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El Fin De Semana "BRRR" - Someone Enhanced My View of Private Credit...And other things to know this weekend...
Good afternoon, everyone: Some notes for you on a Saturday… an emphasis on private credit and a shift in what could trigger a broader, slower retirement crisis instead of a full-blown meltdown… As always, I’ve attached the transcript for this weekend’s video. Not a member? Join MMP… and even MMP Elite to get access to the 502 Stock Momentum Screener while it’s in development… Stay positive, Garrett Baldwin Transcript. It’s been a nice couple of days since the birthday, and the day off yesterday was well deserved after a little bit of a chaotic equity market. We’re going to do a little bit of a weekend review like we always do. We’re going to talk about one chart that you really need to follow, sourced from FactSet, breaking down what’s going on with the S&P 500 as we move toward earnings season, which is kicking off really this week. We’ll talk about dividends and earnings contributions and everything that comes with it. PE compression took 10.5% off of the S&P 500 while earnings grew 5.1%. If you listened to what we talked about at our 2026 outlook, the focus was on the backside of the liquidity cycle and earnings compression. Earnings compression is the opposite of earnings expansion. Earnings expansion since 2023 was just an environment where people were willing to pay more for the same thing. Now we’re starting to see the other direction kick in, similar to what we saw in 2022. Q1 kicks off this week. FactSet is pretty optimistic at 13.2% growth, but zero Fed cuts are priced. We’re going to talk about what bond traders are doing right now — giving up on easing — and a little bit of a reminder about credit stress, what’s happening in private credit, and what’s happening in momentum. From the big picture, this is, I think, the most important chart to kick off Q2 because we’re going to start to analyze what’s going on in the equity markets. I want to take you back to 2022. The S&P 500 fell 25% in 10 months. What happens in this environment — remember, price-to-earnings, a lot of focus on price-to-earnings. I typically don’t care about price-to-earnings. I look at enterprise value to earnings before interest and tax when looking at companies. But PE ratios still dominate the narrative, still dominate everything that comes with the news cycle, and particularly when we’re looking at reports coming out this week. The key term this week is valuation compression — that means PE multiples are declining. One of the things we see in these boom markets, particularly in cycles, is earnings really become an expansion and a rationale for people to pay more for the same thing. This happened during the dot-com bubble as well. If you go back and look at the Shiller CAPE ratio, you see that across the market, people will be willing to pay 20 times earnings, then 21, 22, 23, 24, 25 — and it goes up and up. Well, then on the backside, it compresses. At some point people say, I am no longer willing to pay the same price that people were a week ago. And you start to see valuation compression. You can see during the 1920s it just went up until that crash. Then the start of the cycle in the early ’80s led us to the top point of the dot-com bubble where people were paying unreasonable amounts — not just in earnings, but also price-to-revenue. The fact that people were paying price-to-sales at multiples of 20 years was crazy. Once we hit the ’08 cycle and started quantitative easing, valuation expansion kind of became the norm. But in the post-COVID era, what we’ve seen as monetary expansion happened through these last two cycles — we saw a significant move toward the end of 2021, we peaked, and then we rolled over. The cycle peaking around October, November of that year, we saw compression that led us to the lows, which ultimately were the gilt crisis. A pretty sizable move too — 38 times earnings down to 28 times earnings. That’s a big decline. In this event, we went higher on the PE ratio and the Shiller ratio, and we’ve been pulling back since the top of the cycle. So as we look at this right now, what we have to pay attention to is the idea that companies can report great earnings, they can show us they’re really doing everything right, firing on all cylinders — but if we’re on the backside of this cycle and valuation compression really kicks in, that multiple compression will offset, if not make it worse than what the earnings and dividends are contributing. That’s part of the reason we’re seeing that 5.1% downturn at the same time. Multiples are contracting while earnings are growing. Investors are deciding that the future is worth less than the present — that’s the academic way of looking at it. But from the waterfall theory that we subscribe to of liquidity, momentum, and everything else downstream, this is very comparable to what occurred in 2022. The markets are likely going to, if we do not see some sort of monetary expansion — the long-term cycle going back to 2018, something I wrote about this morning in Chart Party — take us somewhere in the range of 5,400 to 5,500. That’s the most bearish case. And it’s obviously built around the compression and the drain of capital and liquidity in the financial system and how that impacts investor sentiment and multiples. Currently, forward PE expectations are sitting below the five-year average of 19.9. I don’t want to sound like I’m being that bearish — I just want to point out that in a world of cycles, particularly post-2017, this is kind of how the market has behaved. Lower highs, lower lows, very similar to 2022. Along the way there will be squeezes, pops, hated rallies, and moves from oversold up to overbought and then a contraction back. What happened in 2022 was the start of the backside of that cycle, kicking in November 2021. On the weekly chart, COVID hit, we squeezed higher, the cycle peaked in late 2021, and we started this process of lower highs, lower lows. We squeezed into the summer. Ultimately something broke at the end of 2022 — that was the gilt crisis in England. We started to see monetary policy changes from a number of central banks around the world, including the Fed with a little bit of a pivot on how they were handling mortgage-backed securities. The Bank of England started the week by raising rates and by the end of the week they were printing money. China really started to fully reopen its economy on the backside of COVID. And there were a number of other changes done in terms of the Treasury helping to provide what CrossBorder Capital defined as “stealth QE” — considered non-yield-curve control, but a form of it. In addition, the Bank of Japan clearly running loose monetary policy on the backside of this. As we analyze this market and assess what things will look like, the big picture story that’s going to be told through CNBC and all the other groups is earnings-focused. Earnings are a big deal to the financial media because it gives you content every day — something to talk about, optimism. This is where you get ping-ponged, because one day a company like Delta might say it’s not as bad as it looks involving jet fuel, and then a week later another airline comes out and says doom. Don’t get caught in this. Focus on the longer-term cycle. But it is important to note that FactSet said in their Earnings Insight from Thursday: 13.2% expected year-over-year growth. That would be the sixth straight double-digit quarter. Estimated earnings of nearly $630 billion, revenue growth of around 9.7%, and forward PE of 19.8. The guidance is interesting — 59 positive versus 51 negative. That is unusually optimistic given the current state of affairs. The upward revisions are concentrated in tech and energy. If you strip those two out, estimates are actually flat. The earnings roadmap according to FactSet looks like: 13.2% now, 19.1% in Q2, 21.2% in Q3. That’s an interesting number, and we’re going to see how it goes. This week we’ve got Levi’s kicking off on Monday — important consumer figure, obviously a company that may be impacted by tariffs. Delta — we want to get that forward guidance on the airlines, really understand what’s happening with jet fuel and consumer spending heading into the traditionally busy summer travel season. And the ISM Services kicks off Monday at 10 o’clock. Now, this is where everybody gets distracted around Fed interest rate cuts. Bond traders ended the week betting the Fed will keep interest rates steady this year. I don’t care about the interest rates because at the end of the day, we saw markets move much higher in 2023 and 2024 in that regime of higher for longer. That had a lot to do with the liquidity cycle and the expansion of capital we’ve been talking about, citing the work done by Michael Howell. Bloomberg reported Friday that traders erased what little remained of their wagers on Fed easing in 2026. This leads to that ping-pong effect — a week ago we’re cutting rates, a week later we’re raising rates. It feels as though we’re lost in this narrative that has largely failed to be explained properly since 2008. As we’ve noted, SOFR — the Secured Overnight Financing Rate — is way more important. Trillions of dollars overnight in terms of management versus the Fed funds rate, which is really just used as an arbitrage for international banks. It’s a very small pool, but it does set the guidance. I’ve written about how the financial system was rewired after 2008. It’s all out there, widely discussed in policy circles, but nobody reads the reports. Nobody reads the Bank for International Settlements. Nobody cares what the Federal Reserve writes about. They just care what color tie Jerome Powell is going to be wearing at the next Fed event. The news will lead to reactions in this market — different types of swings in intraday momentum. But the longer-term points to, in my view, who cares unless they’re going to raise rates and do so aggressively. Treasuries fell after the better-than-expected March jobs report. I went through that jobs report and showcased there’s a lot of cracks in the system. Even though that number was much higher, the reality was it came in above expectations at 178,000 — but 35,000 of those jobs were people coming back from a strike. Think about what’s happening. Oil’s above $112 — it’s an inflation accelerant. Gas is over four bucks. The jobs report headline number came in well above expectations, which kills the last argument for cutting rates according to the policy wonks. So the Fed is stuck. They can’t cut because the inflation risk is rising. They can’t hike because the labor market is showing cracks underneath that headline. And oil is an exogenous shock they can’t control — you can’t print more oil. No rate cuts plus an oil shock plus private credit stress is this trifecta that can help explain part of the PE compression, but not fully all of it. That’s where the focus on liquidity, SOFR, and the impact of haircuts in the financial system matters immensely. The market isn’t falling because earnings are bad. It’s falling because discount rates are impacted as well — what people use to value future cash flows is potentially staying higher for longer. And that changes how people price growth. Higher for longer is the base case now and will be the dominant narrative for weeks ahead. I do want to talk about private credit because this is literally the most important story in the world. If we were not in the middle of a war, this would be on the front page of the Wall Street Journal every single day. We’ve covered Blue Owl and the gates extensively. We’ve warned about private credit going back to August and September of last year. We’ve talked about the impact of the Japan crisis and the ongoing issues there combined with private credit and how this impacts insurance companies across the board, not just in the United States but internationally. A recent Reuters piece dropped Thursday. They talked to about a half-dozen people across the industry, and the consensus splits into two camps. Some think it’s a tempest in a teapot. Some think it’s about to spark a new financial crisis. I’m going to put myself right there at about a six or seven on a one-to-ten scale. I’m not going full-blown financial crisis yet, but I’ve shown that the domino effect and how those things operate — without transparency and so much opacity — can happen very quickly. Javier Coramines at Oxford Economics said the market is already in the early stages of a rolling crisis in private credit. He estimates that about 25% to 35% of these portfolios are already subject to AI disruption risk. That’s not a small number in a world where default rates at just 10% can cause a massive problem. Alberto Gallo at Andromeda Capital put it vividly: you have a box with 100 companies, but you know that 10 of them are dead cats. Until you open the box, they’re still alive. That’s basically what they’ve created. Until they actually open the books and show you what’s in these portfolios — which so many are not willing to do — you would discover who those 10 out of 100 companies are, and they’re effectively wastelands. On the other side, John Giordano at Seaport Global pushed back, saying business development corporations have low leverage, hold senior debt, and the banking sector is well capitalized. He doesn’t see systemic risk yet. But the number that matters most is Coramines at Oxford Economics flagging the insurance channel. As we’ve seen in momentum, so many insurance companies continue to be at the bottom of the list in terms of momentum, lack of insider buying, and deeper concerns about what’s happening. Private credit now accounts for around 35% of U.S. insurer investments, according to this report. They need long-duration income, but they’re now stuck. In the U.K. it’s about 25%. Insurers affiliated with private equity firms hold an estimated trillion dollars in assets acquired through these relationships. That means the exposure to private credit losses falls disproportionately on U.S. pension funds — think of the cities, think of the teachers’ unions — and on the retail savers who bought life annuities from those insurers. His exact quote: should private credit losses erode insurer solvency, the resulting contagion would not resemble the bank-run dynamics of 2008 but would instead manifest as a slow, grinding erosion of retirement security — harder to detect in real time and significantly more difficult to reverse. I think this is the first time somebody has put it this way, and I absolutely agree. It’s no longer a situation where you’re waiting for a sudden implosion in the financial system, but instead this grinding erosion — the frog in the pot as you turn the temperature up. This gradually-and-then-suddenly feeling is manifesting at the same time as a report I wrote this morning covering a Yahoo Finance article noting that four in ten Americans are willing to take a 30% haircut on their full Social Security benefits and take what they can get at 62, because they don’t believe the system will keep its promises eight to ten years out before they hit 70. You have this deeper issue happening with our public retirement system, and now the impact of what could potentially happen in retirement security for pensions and life annuities. That is a completely different type of challenge than what we saw in 2008 or 2022. If I don’t have Social Security, and now the threat of my private pensions and private retirement security is in play — how do they address that? If you look at certain pension systems across the United States, one of the solutions to the holes has been to raise taxes, places like Chicago. People leave, or taxes go up and you start to stifle the people paying into those systems. We are witnessing another manifestation of a retirement crisis that continues to build. Partners Group Chair Stefan Meister said last month that default rates in private credit could double over the next few years, owing to AI-driven disruption. BDC share prices are now trading at roughly 20% discounts to their net asset value. The Software Services Index is down 20% year to date. You see this exposure happening in the insurance industry — 35% of investments reportedly in private credit, a trillion dollars in PE-affiliated assets. We talked about Apollo and Athene and their merger, KKR buying Global Atlantic. Different animal, different contagion channels. Regulators always fight the last crisis, as Gallo said. But it’s that slow, grinding erosion of retirement security — harder to detect, more difficult to reverse. Interestingly enough, there is a contrarian signal: significant insider buying since late February in the BDC space. And remember the argument from Giordano at Seaport — low leverage, senior debt. That’s important. Sixth Street — the founder bought $10.8 million. Five insiders bought $10 million in two days. New Mountain, $10 million. Six insiders, three escalating buys. Hercules Capital, Trinity Capital — all of these prices are down. TSLX is getting beaten up hard. FS/KKR — very problematic, was at $22 last summer, down to $10.50 now with gating concerns. But here’s the key thing. Let’s imagine a world where regulators get together, as called for by the U.S. Treasury Department, and they say we’ve got holes we have to plug. Plug the pension system so people don’t lose confidence. Plug what’s happening within the broader financial system to ensure there isn’t a liquidity crisis. Lyn Alden’s figure of $2 trillion, which she’d consider a big print — let’s say they do that. Something breaks and they say the credit system is completely falling apart, we’re going to print $2 trillion. What’s going to do really well? In a financialized economy, it’s going to be plugging the holes. If we look at TSLX — Sixth Street — it’s been getting banged really badly since the top of the cycle. Significant insider buying. They’re buying in that $18 to $19 range. Keep that in the back of your mind. Keep the whole list in mind. Look at Nuveen Churchill, NCDL — this is getting really beaten up, down 50%. What happened in previous crises when we saw monetary expansion or policy accommodation? 2016, China — TSLX went from $12 to $17. COVID — we injected trillions over a weekend, $10 took you to $23. The gilt crisis, bottom of that cycle — $15 took you to the top at $24. And by the way, they’re paying double-digit yields. So all of these BDCs, if there is suddenly a “we’ve got to print” moment — and the insiders were buying, and you know exactly where they were buying — we’re going to be in on some of these names. It’s like AIG. Every major monetary policy action has accommodated the long-term insurance mindset. The European crisis — AIG from $21 to the top of the cycle at $64. COVID, the top of the cycle, selloff, pop — then higher after the bottom. AIG is a massive canary when it comes to combining AIG with insider buying activity to identify if and when policy accommodation is coming. Right now the insiders aren’t buying AIG. There’s no major event giving us a ton of confidence. But we want to be patient. We want to wait this out. Look at FSK — it was always a gold standard in this credit space. In 2020, a couple of bouncers from $15 up to about $24. But on the daily chart, this thing’s getting crushed — was at $22 last summer, down to $10.50 now, gating concerns. That dividend looks attractive, but you’re not going to get me chasing this yet. These become the names in the world of financialized systems that — again, lower leverage and senior debt — these are the types of things I’ll be looking for when and if that expansion or action comes, or they create some new program designed to stabilize this system through some backdoor. I’m not going to say it’s going to happen exactly like that, but it’s probably going to happen exactly like that. This is just kind of how it all works. We’ve changed the rules so much since 2008. People keep saying there’s no way they’re going to bail this stuff out, no public appetite for it. There will be if the pension system is screwed, if people’s pensions are under pressure, if security is under pressure. You’d be shocked. So when we look and listen and pay attention to what’s upstream in the liquidity world, and we look at momentum, and we start to see some policy possibilities, and we start to see insiders buying at an extreme level — then yeah, I’m going to be buying Blue Owl Capital after crapping on it for six months. Because that’s the way it works. That’s the system we operate in. On the positive side, the things that get me out of bed and excited every day — it’s all about momentum. Very important to note that the top 10 strongest momentum stocks in the S&P 500 right now: EchoStar, Communications, up to 81, up 15% — a lot to do with M&A activity. Citizens Financial picking up at 75. Entergy, a utility score of 74, up 11.7%. Archer Daniels Midland and Bunge continue to show strength — a lot of focus on consumer defensives and the expectation of rising food prices. Apache (APA), strong energy momentum. Intel continues to showcase strength — the one tech name, a deeper value turnaround story, not a true momentum growth play. Merck in healthcare. eBay picking up a little as a value name. And Sempra. What’s the pattern? Utilities, consumer defensives, energy, healthcare, cheap stocks, real assets, inflation hedges, defensive yield. This is not a bull market rotation. This is a risk-off rotation. The bottom 10 is where it gets problematic, but these are names to keep an eye on as well. Remember, Progressive is here — insurance company. Ameriprise. Apollo — private equity. MasterCard and Visa continuing to showcase extraordinary weakness. Six of the bottom 10 are financials: S&P Global, Progressive, Aon, Ameriprise, Apollo Global Management. Apollo is the third weakest stock in the entire S&P according to our multiple momentum model. Dead last: Visa and MasterCard — the two biggest consumer spending proxies in the market, and they’re the weakest momentum names in the index. Think about what this means. When Visa and MasterCard are breaking down, it’s not just about those companies — the market is saying consumer transaction volume is under pressure. There are regulatory concerns in Europe as well, but the worry is that people are going to pull back and spend less. When Apollo, Ameriprise, Aon, and Progressive are all in the bottom 10, that’s the market telling you the financial plumbing in the economy is showing strain, and the private credit story isn’t just in the headlines anymore — it’s the price action. The rotation is the message. Money is flowing out of financial infrastructure and the pipes that move capital, and into real assets and defensive yield. That’s not a correction. It’s a regime change — for now. Let me tie this together. Busy week coming up. Monday: ISM Services and Levi Strauss. Delta reporting Tuesday. Multiple Fed speakers this week — look for any shift in language around no cuts. Private credit will continue to be the main story. The war is on as well. And the FactSet Earnings Insight for Q1 will be provided next week. This is a reminder that it’s very important to know what you own. We are in a very unusual pattern right now. Oil is very high. Private credit is in the early stages of what Oxford Economics has called a rolling crisis. The real exposure sits in the insurance side that holds annuities and pensions, at the same time we’re seeing the early conversation about Social Security and retirement in the United States. I think that may be one of the rationales if we do get some sort of policy accommodation in the future. The insiders disagree with this panic — 17 BDC vehicles had insider buying since February. Founders putting $10 million of their own money in. That’s not something you ignore. But momentum confirms the stress. We remain negative. Defensives and real assets are leading. Financials and consumer spending proxies are breaking down. The market is rotating from the future to the present, from growth to value, and from paper to real. Know what you own. Take the time to answer that question: why do you own everything in your portfolio? If you don’t have a good answer in the first minute, why do you own it? Let it go. Think about the opportunity costs. Cash is a position in this market. We’re still a ways away from having good insight on when this war could be wrapped up. Oil markets seem to expect something will be done in the next month based on the backwardation between the May and June spread. The June and December spread backwardation is absolutely manic. We’ll see whether the longer-term futures start to rise with the reality of higher for longer, or whether we see some sort of accommodation or resolution to this war soon. Tomorrow I’ll be releasing Postcards from the Edge of the World, and that will include the Hedge of Tomorrow 2.0 report. It’s a very long report — I’m going to warn you. It’s taken us about a month to put together. But it’s a reminder of the importance of patience in this type of environment and the types of assets you’ll want to focus on if and when there is some sort of accommodation. That could come next week. It could come in 12 months. But right now it’s about getting you mentally prepared to understand how these cycles have operated — specifically since 2008, but really going all the way back to the early 1970s when Jerry Tsai was at Fidelity and momentum really came into vogue. While momentum was very strong, it also led to catastrophic losses for people who were not prepared and didn’t have the tools we have today to manage and stay ahead of significant downturns. All right everybody, have a great day. Talk to you soon. Stay positive. Keywords valuation compression, PE compression, Shiller CAPE ratio, earnings expansion, earnings compression, FactSet Earnings Insight, Q1 2026, 13.2% earnings growth, forward PE 19.8, S&P 500 5400-5500, 2022 comparison, liquidity cycle, backside of cycle, gilt crisis, stealth QE, CrossBorder Capital, Bank of Japan, Bank of England, SOFR, Fed funds rate, higher for longer, zero rate cuts, March jobs report 178K, oil $112, WTI, Brent, gasoline $4, stagflation, ISM Prices Paid 78.3, private credit, rolling crisis, Oxford Economics, Javier Coramines, Alberto Gallo, Andromeda Capital, John Giordano, Seaport Global, BDC, business development corporations, TSLX, Sixth Street, NCDL, Nuveen Churchill, FSK, FS/KKR, Hercules Capital, Trinity Capital, Blue Owl, insider buying, AIG, insurance channel, pension funds, Social Security, retirement crisis, Apollo, Athene, KKR, Global Atlantic, Partners Group, Stefan Meister, Lyn Alden, $2 trillion print, momentum rotation, EchoStar, Citizens Financial, Entergy, ADM, Bunge, APA Apache, Intel, Merck, eBay, Sempra, Progressive, Ameriprise, Aon, S&P Global, Visa, MasterCard, risk-off rotation, regime change, Levi Strauss, Delta, ISM Services, Chart Party, Postcards from the Edge, Hedge of Tomorrow 2.0, Jerry Tsai, Michael Howell, Brent Johnson, backwardation, oil futures spread YouTube Description In this weekend review, Garrett breaks down the most important chart heading into Q2 — the FactSet data showing PE compression took 10.5% off the S&P 500 while earnings grew 5.1%, a dynamic eerily similar to the 2022 backside-of-cycle drawdown. He walks through the Shiller CAPE ratio history from the 1920s through the dot-com bubble to today, explaining why valuation compression can overwhelm even strong earnings growth when liquidity is draining from the system. The session features a deep dive into the Reuters private credit investigation, with Oxford Economics calling it a rolling crisis, 25-35% of portfolios exposed to AI disruption risk, and the critical insurance channel where 35% of U.S. insurer investments now sit in private credit — with the exposure falling disproportionately on pension funds and retail annuity holders. Garrett maps out the contrarian BDC insider buying signal across Sixth Street, New Mountain, Hercules, and Trinity Capital, and explains why these names become the prime beneficiaries when policy accommodation eventually arrives. He also covers the S&P 500 momentum rotation — top 10 dominated by utilities, energy, and consumer defensives while six of the bottom 10 are financials including Apollo, Visa, and MasterCard — and why this risk-off rotation signals a regime change, not just a correction. Bond traders giving up on Fed cuts, oil above $112, the March jobs report’s misleading headline, and the upcoming Hedge of Tomorrow 2.0 report round out the discussion. About Me and the Money Printer Me and the Money Printer is a daily publication covering the financial markets through three critical equations. We track liquidity (money in the financial system), momentum (where money is moving in the system), and insider buying (where Smart Money at companies is moving their money). Combining these elements with a deep understanding of central banking and how the global system works has allowed us to navigate financial cycles and boost our probability of success as investors and traders. This insight is based on roughly 17 years of intensive academic work at four universities, extensive collaboration with market experts, and the joy of trial and error in research. You can take a free look at our worldview and thesis right here. Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.
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