the global asset management galaxy, has its own massive private credit fund—the TCP Capital Fund.

What some may not know, however, is that the TCP Capital Fund just lost 1/5 of its value in the last 90 days.

That’s a BIG Red (or Black?) Flag.

As both large and small players in the unregulated, hidden and grotesquely default-exposed private credit market start tumbling one domino at a time, the commercial banks who seeded these private creditors will once again experience an 08-like moment of credit defaults from failed underwriting and reckless mal-investment.

Nothing New Under the Sun

But then again, banks acting badly is nothing new. The recent “Silver Friday” (and entirely engineered bank bailout) was a classic symptom of banks investing badly.

Having gone levered-short in a rising silver market, the not-so-savvy “big banks” were about to get fatally squeezed. 

The CME then temporarily rescued them by raising margin costs on levered silver, which forced levered long silver players (i.e., hedge funds) to sell silver, thereby engineering a price fall to reduce pressure on the silver noose which the banks had placed around their own necks.

This was not a moment of falling silver demand, but a neon-flashing sign of cash-poor banks trapped on the wrong side of a trade they were too illiquid to face. 

As I warned weeks before Silver Friday, signs from the repo markets were already telling us that the commercial banks were dangerously illiquid and risk-heavy.

If you therefore combine the warning signs from the repo markets and the engineered silver bailout with the now percolating private credit exposure on bank balance sheets, you see all the signs of yet another banking crisis, and hence market and economic crisis, rising to center stage.

See why it’s so easy “to count the ways” to loathe banks?

All Roads Back to Gold

For years, we have warned of banking, market and hence currency riskas critical reasons to own physical precious metals outside of the commercial banking system.

As credit-risky banks and top-heavy (grossly over-valued) markets crawl slowly yet steadily toward yet another global financial crisis, investors will once again realize that flows into hard assets in general and precious metals in particular will be a far safer direction and choice.

Meanwhile, the too-dumb-to-apologize and too-big-to-fail banks will once again take zero accountability for their own mistakes as we head toward yet another banking crisis. 

They will then turn immediately toward their rich Uncle Fed to mouse-click trillions in ever-more fake liquidity to bail them out of yet another self-made fiasco. 

This “solution,” of course, just adds more water to an already embarrassingly debased (and wealth-destroying) dollar and hence more tailwinds to an infinitely more honest (and wealth-preserving)ounce of gold.

Matthew Piepenburg, Commercial Director at Matterhorn Asset Management and co-founder of SignalsMatter.com, has extensive experience in alternative investments, law, and finance, with particular expertise in managed futures, credit and equity investing. He also has years of experience researching, evaluating and investing in alternative investments: hedge funds, private equity vehicles, VC and real estate. Matthew Piepenburg's skills include asset allocation, portfolio management and macro economic analysis. He has written numerous white papers on the long-term distortions of central bank policies here and abroad. He has guest lectured at numerous family office forums, law firms and universities, including Georgetown, Brown, Harvard and Cal State. Matthew Piepenburg is also a published author and regular contributor to The Good Men Project and the author of the Amazon No1 New Release “Rigged to Fail,” which bluntly details the systemic and structural flaws behind central-bank distorted capital markets. 

All of these combined monetary distortions are directly responsible for the staggering level of currency debasement ignored in plain sight by a majority of policy makers and investors, which is why Matthew is committed to informing of, as well as addressing solutions to, these systemic fault-lines in the global system. Toward this end, all rivers flow toward precious metals as currency insurance (hence Matterhorn role in Zurich) as well as sober yet actively managed portfolio construction (hence the SignalsMatter service). 

 

 

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