Over the past 14 days there have been numerous articles in the media about the concerns that APRA and ASIC have about Private Credit products. There is no magic pudding with these products. You don’t get equity like returns with debt like risk – ever! Additionally, their illiquidity will mean they are always at risk of withdrawals resulting in the funds/products being frozen after an external event or an internal event. Clearly the market has forgotten the Babcock & Brown era, but surely remembering Greensill should be possible, given it was in tatters in 2021 despite support from established banks and supposedly very clever credit experts. This is good reading right now given the connection with Gupta and the Whyalla Steel Works being put into administration: Pyramid of Lies – Google Books
The Federal Reserve’s Task has certainly been made a lot more difficult by the Trump Administration. Firstly, perhaps we should restate the Federal Reserve mandate that appears to be overlooked by most analysts and commentators that look to the Federal Reserve as having the ability and responsibility to cure all. The Federal Reserve Mandate is for price stability with the maximum level of employment possible. In practice, the Federal Reserve defines price stability as an inflation rate (defined as the quarterly core PCE index reading) as 2% and an unemployment rate of 4.5%. The Federal Reserve’s actual mandate is price stability and to maximise employment subject to achieving price stability. This is a nuance not often acknowledged by the markets, economists and even the entire board of Federal Reserve Governors. Determining a target rate of unemployment is ‘where the rubber hits the road’.
What triggers the defaults is higher inflation because higher inflation damages underlying cashflows. The markets at the moment are euphoric with a belief that the inflation battle has been won. The battle over transitory inflation has been won, but the monetary policy played a negligible role in its defeat (the real reason the Federal Reserve found cause to cut rates this year). Prices for durable goods that were pushed up by the pandemic lockdowns have now fallen back with the supply chains restored, however, inflation has been high enough for long enough to elevate wages growth to a level not consistent with inflation returning to the central bank’s targets. IMF warns central banks of ‘uncomfortable truth’ in inflation fight
