Full Transcript: Ben Hunt on the Cracks in Private Credit

Has the Bear Stearns Moment Arrived?

Matt: You are watching excess returns. I’m Matt Zeigler, Ben Hunt, founder of Epsilon Theory, Perscient, and a whole bunch of other P words you’re about to hear much more of in the coming weeks is with me. You know him for analyzing financial markets through the study of narratives, game theory, and all the socio psycho behavioral perspectives.

IE, not just fundamentals, and this recent piece, it’s the smart move coupled with his shadow banking presentation that he did for Perscient Pro members. I saw these, I said. We have to talk about this on excess returns. Welcome back, Ben.

Ben: It’s so great to be back, Matt, and man, you do the best intros. There’s no one better than you for intros.

Matt: Well, we gotta, we, we gotta keep it a buck here, I think is how the kids are saying it these days. So I’m an advisor, I’m an allocator. We’ve been using private credit for years and for the last couple of years we’ve started to be worried about private credit because. These nagging little stories would come out about, you were really, and you’d hear about a fund going into, Malaysian motorcycle lease financing and stuff.

And you’d go, what? Really? Why not? Yeah, yeah, why not? But it’s like there’s been smoke in a little fire and not much, and then first brands and tricolor happens. You launched this piece, and I know you mean business. When we lead off with the Tessio funeral scene and it’s the smart move, Tessio was always smarter.

Unpack the Godfather reference. I have to start there.

Ben: Well, thanks for noticing the Godfather reference. It’s been a while. I mean, it’s been a minute I’ve, I kind of cut my teeth with Epsilon theory with lots of Godfather references, so it’s, it’s been a minute since I’ve been able to. Implement one successfully.

So I was really pleased with this. So look, Tessio of course is the, the traitor within the family, and I think we’re all kind of familiar with, with the scene that Veto the Godfather before he dies tells Michael, what? Whoever inside our family comes to you. And says, let’s meet up with Barzini, the external villain.

He’s gonna be the traitor. And sure enough, it’s Tessio. Tom Hagen the Coner. He says, yeah, I always thought it would be Clemenza. The other lieutenant for Vito, the Godfather, and Maggie says, Nope, no, it’s the smart move. Tessio was always smarter. And of course they figure it out. Tessio gets what’s coming to him, and at the very end, I just love this line too.

After Tessio asks Tom Hagan, Hey, can you, can you get me off for old time’s sake? Tom says, sorry, Sally no can do. And Tessio last lines says to Tom Hagen. I tell Mike it was only business. I always liked him, and I thought of this because when it became clear that the both first brands and Tricolor were betrayals.

In the same way that Madoff was a betrayal. Sam Bankman Freed was a betrayal. Elizabeth Holmes was a betrayal. All frauds are betrayals. And I, I thought about Tessa because it, it hit me that in all of those cases, Sam Beckman, free Madoff, Elizabeth Holmes. First brands in Tricolor, and this is true for every fraud, and I’ve looked at a lot of ‘em and written about a lot of them, that what always happens there at the end, they go to someone who trusts them and says, Hey, I’ve got a, I’ve got a great deal for you.

Madoff did this. Sam Beckman free did this. They all do it. It’s always someone you trust. And they always come to you with this great deal that’s going to get them out of trouble. And it, it really struck me that this is the time where we all need to be. I’ll say have some our spidey sense up and some when people come to us with deals.

In this environment after the shocks, we’ve had the, the real economic shocks that basically drove both tricolor and, and first brands to desperation and bankruptcy. I think now’s the time to be a little, I’m not, I’m not saying that whoever comes to you with a deal these days is, is a tessio. I’m saying it deserves some heightened scrutiny.

Matt: It’s interesting that it’s, now that we’re at this part of the phase, and most of the time when somebody comes to me with a 2000 or 2008 or a 2006 even reference, I wanna check it out the door. But in this case, and we’re gonna flash a bunch of the slides from this presentation as we go here. So watch, if you’re not watching this on YouTube, you wanna be on YouTube for this one.

The same script, this slide. You’re talking about shadow banking then versus now, and how financialization of different sectors parallels 2008 here. This is the first time I feel like this is warranted in a minute here, so unpack what’s going on in shadow banking then versus now.

Ben: It’s, it’s such the same dynamic because what always happens in this. Later stage of any financial cycle is that the, the firms themselves, and this would’ve been the commercial banks in 2007 today, it’s, we used to call ‘em Shadow Banks. I think today they prefer the term alternative asset managers, the.

So, so for example, Apollo would be an example. Blue Owl would be kind of a, probably the best two known in that, in that world. Alternative Asset managers, Blackstone for sure. Right. What always happens at this stage. And by this stage, I mean we’re kinda long in the tooth, right? you mentioned we’ve, if you’re, if you’re a financial advisor, if you deal with other people’s money at all, you are pitched to these deals.

Private credit deals I’m referring to constantly, probably multiple times a week. If you’re at a big shop, and this has been going on for years now, for years, and there are all sorts of vehicles and different ways you can play it and types of. Offerings that come your way. BDCs, be a funder for a lending facility, buying loans out of a warehouse facility, giving money to a manager who’s going to create a portfolio of such and such characteristics.

All these kind of deals, we’re late in the game. And what always happens when you’re late in the game is that. The banks shadow bank or commercial bank, they build their business to be, I like to call them flow machines, FLOW, flow machines. That is, it’s not just about making a loan and then, oh, I keep that, I made a good loan.

Good. That’s, that’s a, that’s a good investment for me. That’s not where the money is. The money is being a one-stop shop to do every step along the way. Originating the loan, negotiating and structuring the loan, funding the loan, and then most importantly, selling the loan, getting it off your balance sheet, selling it to someone else.

That’s what all these companies have done. They have become these flow machines where, making good loans to private companies. That’s nice if it happens. But the goal here is to create this machine just to flow. And once you create a machine of flow, the goal then becomes just push as much fuel IE capital.

Through that machine that you’ve built, as is humanly possible.

What has happened, and this happened in from oh 5, 0 6 and oh seven culminating in oh eight, also been happening here for actually more years, is that there’s an intentional complexity and muddiness opacity to the structuring of this. Of the system, for example, of loans to a First brands, it’s intentional because it creates informational asymmetry between the Apollo or the Blue Owl, the, the, the entity that knows all the pieces and all the players.

And you. Now you understand this. We’re not, we’re not stupid. We know that we’re on the wrong side of that informational asymmetry.

And we have this level of trust with the entity, whether it was that commercial bank, the Wachovia, the wamu, the city, the Wells Fargo, the Countrywide, which became part of, of B of A. So we have some trust that this entity. It’s not gonna do us wrong, but the big similarity here is that when that trust is broken, and there was a clear moment when the trust was broken in 2007, just like I think there’s a clear moment today where the trust has been broken, then all of us funders of this system, we get nervous.

And we wonder, A, is there is the next deal that’s offered to me being offered to me by at Tessio or B? the people that I have money with, have they been played for a fool by at Tessio? Either way, you pull back as an investor, as a buyer of these deals and that. Is what creates this chain reaction starts in the real world.

Delinquencies, foreclosures in homes in oh seven

today, first brand tricolor, whatever. The two failures that Zions and the other bank regional banks were talking about yesterday starts in the real world and then it goes into the financial world. And that’s where it is right now, where the investors, the buyers of these deals are looking at it and saying, I don’t know.

I don’t think I’m going to be participating in this next deal.

So that’s where we are. And the question’s going to be, are these alternative asset managers today? As geared for capital velocity and as vulnerable to a slow down in that capital velocity as the commercial banks were in 2007.

Matt: Because inherent to that question is back to this flow story. Right?

Ben: Exactly

And so I, I, I think we’ve got a, a, a picture here of Chuck Prince who was the city group. CEO as we went into the great financial crisis, and his famous quote was that, so long as the music is playing, you’ve gotta get up and dance.

E everyone knew that the mortgage backed securities market was horribly overextended in 2007, just like today. You are nervous as an investor in these, for your clients. Everyone’s nervous. All fund, I think Bank of America did a survey asking fund managers, where do you think the next big crisis could come from?

And something like 57% said, private credit, private equity, that’s, that’s gonna be the source. It was the same in oh seven about mortgage backed securities, but. Even if you know that one day there’s going to be hell to pay, so long as that day is not today, you’ve gotta get up and dance. You’ve gotta get up and dance.

If you are immersed in that market, if you’re like city group was with mortgage backed securities in oh seven, or if you’re like one of these alternative asset managers today, you’ve gotta get up and dance If you’re a financial advisor. this, Matt, the, the risk for a financial advisor is not doing poorly when everyone else is doing poorly.

The risk when you lose your clients is when you don’t do as well as another financial advisor when you’re not getting up in dance and participating in one of these overextended markets. Let me tell you the last similarity if I can, Matt, between please what? Oh seven and today. So the same, similar type of catalyst in oh seven.

It was the Bear Stearns had these two high yield funds based on mortgage that went bad, went bankrupt because the mortgages inside today, we’ve got the catalyst of Tricolor first brand. Some other cockroaches, as Jamie Dimon would call it. You’ve got the same overextended market where even the players who are immersed in it know it’s overextended.

We’ve got a situation where everybody feels like we got, we still gotta dance as long as the music is playing,

all of the people who are immersed in it. In oh seven, I remember this so vividly, all of the analysts in Wall Street who would cover this, all of the management teams. For the big banks, they would all tell you, like I say, yeah, there’s, it’s gonna be a problem one day, but we’ve got time. We’ve got time.

That same quote from Chuck Prince, he’s saying, yeah, when the, when the liquidity stops, there’ll be some complications, but they’ll be manageable. Ring fences, they’ll be manageable. They’re really is. So that what you’re, what you’re going to hear from analysts, what you’re going to hear from management is that, yeah, there’s some problems but it won’t get out of hand and it won’t deteriorate too fast.

And that I think is because they are underestimating the degree to which. those of us who are on the other side, the ones who are investing in these deals, they are terribly underestimating the degree to which we feel betrayed, the degree to which we do not trust, and the degree to which we will pull our funding.

Matt: I wanna draw a connection because. Yeah, there’s a common knowledge aspect to this. And I want to take us back for a second to a breaking news that we recorded with, with Jack Forehand on this too. And this was the Biden, the Biden debate that went awry. And you said, emperor has no clothes.

Everybody now knows that. Everybody knows. And that changes the complete dynamic. Even though that feels like a relatively minor incident because that’s the trust mechanism, that’s the, all of a sudden everybody knows we don’t believe this is story and all of our neighbors are saying the same thing.

I was watching this and I was saying, okay, I know what I think about Joe Biden’s cognitive abilities, his mental competence for the job, but I, I’m still, I’m still kind of leaning towards the guy, honestly. And then we all saw what we all saw, and you could just see the common knowledge change around you.

And it changed, it changed everything about. How I think that that was the point of our breaking news episode last week that I had already gotten to the point was, sorry, I can’t do it anymore. I can’t do it anymore. I can’t support the guy. And that same sort of realization, which was very sad and, and just, and, and terribly I, I think distressing was felt by millions of people.

But that’s exactly the process, Jack. You’re exactly right. It was interesting to me too, like how important, and you, you touched on this, on Twitter, how important the reaction like John King on CNN was. Like what they did right after the debate was over. It, it wasn’t just what we had all seen. It was, Democrats are scrambling behind the scenes.

They’re trying to replace him. Barack Obama’s on the phone. Like, can you talk about that, how important that was? Yeah. So, our, our friend, Tom Morgan, Wrote a note and he was, he was tweeting me about this, the, the, the other day about a, a, a, a great example of that, of the crowd starting to respond in the middle of the speech because I, I don’t know about you if you’re watching a lot of people watched it with, in a small group, we knew that we were part of an enormous crowd.

We knew that there were how many tens of millions of people watching it, and we also mostly watched it with other people. Right. Our family, People would go to a watch party, something like that. So you are part of a crowd and you’re, you’re, you’re starting to, to feel the crowd around you respond to what happened just almost immediately.

For me, it was my, my Twitter feed started blowing up. I started making a few tweets also. I mean, just three minutes in it’s like, oh my God, what is going on here? And you could. Maybe you got it from your social media, maybe you got it from somebody texting you, Hey, are you watching this thing? Maybe you were watching it with, you started to hear the, the, the murmurs of whatever group you were with watching the debate.

So the crowds starts to hear the crowd respond, and I mentioned my friend, our friend Tom Morgan. He was tweeting me about another case like this, which was, Nikola Sco the dictator of Romania. This is 1989. He starts giving a speech. It’s a televised speech, and the audience starts yelling back at him and he starts, they start heckling him and he starts yelling back at the audience.

And this is all being televised. And within like a week, the government falls. It’s done. It’s done. It’s all because the crowd, that crowd at the Palace Square, whatever it was called in Romania and Bucharest, it gets televised to the much larger crowd. The crowd sees a crowd or responding in a certain way, and that’s what drives this common knowledge formation.

Matt: What are we seeing here that that rhymes with that type of common knowledge moment?

Ben: You saw it in, I’ll call it market action yesterday, so. Yesterday when Zions and the other regional bank came out and said, yeah, we’ve got some cockroaches too in our loan book. It, it wasn’t that everybody said, oh my God, Zion’s Bank has a $50 million loan that went bad. We’ve got to, sell Zions immediately, sell all the regional banks over a $50 million loan.

It’s not about the loan. It’s, it’s about that. You, and by you I mean all of the banks, commercial, regional, and the, all the shadow banks, most of all have been telling us, no, our loans are good. Our loans are fine. It’s all good. When you have bankruptcies. When you have defaults, that is the moment where reality.

Hits. That’s the moment where narrative stops. It’s probably the only moment. It’s probably the only moment. And one of the things I love to say is in the financial world, you can be insolvent forever, but you can’t be illiquid for a moment. You can’t renege on your promise to make a cash flow, not for a second.

Because when you do. That’s when all the narratives stop and the reality kicks in of bankruptcy and default. Same catalyst in oh seven. For there, it was really focused on Bear Stearns. Today we’re going to see the same thing. We’re already seeing the same thing. Oh, it’s just, it’s just focused on these couple of companies.

Maybe Jeffrey has got out over their skis, but it’s just them. It’s just them. What you saw yesterday was announcement. Hey, it’s not just them. It’s more than just first brands in Tricolor, and now my belief is that everybody is on edge because we just don’t know and we don’t know because the, the structuring of these deals is intentionally opaque and complex.

It is done intentionally to create this asymmetry of information so that the Apollos and the Blue owls, yeah, they may be moving most of these loans through their machine, but they have such good information to say, well, maybe I’ll keep this one for my own balance sheet. Apollo was short. First Brands, Apollo was short.

The bonds of first brands,

Matt: they got a look and they took the short position and then turned around and took it right. Yeah, that was the idea. They got to see it said, we’re not gonna participate and we’re gonna, they

Ben: were, they were invited to participate in a, a working capital group for first brands back in 2024.

I don’t know how much they were taking over the wall and all this other kind of stuff, but they saw the documents that invitees to a working capital group would receive, and they decided I’m we’re gonna short the hell out of these bonds. So that’s what I mean by an asymmetric information flow. Un, unless you’re invited to sit on the Working Capital group and you’re not, you’re not gonna have that information to say, oh, I, I think actually first brand is a real problem here.

But, but, but probably because there’s this asymmetry of information and we all know it and we know that we’re on the wrong side of it. We don’t trust people. We don’t trust people. They may be a tessio. Like the first brands and tricolor guys were, maybe they’re just being played for a fool by other Tessiers.

Either way, I’m not playing the game. And that’s what creates the the next domino to fall, which is when the funding stops. So that’s what we gotta watch for now, Matt, is whether or not. These alternative asset managers are as vulnerable to a hiccup in funding as the commercial bank flow machines were in 2007.

Matt: I wanna put the highlight on this point that the size of these defaults, ‘cause I’ve already seen lots of people talking about the nominal size of these defaults and comparing it against to how big the industry is and blah, blah, blah. Hundreds and hundreds of billions over here. There’s 70 or 80 billion at Blackstone alone, and you’re worried about these, 20 odd billion here and this other stuff, and 50 million there.

Yeah. Yeah. Putting the highlighter on this, just say this one more time. The size of these defaults doesn’t really matter. It’s the trust in this broader flow process that we have to be tracking.

Ben: Yes. And so I think that the, the size of these look, a $50 million loan that Zions has or Wachovia or whoever, that that is, that’s not big, but it’s indicative of a market that’s got.

billions of dollars of loans to it. Tricolor is pretty big. $10 billion. Yeah. First brands was a little bit bigger, 11 and a half, $12 billion, but it wasn’t just that it was 10 to $12 billion for each of them. It was that the participants of these loans, they didn’t think it was anywhere near that big.

There was hidden leverage in the system of loans to tricolor. And the warehouse facilities and all like that, there was hidden leverage in the system of loans to first brands leverage. That doesn’t seem to be there if you’re just looking at that one individual deal. You’re a advisor for your clients.

You’ve been pitched some deal. You look at it, they’re not lying to you about the characteristics of the deal or the leverage that’s in the deal. They’re not lying to you. It’s what you don’t know. That creates the hidden leverage. What’s the system of loans of which your deal is only one small part. I think there’s a lot of hidden leverage here and more than just hidden leverage in terms of size, it’s leverage in terms of vulnerability, in terms of what other obligations do you have that you’ve gotta make good on

when you have real world shocks. Like our deportation policy created for Tricolor who made loans to a lot of undocumented people. When you have tariff policies that create shocks for an auto parts supplier, like First Brands, these are real world events that you can’t wish them away.

First brands, the impact of the tariffs was that they had about, they had to spend about $200 million in cash to build up inventory in advance of the tariffs coming into place. Doesn’t seem like that $200 million would be enough to tip the company over into bankruptcy, but the problem for first brands was that.

They had a larger financing that they needed to complete this summer, about a $6 billion financing, which would’ve made all their problems go away. They weren’t able to complete that financing. So it’s that. It’s that old line of, for the one of a nail, a shoe is lost. For the one of a shoe, the horse is lost for one of the horse.

The rider is lost, and the rider, the battle, et cetera. There is. A cascading effect that can happen in highly, in companies that are highly optimized for capital flow, where they gotta get that financing done, they gotta get that funding done because they owe o and there’s a, there’s a ticking clock on something.

So I, I, I hear the questions about, well, there’s not as much leverage. True. That said, I think there is both hidden leverage in the system of these lendings. I also think that operationally there is such gearing towards the next funding and the next refinancing. That this has been optimized so great with such great precision that when there’s an external shock like we’re experiencing all over the world today, there’s a cascading effect.

So even something that seems small and who could say, I mean, $20 billion, it’s not small, it can absolutely trigger this sort of cascading effect. Great question. But that’s my answer to this about why even seemingly small numbers can matter a lot,

Matt: and I think most profoundly both in looking at the deal graphic and then the entity graphic that you shared in the piece, because now you see that function of what you owe in the context of is always going to be driven by flows.

Ben: Yep.

Matt: You can have 18 interest free credit cards and be playing the game and spinning it all, and your, your one layoff or bad job day or whatever missed bonus away from That’s right. Everything coming crashing down on your shoulders and

Ben: that’s it. Exactly. Matt, we’ve, we’ve got, I, my strong sense is that particularly for.

I call it companies and enterprises that are outside of the magical world of AI where it is truly silly money and seems to be object. I think that in real world businesses like auto parts and car loans, construction, housing, anything facing a consumer. I think we’re working on pretty thin margins, and I think that the financial companies that have grown the alternative asset managers, they have very little margin for error.

And I, I know this to be true because this is Jamie Diamond’s big complaint about. Private credit and the shadow banks and the alternative asset managers, Jamie Diamond saying, look, right, they’re drinking our milkshake, to use the, there will be blood. They’re drinking our milkshake of making loans into the real economy because they don’t, they don’t have the regulatory and capital requirements that we commercial banks do.

Now, Jamie Diamond can cry me a river, right? I mean, he, he cannot fail by edict of the American government, and he is a billionaire because of it. But he’s got a point when that it is a, it’s a good point, which the, is that we’ve given over the necessary function of lending to mid-market companies. To private credit, these alternative asset managers and we’ve made their man, their managers very, very wealthy by building these flow machines to just keep pumping the stuff through.

It feels to me like we’ve got some catalysts and it’s an open question as to whether these alternative asset managers, whether they are more robust. Then the commercial banks were in the mortgage business in 2007.

Matt: Talk me through, I’m gonna call these the doom loop diagrams, ‘cause I don’t know if there’s a better word to describe them. Yeah, yeah. These sort of circular charts that you put together between 2008 and the housing crisis. And today with private credit and, and I wanna point out this too, as we see the.

CLOs and the private credit ETFs and the jamming of products into things to go, like retail can take some of this. That’s the other part where my ear lobes start itching again. Yes. Yes. Because the, the pitch comes in, and I forget who said this first. It’s like you hear these pitches and you go, I’ll either see you with your Nobel Prize in economics, or I’ll see you on the other side of the prison bars.

This doesn’t feel good. No, it doesn’t feel good, does it e explain these Doom loops to me.

Ben: Well, I, I think what broke the world in 2008,

yes, it was what happened in housing and nationwide decline in home prices. But what broke the world was Wall Street. What broke the world was Wall Street, because we had, we had developed a system, a financialized system where. The mortgage market

became more weaponized and powerful to shatter our economy than the, than the homes themselves. So, so, and this is the part that I think people are kind of missing again, when they, when they say, well, there’s not a lot of leverage here, or, oh, it’s not that much money in the grand scheme of things.

All of which is true, but it also wasn’t much money. in those Bear Stearns high yield funds that went belly up in summer of oh seven, it’s like a couple of billion dollars less than first brands alone.

But what happens is that when Wall Street seizes up. When there’s a buyer strike, a funder strike, which happened to Bear Stearns, right? So people got nervous about Bear Stearns and I, I was a, my hedge fund, bear Stearns was our prime broker. I loved Bear Stearns, I loved those guys. But I took my fund out.

I, I removed my funding from Bear Stearns by removing my hedge fund from. Their prime brokerage, and I did it early. Again, not because I thought that they were bad guys. I didn’t think they were a sios, but I thought they were being played for fools by SIOS that were out there.

It’s that run on the bank and runs on a bank. Don’t just have to happen with depositors taking their money out. It can happen as it did with Bear Stearns hedge funds saying, I don’t want you. I hope I’m gonna take my business somewhere else. That’s a run on the bank. And once that happens, it creates this incredible distrust in all the other banks.

And I’m using the, the quotation marks now

and when Wall Street has these sort of moments. You get a credit freeze lending into the real economy stops and lending credit into the real economy. That is our oxygen, and that’s what I mean by a financialized economy. Our economy, our real economy depends so much on the credit that is extended to us by Wall Street.

That if that credit stops, then it creates more defaults, more problems in the real world, which creates still more problems on Wall Street. This is what I mean by that, like the phrase, doom loop. And I think what people miss is that it’s not limited to what happens in the the real economy. What happens is that the real economy has these outsized impact in the financial world, which leads to these financial players not being able to, or not being willing to extend loans credit into the real economy, which breaks us.

Sadly, that’s our world where our real world, our real economy, depends on Wall Street to keep that credit flowing. That’s the similarity, Matt, and that’s what I think we’re not adequately grappling with next. We’ve had the real world shock. Now we need to see, do we have a seizing up in Wall Street?

Because if we do, that will have impact then into the real economy again, and it feeds on itself.

Matt: I wanna rewind clock for a second because I think this is, we’re gonna jump into Perscient Pro and how this can help with tracking these narratives.

Ben: Mm-hmm.

Matt: I wanna go back to 2022. I wanna go back to the rate.

Hiking cycle when we were on it, turmoil and bonds and you had flagged around Silicon Valley Bank and all that stuff going, going wrong then Mm-hmm. Basically pointing out that, here’s, here’s an indication of this forming problem we’re seeing in if credit seizes, and you moved off of that one. I don’t wanna say really quickly, you said the problem’s still here, but this isn’t the point where clearly the common knowledge hasn’t tipped.

Yep. Can you differentiate between that event and what we just saw here too?

Ben: Sure. So the, there was a classic run on the bank for Silicon Valley Bank, and then a slightly less classic, but still pretty classic, for a couple other of the regional banks

there were. Our system, though, is pretty good at stopping these classic runs on the bank, and you do it just like you did and it’s a wonderful life. You just shovel the money out there. You get a JP Morgan says, no, we’ll, we’ll take it. You, you get the, the Fed, the office con controller of the currencies.

Say, no, no. The bank regularly say, Nope, we’re putting you together. We’re gonna put these troubled banks into a big, safe and sound bank. We’ll give you all the, the funding you need to, get through this. That’s what central banks are for. Right? That, and they, and they’re very good at that. So you, you saw some efforts to kind of create this.

Narrative that, oh, your money’s not safe at, I don’t know, bank of America. That was one that some people were talking about and it didn’t go anywhere, and we could track that. We could see that that narrative’s not picking up steam.

What we’re looking at today though is kind of inside Wall Street. Runs on a bank like in oh seven, there was a run, a run on the bank by hedge funds taking their money out of Bear Stearns, of which I was one.

That’s the sort of thing that

you’re not going to be able to fix in the same way that. The Fed and the big end can fix kind of these old fashioned depositor runs on a bank. So that’s the sort of thing that that, that I’m really trying to monitor now. Looking for those signs of stress inside Wall Street with the funding of the alternative asset managers.

That’s, that’s what I think we can really track. And I think that’s, that’s what we’re trying to figure out. What does a run on the bank look like for one of those companies? Where do we start to see mentions of that in the financial press? That’s the stuff I think we’re really good at picking up on, and so that’s where we’re focused.

I am not saying the doom loop is here. I’m saying we had the catalyst. I’m saying we’ve had some initial reactions and now we’ve gotta see if we get a seizing up of one of these funders. That’s what we’ve gotta track really carefully. If it doesn’t happen, great, then this’ll be a inconvenient thing.

It’ll be, a bear market for these. Alternative asset managers in the regional banks, fine. It won’t be a great financial crisis, but if we get a seizing up, if we get a problem internal to Wall Street, that’s what can have this sort of looping effect into the real economy.

Matt: My mental visual is like the Chuck Prince jukebox and it’s like you get a traditional run and it’s like the song ends and all of a sudden you hear the TV in the corner of the bar.

And you’re like, oh yeah, the price is right, is on over there. And then somebody walks over, pops in a few more credits, the music comes back on. And there’s a big difference in that when all of a sudden, like mid song, the jukebox gets unplugged, refuse blows and you gotta go hunting for it. Yeah,

Ben: that’s exactly right.

So the, I don’t think we necessarily need more defaults to trigger something. I think we’ve had some big ones. You saw the price action yesterday. Investor, the investment world’s very nervous about this. It’s gonna come out we’ll, we’ll see, over the next weeks, probably takes some months. But is this a And by personal belief, it, it feels too much like it, it’s just rhyming too much for me.

and so I, I, my personal view is that we will start to see some sputtering. In these financial companies that have been geared, optimized to be cash capital flow machines. I think we’ll see some problems there, but I don’t know. That’s what we gotta watch for.

Matt: Okay. Over on Perscient Pro. Okay. First off, because you look at these things through this, this framework called a storyboard.

Mm-hmm. What, what is a storyboard? Let me start there.

Ben: What we’ve built is the, the technology, and this is something I’ve done my whole professional career. I’ve been involved in this for 35 years, which is trying to find the structure in unstructured data, kind of highfalutin phrase. What that means is, what are the. What are the underlying storylines in the news of the world?

Not what’s the headline, but what is, what is it saying? And can you track narratives, storylines that you care about out? Can you track them through all the news of the world? And the answer is today, yes, you can. So what we’re able to do now is we’re able to read the news, any language, any country, all of it.

So our archive is hundreds of millions of articles and documents and transcripts and all like that. And then analyze it for stories like the. Investors are increasingly concerned about alternative asset managers or funding for private credit deals is problematic. It’s not word search and it’s not sentiment.

It’s actually looking for the. Very specific meaning of those two sentences I just said and we can track with. It’s pretty shocking precision, right? When those stories start to grow and they are growing today, we can see if they keep growing, do they taper off, do they slow down? That’s what we’re able to do, so we’re able to read the news of the world to track the narratives of the world.

And it’s, it’s a totally different way of thinking about the world because I don’t, I don’t know what is actually happening at any one of these companies. But the thing is, I don’t think that’s what really matters. I think it’s much less reality than it is what our collective perception of the reality is, and that’s what we can measure.

So that’s what we tried to do in the story we call ‘em, not dashboards, but storyboards because we can measure this daily, report it weekly so we can all track these questions. ‘cause like I say, I don’t, I know what I think, but I’m a curmudgeonly, short selling kind of guy. So yeah, of course. I want to kind of think it’s kind of gonna be a bad case.

That’s what I think. What I know is what I can see in the data. And that’s what I’m gonna be looking for.

Matt: I want you to define another word relative to this. Two Sure. Signatures, semantic signatures specifically. But what do you mean when you say a signature? I.

Ben: I’ll use that interchangeably with, I mean, narrative is such a big word, right?

And it’s also become kind of a, a, a bad word. Oh, that’s just your narrative, man. And it, what we mean by semantic signature is like a, it, it can be a big political narrative. It can be, but it can also be something very specific like, Funders are concerned that, there are more bad loans out there than, than advertised in the private credit portfolios.

There’s a meaning to that statement. I say it’s not word search. It’s all there. There are a million different ways to express. What I just said, concern about bad loans. In a portfolio, you say it a million different ways. What we’re able to track, and this is what semantic means, is getting at that core, meaning not doing word search.

not doing sentiment. Are you saying mean words or nice words about a loan portfolio? Now, what are words that when you put ‘em together, have that meaning? That’s what. AI generative AI is really good at doing, but the trick is you can’t just ask it. These open-ended questions for chat GPT or clawed or whoever it, you won’t get good results ‘cause you’ll ask it a second time.

You’ll get a different answer. To get real good data on this, you’ve got to put that genie into this very tight bottle where you only let it read, you chop up the, the articles, you don’t let it go off and find them. You chop ‘em up into little pieces. You tell it how to think and then you check your work, check.

You judge its results carefully. And you do it at enormous scale. So we’re, we’re processing, hundreds of billions of tokens. It’s, which is crazy now what’s available to you to do? But, but, but, but, but that’s what we do. And so we call them semantic signatures. You can think of it as a narrative, but it, it can be something as tight and focused as.

Investors thinking about bad loans within a particular set of portfolios. That’s what a semantic signature is. Meaning and focused. That’s what we do.

Matt: Not to keep torturing this analogy, but this is what’s clicking in my brain right now. It’s good, is I see the Chuck Prince jukebox. I see that album and I see the signature being, whatever the song is that’s on there.

And what you’re saying is we can take that song and not just know, is this song, does it exist on this, in this jukebox, in this, in this player? But then we can see how much it’s being played. We can see how much

Ben: is this getting Matt? That’s right. But it’s even more than that. Right. So this is particular song’s got a particular title.

Yes. You could look up how many times that particular song is being played, but it’s, it’s r and b. It’s jazz, it’s there’s, there’s a type of music and what you’re really interested in is, or it’s a sad song, or it’s a happy song, or it’s a three quarter time song. What you might, you’re probably really interested in is how much are happy songs played, how much are r and b songs played.

That’s what we mean by semantics. So it’s not just the title of a song, it’s the meaning of a song and all the different dimensions of meaning that a song can have. We can track those dimensions of meaning. That’s what a semantic signature is,

Matt: and able to log into a portal, to some degree, customize what you’re looking at and to drill into these sections, and that’s is that the, the dream of what the Perian Pro tool evolves to over time.

Ben: Well, yeah, so that’s what our technology does now. We offer it to different people at different levels of depth. So if you want that sort of customized bespoke, oh, I’m interested in all these sectors and these 500 narratives, we’ll do that for you. PerscientPro is what we think are the most interesting.

Things happening for a professional investor. It’s not bespoke, it’s not customized, but it’s storyboard on private credit storyboard on ai CapEx storyboard on core macro things. Storyboard on, safe haven assets storyboard on, tariff rationales. So we cover a lot of waterfront and it’s designed for that.

I, I say professional investor. Yes, professional investor, but somebody who, if, if, if you’re involved with your money, investing your money on a day-to-day basis, I think this is something for you.

Matt: Looking across some of this data, what are some of the other things? So we spent a lot of time talking about private credit here.

Yeah. And there’s, there’s a world to mine and monitor if nothing else, because like post Silicon Valley Bank, you wanna know if the story is gonna ebb. Or if this is gonna keep going up, what are some of the area, other areas? I’m thinking about gold, I’m thinking about tariffs, I’m thinking about ai, CapEx, gimme some others that are flagging interesting signals right now.

Ben: Well, one that’s interesting to me, and I think Matt, you wrote an article about this is about housing, right? So the, we’ve got a housing storyboard where the dominance of this being a buyer’s market over a seller’s market. It’s come off, its, its peaks, Matt, from when you wrote that an article a month or two ago,

Matt: couple months,

Ben: but it’s still, it’s still phenomenally high.

And so there, there are all sorts of aspects of housing, mortgage applications, rent versus own. I finding that stuff really interesting. I’m, I’m, I’m increasingly. Concern’s, not too strong word. I’m very concerned that whether you’re an investor or just a human being, we have increasingly little insight into what is actually happening in the real economy.

That the, the data, whether it’s unemploy, obviously this is impacted by government shutdown and all like that, but even before the government shutdown our unemployment data was for, for, was. For shit, right? It, it was terrible. Ditto. I don’t trust the inflation data and the like, what I think is that if you read what the world is actually saying about employment or inflation or the like, or housing, that actually gives you a lot clearer and more accurate view of what’s happening in our economy than the numbers that we’re given.

So I, I’m really excited that I use this stuff every day to try to get that comprehensive view of what’s actually happening right now in our economy. And, I think that’s the biggest value of it.

Matt: Any other areas? I’m just gonna hit this one more time. Any other areas that are. Surprising to you for how they’re reading right now or presenting themselves?

Ben: I, I mean, gold is certainly surprising. I, I think that that what we’re seeing in our data, it’s, it’s not a debasement trade. I, I know that’s what the, the phrase that goes along, maybe it used to be a little bit of that, but that’s not what it is today. It’s, it’s a safe haven asset. In a world where traditional safe haven assets like US treasuries, the US dollar, the Japanese yen, are not seen as safe havens.

So I, what we’re seeing is less that, oh, there’s some magical reapp appreciation of gold as it is that, I’ll call it gold alternatives in terms of a safe haven asset in terms of an insurance policy when things are going badly in the world. Those other. I’ll say similarly, traditional insurance policies, the, the narrative around that is profoundly negative and poor treasuries, dollar yen,

Matt: Ben, you’ve got a lot going on these days. People wanna find out on the internet, they wanna see more of this stuff. try things out. Where, where should they look you up? Where should they bug you? Where do you wanna send people?

Ben: So I wanna send you to two places. Epsilon Theory is always there. I’m at Epsilon Theory on Twitter, Epsilon Theory.

We publish, I think a lot of great stuff. Our Perscient website leading to our professional Perscient Pro, our other offerings, those more bespoke, more, involved applications of our technology that’s also there. That’s where I’d send to people. I’m always on Epsilon Theory. I think we’re always doing some really interesting work there.

And then increasingly, I’d love for people to come check out Perscient Pro and persuent.com.

Matt: Being able to access so many of these storyboards, track these narratives, play around with them. I’ve had my hands in this dataset now for a while. I’ve been able to write a couple posts using it, and it is, it’s something else to be able to explore this and not just talk through them with you because I, I’m gonna keep going back to that 22, 22 scenario where we see these things crop up.

We wanna know if they’re gonna keep carrying forward and that matters both with our clients, ourselves, our families, and what we’re looking out for. Ben, you always do a great job presenting this. Thanks so much for coming back on excess returns.

Ben: My pleasure, Matt. Thank you very much.