Most important take away

A credit cycle is emerging in private credit, a $1.8 trillion market that grew from just $300 billion a decade ago. The sector is dangerously overexposed to software companies (estimated 25% of direct lending loans), whose valuations are declining due to AI disruption, and multiple major funds (Blackstone, BlackRock, Morgan Stanley, Cliffwater) are hitting or exceeding their quarterly redemption caps as investors rush for the exits.

Summary

Market Overview: With the Iran war ongoing and the Straits of Hormuz closed, oil remains above $100. The S&P 500 is down 4% YTD and NASDAQ down 5%. Treasury yields have risen from 4.0% to 4.3% since the war began, as investors fear prolonged conflict will reignite inflation. Treasury Secretary Besen confirmed no plans to intervene in oil markets.

Actionable Inflation Insight: Oil above $100 is driving up fertilizer prices (the Green Market’s North American index rose 43%, from $700 to $1,000 per short ton) and will soon push airline ticket prices higher. If the war ends quickly, inflation impact is negligible; if it drags on months, expect meaningful inflationary pressures in the US.

Private Credit Risks — Key Actionable Insights:

• Redemption pressure is real and growing. Blackstone’s BCRED ($82B fund) saw 7.9% redemption requests against a 5% cap. Cliffwater saw 14% requests against a 7% cap. Morgan Stanley and BlackRock funds also exceeded caps. Expect elevated redemptions for several more quarters.
• Software loan exposure is the critical vulnerability. An estimated 25% of direct lending loans are to software companies acquired by PE from 2018-2022 at high valuations. AI is threatening these business models. Apollo’s co-president John Zito publicly expressed concern about these lower-quality software companies, noting Apollo itself has only 2% software exposure.
• Refinancing wall ahead. 11% of software loans need refinancing in 2027 and another 20% in 2028, at significantly higher interest rates than when originated.
• JP Morgan is proactively marking down private credit software loans below par and restricting new lending to software companies — a warning signal that other funds may still be overvaluing these same loans.

Stocks and Investments Mentioned:

• Apollo (APO): Positioned relatively well with only 2% software exposure vs. 25% industry average.
• Blackstone (BX): Its BCRED fund is the largest private credit fund at $82B and is facing redemption pressure.
• SoFi (SOFI): Its SCLP 2025-1 securitization breached its cumulative net loss trigger (2.97% vs. 2.60% threshold), meaning SoFi loses its spread income until investors are fully repaid. A second securitization (2025-2) may breach soon. This is potentially a disaster if securitization investors lose confidence in SoFi paper.
• Carlyle: Created a novel “collateralized fund obligation” (Project Potomac) to bring in new investors to buy out old ones — a sign of PE liquidity stress.
• Go Easy (Canadian subprime lender): Stock fell 60% after revealing it booked loan payments as revenue before collection — premature revenue recognition.
• NVIDIA (NVDA): CEO Jensen Huang expects $1 trillion in purchase orders for Blackwell and Vera Rubin chips through 2027. AI spending shows no signs of slowing despite critics.

Drug Pricing Discussion: Mark Cuban’s Cost Plus Drugs model (wholesale + 15% markup for everyone) aims to reform drug pricing through transparency. The US drug pricing problem is largely driven by perverse incentives in the delivery system (particularly PBMs), not just drug development costs. Generic drugs are actually cheaper in the US than other developed countries; the cost problem is concentrated in branded drugs (10% of prescriptions).

Chapter Summaries

War and Oil Impact on Markets: The Iran war continues with the Straits of Hormuz closed. Oil above $100 is driving inflation fears, pushing Treasury yields from 4.0% to 4.3%. Fertilizer prices up 43%. Treasury Secretary Besen says no government intervention in oil markets is planned.

AI Investment Landscape: Despite ongoing debate about whether AI spending will generate sufficient returns, NVIDIA’s Jensen Huang projects $1 trillion in chip orders through 2027. No signs of AI spending slowing, unlike the dot-com bust parallel some critics draw.

Private Credit Explained: A deep dive into the $1.8 trillion private credit market — its structure (direct lending, asset-backed finance, distressed credit), its players (BDCs, often owned by PE firms like Blackstone), and the circular nature of PE firms lending to themselves for buyouts.

Private Credit Risks — Retail Exposure and Redemptions: Private credit funds expanded from institutional to retail investors, offering capped quarterly liquidity (5-7%) on inherently illiquid assets. Multiple major funds are now seeing redemption requests far exceeding caps.

Recent Private Credit Events: A rundown of nine significant developments including Blackstone/BlackRock/Morgan Stanley redemption breaches, JP Morgan marking down software loans, Carlyle’s creative securitization structure, new lending fraud at MFS, Go Easy’s revenue recognition scandal, and Apollo’s John Zito’s candid warnings about software loan quality.

SoFi Securitization Tutorial: An explanation of how securitization works, why lenders need it for leverage, and how SoFi’s securitization breached its cumulative net loss trigger — potentially threatening SoFi’s ability to fund future loans.

Drug Pricing and Cost Plus Discussion: Responding to a viewer question about drug price regulation, Eisman argues the problem is the non-transparent delivery system (especially PBMs and rebate structures) rather than innovation costs. Mark Cuban’s Cost Plus model aims to fix this through radical price transparency.