As U.S. economic policy swings wildly, private capital firms are caught in a vice. They’re struggling to sell off their holdings, which means they’re doubling down on leverage, often at the expense of higher-interest debt from private credit lenders. This is a disaster waiting to happen.
At a recent conference in London, private equity players privately expressed growing concerns. They’re seeing serious risks in the form of interest-coverage ratios on their portfolio companies, which could spell trouble for the broader economy. The ticking time bomb is clear, the leverage these firms are taking on is unsustainable.
One prominent investor, Claire Madden from Connection Capital, summed up the situation: “Too much money has flown into the private credit asset class.” She’s right. We’re in a cycle that hasn’t seen a downturn in ages, and the longer we go without one, the more vulnerable these firms become. They’re betting on a stable market—something we haven’t seen for years. When it falls apart, the shock will be felt everywhere.
This situation is reminiscent of the 2008 collapse. Back then, the financial world was convinced U.S. home prices would keep climbing forever, only to be blindsided when they didn’t. But this time? It’s going to be much worse. 2025 was supposed to be another year of growth, but it’s quickly unraveling. From here on out, the situation is only going to deteriorate. Investors are loading up on AI and leveraging massive amounts of debt to prop up their strategies. When the music stops, it will be a crash of epic proportions. The stage is set for a financial crisis, and no one seems to be paying attention.
Looking at the data, it’s clear that we’re nearing a breaking point. Borrowers are paying more for money now than they did in 1999 and 2006, levels that signaled severe complacency before past crises. The rise in risk is unmistakable, and it’s just beginning. This is the moment when everything starts to unravel.
But while all this is happening, investors continue to throw money into the market. BofA reported the third-largest weekly inflow into equities ever. It’s as if they’re betting that this time will be different, that the market will bounce back like it has in the past. Spoiler alert: It won’t.
Meanwhile, the New York Fed’s manufacturing data paints a grim picture. The actual reading of -20 is a stark contrast to the forecasted -1.9, showing just how far the economy has slipped. This is a symptom of deeper issues, and anyone pretending otherwise is in denial.
And don’t get me started on the political implications. The GOP’s obsession with cutting government spending in a slowing economy could send the U.S. into recession. The paradox of thrift will hit them hard—and they’ll learn the lesson the hard way. As for Trump, his record-breaking deficits are about to get even bigger. If he continues down this path, his post-WWII deficit will soon be the largest in history again.
The clock is ticking, and the coming financial crash will be more brutal than anyone is ready for.
Sources:
https://finance.yahoo.com/news/five-charts-show-credit-complacency-190000091.html
https://fred.stlouisfed.org/graph/?g=1EB1O
https://x.com/LanceRoberts/status/1901580152737239474
https://x.com/Mayhem4Markets/status/1901621835885605233