Private Credit Meltdown - Are Banks Next?

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Alrighty folks, wild times in the economy. We're going to talk with Miss Anna Kelly and try to

give you some advice on what we're doing, what we think you might want to do in this environment,

because what's going on? Well, we have private credit imploding, maybe being the next Black Swan

event, draining liquidity. We obviously have the Iran War. We have Jeffrey Gunlock talking

about a lost decade. All by the way, just another Tuesday morning, Anna, how you doing?

I'm doing great. It's interesting, and it's just getting more and more interesting as we go,

for sure, to say the least. Yeah, I've shared this with my channel. I'm curious what you think of

this is this is the most fear I've seen in a long time, right? Because I talk to people

on this journey, and I don't usually sense fear. I get nervous. I get excited. But fear is

really, it does seem to be rearing its ugly headed. To me, the closest comparison I have

was the couple of days after 9-11, right? Where fear was like, oh my God, is another one coming,

right? What's going on? That's the only compare I have in my adult life to what's going on right

now, because it's just, you throw on top of that AI taking white collar jobs. There's so

many reasons to be afraid. What do you think? Yeah, in fact, the fear gauge is all the way down,

and read as of yesterday. We are seeing some evidence of extreme fear, and Warren Buffett has

the old adage be greedy when others are fearful and fearful when others are greedy. Like you,

I said, we're not at the fear part yet. There's enough money still transacting that although

some of the smaller investors are getting fearful and getting out, big money has not shown fear

yet. I think some of that started to unwind last week, and we started to see a little bit more fear,

and again, a much higher fear gauge. I still don't think we've seen a bottom. Most people think of

the stock market when they're looking at fear or not. They're not really looking at a wide array

of asset classes. We've seen some fear and commercial real estate. In the last couple years,

we've seen some fear in the stock market. But I think what's making people more afraid

this time, Michael, is we've already been through multiple shocks over the last six years now,

since COVID hit us. We've seen many things happen that nobody expected, and each time that those

things happened, something in the economy started to break or rattle. We had COVID, and then we had

inflation, and then we saw a couple of banks, three banks, I think about to fail, and treasury had

to come out and issue a new bank rescue fund for lack of a better word, even though they wouldn't

call it that. Then we had the tariff war start out, and the retaliatory tariffs, and then war

with Russia and Ukraine, and then Israel under attack, and now Iran war. At a time when inflation

is showing to be more persistent than what many thought and growth and lack of jobs and

ticking up unemployment, have shown pain to the downside. I think people are starting to realize

this hope for a Goldilocks, and the next big expansion, at least it's kicked down a little farther,

and when you have a very stagnating economy, like we've been talking about on the show,

it can go either way. I think people are rightly concerned when you start seeing things like

private credit defaults, and big banks riding off bad debt. It starts making people wonder,

is this the next GFC? That's what I'm hearing. Is private credit about to drop, and then

that was already right at the cusp of canary in the coal mine saying things were kind of dangerous,

and then we go to war. I think people are rightly concerned. I think we're not at the bottom of

fear yet. I think that there's probably further to go, and any additional shock, Michael,

that happens between now and then could cause a financial crisis. I think people are wise,

not to be a doomer and sell everything at the bottom. That's the worst thing you can possibly do,

but to be conservative and think about where you have exposure and risk, whether it's risk that

you can really stomach if you see a lot of volatility, because I think, regardless of if you've

actually have a deep recession or a financial crisis or hyperinflation, even if we don't have any

of those extremes, I think you're going to have extreme volatility over the next year or two,

and the longer this war goes on, the more fearful the markets will become, because oil shocks usually

generate recession as well as inflation pressure. This oil shock is, I think it really does lead to

demand destruction, because again, mom and dad go fill up the car once a week, and it's just a

constant reminder that things are more expensive, right? That's going to start changing behavior.

You're going to start to see, I read an article over the weekend that said, the next two weeks are

important, because if the war is resolved in pieces, a piece agreement is done, you probably have

enough slack in the supply chain where things will work themselves out. Okay, but if it goes on much

past two more weeks, then you start talking about crops and you start talking about all these

other things that you just can't undo, and that will be kind of the second order effect, and

that's when inflation goes wacko, right? We're about to get a nasty inflation reading, because

gas is up a dollar, in like 12 days, that's going to be a horrible reading for CPI.

Absolutely, and diesel gas is up over five bucks, and most transportation of goods and services

goods across the country, I shouldn't say services, is run by diesel trucks, right? So the fuel

cost will be passed on for sure. Absolutely, and again, that's just the cure to higher prices is

higher prices, and this could be the straw that breaks the back and sends us into that long

call for a recession. It's that important, so again, we've got to be hoping for peace, but I've

got to tell you there's nothing going on right now that makes me think this is going to be short.

We even had President Trump talk about negotiations, and then Israel launched this, and Iran launched

that. Doesn't sound like peace to me. That's a hell of a, that's a hell of a peacetime when you

have these waves of missiles going. Yeah, you know, I wish and hope that it will be over quickly.

I just don't have a lot of realistic optimism that it's going to be short, and the reality is

the length of the war, and what it does to the supply shock and to oil prices, and not just oil,

but gas into your point about crops, fertilizer, aluminum, a significant portion. Helium, just helium.

Yeah, I didn't even know about helium, but there's a lot going on. 40% of the helium is offline

right now because of somebody bombed something. And helium, you know, people think, you know,

party balloons, but you guys don't realize this. Helium is a part of the manufacturing process for

semi-conductors. And yes, it's only 1%, but it's a pretty critical 1%, because helium can't be

replaced for whatever it does. I'm reading all of this. I'm like, oh my god, this is, this is going

to get, this is going to get wild. And it's even similar, you know, I don't remember the exact

stat, although I looked them up a couple of weeks ago, but you know, even though not, it might be

somewhere just under 10% of the world's oil goes through the straight of her moves, but it's like

20 to 40% of certain nations all around it. There's the ply of oil and gas and then the chemicals

for fertilizers quite a bit. So it will have a direct impact on food costs for sure, as well as,

you know, consumer discretionary goods. And so the longer it goes on, the worse those supply chains

are and the worse the high oil prices end up feeding through to inflation. And so I think when

you start to see inflation and you start to see the fed hiking rates, Michael, I didn't think the

probability was very high for a rate hike until we went to war with Iran. And now it's a real

probability. And so 50, 50, you know, in the real estate world where so much debt still has to be

refinanced, this is where the real fear is coming that, oh my goodness, not only are we going to

have more inflation, but the Fed may have to raise rates. And so I think that's spooking the

market. And the other thing that I think really is creating a lot of fear is that you're starting to

see assets that are generally not highly coordinated, correlated all take a beating. So again,

we've been talking about, and I'm still bullish on, you know, golden silver over the long term,

as an inflation hedge, but you did see. And I've kind of warned about this a little bit, but I was

surprised at just how quickly and how deep golden silver sold off when energy started to spike,

and when the stock market started to correct. And it is kind of common sense that when you start

to see a stock market correction, like the Russell 2000 is in correction territory now, the S&P

is down, I think 7% something like that. So not correction territory, but heading that way,

when you have that happen so much of the markets are leveraged with margin calls. And so when you

start to see people like, I want to sell and fear breeds, I want to sell and take, you know,

take my gains off the table, they sell not necessarily what they want to, but they sell

their winners. And so if they've made a lot of money in golden silver, they're selling, I would argue

largely to cover those margin calls and to take what gains they can. But when the average investor

sees that that everything's selling off, it's like, oh my goodness, where do I hide? Or do I go?

And I think that uncertainty and not knowing what's next is what creates so much fear. And the

question is just how long will it last? What happens to different asset classes? And are the

do people panic sell and do companies go under or do they weather the storm and things end up okay?

So yeah, I mean, you add on top of that, the fear of AI and white collar jobs, right? You had

block layoff 40% rumored meadows going to layoff 20%. This is just another fear that people have.

So if you were in the room with 100 folks, you know, that, you know, at different age ranges,

but they're all W2 employees are all employed. What would what would be your kind of advice if

you're on stage? You know, there's going to be a thousand or more people watch this video. So

what would you tell? What would be a couple of messages you would tell them? So I think just off

the cuff, the first thing would be the most important thing is to know your own financial situation.

And what your number one financial goal is over the next year and then five to 10 years. And

and the reason I say that is because all of us are in a different position as to what level of

risk we really can take when we have a very volatile economy where things could kind of go

in not so great directions where it's not clear that we're at a bottom that we're about to come

out of, you know, with some some levels of growth. And so if you are someone that doesn't have a

lot in savings, you certainly don't want to take risks of trying to catch the bot, you know, catch

the bottom and catch a falling knife. Like you don't want to just say, oh, Mark, it's corrected.

Let me throw everything I have and make bets that it's it's going to, you know, bounce back up.

If you have a lot of money and your income needs are met and you've appreciated and you want to

preserve some, then you can afford to take more risks. So you have to understand before you

listen to an advisor or a talking head economist or a hedge fund manager or, you know, even you and

I, you have to ask yourself, what's number one for you right now? Is it that you need more income?

Is it that you want growth and appreciation? Or is it that you need to preserve what you have?

And so that is the most important question. And so if you don't have at least six months of your

income and expenses, ideally you're your income, but at a minimum, at least six months of expenses

that you could afford a job loss. Let's say a company that you work for, like I did, the GFC

worked for AIG starts to stumble and they have layoffs. Can you afford a layoff? And what are your

prospects with your within your industry for finding another job? You know, if you're in your young

20s and you're a new college grad and you lose your job, it may take six months or a year to find

another job in your field. And so if you're a high income earner, if you're a manager level and

you get laid off, can you afford to be without work for six months? So I would say protect your

protect your liquidity at least for six months expenses set aside before you invest in anything.

If you have those expenses set aside and you have a risk tolerance and a time horizon that's

very, very long, then sure dollar cost average into the market, the stock market within, you know,

appropriate time horizons and risk tolerance. And there is two different school of thoughts, Michael,

and the advisors with these two different schools of thought will argue with you and they will argue

with each other as to who's right and who's wrong. But you have advisors that just say go into

the ETFs, DCA, this is what, you know, we were taught, this is what I was taught when I went into private

banking. Dollar cost average always, it doesn't matter if the market's up or down, just keep going into

the S&P 500 in an ETF. And over the long time, history shows, the markets are going to get up,

so don't worry, don't look at all these ups and downs, just set it and forget it. In the other

school of thought, in fact, it's a lot of older investors who've been around many financial

hiccups, let's say, maybe minor to major crises, you know, since the 70s and beyond, they're kind

of saying, you know what, it's not so easy anymore. And the markets are very disconnected from

fundamentals. And you can't just park your money passively in an ETF and hold on. You have to

be better or work with money managers who understand what sectors do well in these kind of environments

and what don't. And so I am at the school of don't just passively set aside your money and wait

for 10 years, although some advisors would argue with me, you know, I have a wealth manager as well,

and we're looking at things like what asset classes do well in periods of stackflation, recession,

and inflation. And I'm hedging some of my investments with number one, my number one goals asset

preservation, right? So I'm not getting greedy just because everyone's fearful, because I don't think

they're fearful enough yet for me to get real greedy. But on days where we've had some down markets,

I've added back to gold and silver. I bought some gold and silver miners. I bought some energy stocks.

I have bought some commodities and some things like dividend aristocrats, you know, who pay

hot dividends, consumer staples that tend to have pricing power and they can weather, you know,

some inflation and some downturn. And so I am dipping my toes back into the market. In fact,

I bought about 10 stocks or ETFs today while the markets were down a little bit. But again,

everybody's different. And so talk to an advisor, but make sure your advisor's been around the block

20, 30 years, ideally, and that they're not just put your money in the S&P and just ride it out

for the next 20 years because you can lose a lot. And if you lose a lot now because you're not

at least preserving some of what you have before you get real aggressive with what you can afford to

lose, it may take 10, 20 years to regain the losses that you could take when you're coming off of an

asset bubble. Yeah, well, let's switch gears to private credit because we're seeing seemingly

every day multiple, you know, folks hold redemptions back. We had two again this morning

that we talked about. Do you think private credit really could be the spark that makes this the

next GFC or what are your thoughts on private credit? How bad is this going to get? Absolutely.

I don't know if you remember, but we probably started talking about this about two years ago with

private credit and derivatives. And really the risk being that we don't know quite how big it is

because it is private. There are not daily publications that's public data. And it's highly

unregulated. So private credit and the derivatives market, they are not under a strong

purview of the US government, you know, auditing financials and knowing what exactly is happening.

And so my concern then, and it's actually panning out to be true now, is that when you have private

credit and those more, let's say it's private financing. Okay, so you've got a mortgage. We'll just

employ for real estate that was done on a private loan. We don't know how many times that debt has

been sold into whom. And we don't know if the, you know, my liability is a credit company's asset.

How many times did they pledge that asset as collateral to get loans for themselves to,

you know, and spread the risk? So you have one asset, one loan, kind of as collateral for the lender,

and then collateral for that lender loans to a big bank. And what we've been seeing is some evidence

of that. So we've seen some really big public banks write down losses of lending companies who

lent to borrowers with bad assets. And so it's hitting two or three lenders up instead of just the

one bad loan that's going bad. And so that is, I think, the real risk where this could become systemic

is how big is it? You know, they're saying something like 1.2 trillion, but I've seen, I've seen

numbers like four trillion dollars. And so, you know, how big is it really? And the reality is nobody

knows, including Jerome Powell and Scott Bessent, you know, and so if it's unregulated and it's

unknown how big it is, you really cannot determine how big of a risk it really is. But what we do know

is in typical credit cycles and liquidity cycles is once you start seeing a number of large

institutions start to fail, it generally is an indication that there's a lot more, you know,

Jamie Dimon said there's probably more cockroaches in the kitchen, you know, and so I think that

private credit is a real risk and it's a real systemic risk at a time when we're seeing the liquidity

cycle downturn when you have so much debt that has to be refinanced. And so I think it's probably

the biggest risk we have in the financial system right now is the downturn and liquidity and then

central banks who usually provide that liquidity as a backstop, they're out spending money on war,

you know, we're spending a billion dollars a day on the iron war. So the only real answer is you

either let everything fail, which governments don't like to do or you bail it all out, which

governments don't like to do either. But neither is good for the economy. And so I think it's

something we really have to take seriously and not be too rosy optimistic like all the advisors

want to tell you to be, but also not be paralyzed with fear on the other side and do nothing. You

just might want to steer clear of if it's a risk, I'm investing in things like financials,

you know, if they're going to be inequities, a lot of the big money's rolling out of financials

and into commodities and into, you know, consumer staples. Yeah, when I look at private credit,

and I try to play the Domino's game, you know, let's just say it's a trillion dollars so the math

is easier. And I try to ask myself how bad could it be? And because again, there are assets behind

these loans. To your point, some of them might be pledged multiple times, which is obviously fraud

in its own problem. But, you know, the biggest number that I can get to is 40% off, right?

Just fire sale, bad pricing, you know, raise capital. So on a trillion dollars, that means there's

400 billion of losses coming somewhere, probably lots of places. And lots of that money will roll

up to the big banks to your point earlier. And the other thing that I think sparking this is

our comment earlier about interest rates. I think there were a lot of people operating, especially

in the commercial real estate area about rates for coming down. And they were, they were hoping for

that, you know, one or two more cuts. And it was going to somehow save them or stop the bleeding.

Now we're looking at rate hikes. And I think what's happening is financial institutions are going,

okay, time to clean the books, time to dump this stuff that, you know, we're not going to be,

the Fed's not going to save us this time. We got to start writing this stuff off. And thus,

private credit starts to implode. And the problem with a credit cycle like this is the first

people to sell are actually the winners. Yeah. Because they take the smallest loss. It's the people

that come second, third and fourth that really causes this thing to really crater. So long story short,

I think we might have some really good commercial real estate deals in the next 12 to 18 months. What do you

think? I do, but what I also know is you have to be very, as we say, well healed, you know, if you've

got a billion dollar fund, you know, that can go take down several, you know, deals that are a

couple hundred million dollars a piece, great. You're going to find some huge opportunities. So,

but for, you know, small fish in the pond, you might do well to invest in some reeds of funds

that are going after these very large commercial real estate deals. So the smaller commercial real estate

deals, the 10 units, 20 units, that 30 unit properties, the small ones, they can typically be traded

with a small group of investors, even still using a local bank. But I think most of the distress

is actually in the large wealth I family market where, you know, I've played for quite some time.

And it's because, you know, people don't realize most investors are not holding these big apartment

complexes as long term holds. They're buying them to flip them. And so they bought them at low prices.

And, you know, I full disclosure have bought, you know, many properties in at low prices as well.

And, you know, the intention was when you bought them in, you know, 2022, 2021, we're going to flip

these in, you know, two years. We'll renovate all the units. We'll sell it to a new buyer. We will

have created a lot of upside on the income and then interest rates changed. And so even if you've

got a loan that's really good, you know, most loans on properties that are being flipped are done

with, you know, two to five year financing. Short term paper. Short term because you're flipping,

right? You're not only missing for 30 years. So you're not going to put on a mortgage that's a

30 year mortgage. You can't actually get them in commercial. But even if you had a a Freddie Fanny,

you know, 30 year amortization and a 10 year loan, even if you got them at really low interest

rates, Michael, when you try to go sell that property today on paper, the new buyer is having to,

you know, borrow it seven. And so it, they can't pay as much and your taxes and your insurance

have gone, you know, way up. So you're in a eyes down. So what this means is that even really good

operators and really good properties on paper are down about 30 percent or up to 40 percent. So to

your 30 percent haircut. So these banks, you know, they're not extending anymore. So the mantra was

survived to 25 and extend and pretend and the banks would just let you go another year and wait for

the Fed to cut rates. And I don't know if you remember, but in 25, I said, I think it's going to be more

like pray to heaven. You make it to 27. And now I'm like, here, here we are. I've got a couple

properties. Again, full disclosure, where, you know, we've got rates that will reset and not

able to pay investors dividends right now because we've got mortgages that are going to go up

and our debt service payments going to go up. And if rates continue to go up because inflation,

we won't be able to find a buyer at the price that we need to not only get out of the loan,

but pay back all of our investors. So it's a really, it's a really difficult situation for commercial

real estate asset holders. And, you know, you just have to hope that you can manage it so well

and keep, you know, pushing up rents to cover the additional expenses. But at some point,

when you have a slowing economy, you know, the renters are tapped out and they can't afford the

rental increases. So there will be huge opportunity because it's significant distress and commercial

real estate. But, but you have to be very, very careful. Don't just buy into a syndication because

someone says, I'm getting it at a 20% discount to the last donor. Well, should you be getting it at

a 40% discount? And what is your interest rate? And, and are you getting it in a way that that

de-risk's it for your investors? So there, you have to know what you're doing to make money

on commercial real estate, you know, falling. Yeah, this just, it feels to me that this is the

perfect storm to finally flush the system because there are a lot of bad deals done. Not only

commercial real estate, but private, you know, company financing. Yeah. Because again, when rates

you know, doubled essentially almost overnight, there were just deals done that made sense at 3% that

don't make sense at seven. And, you know, that refinancing is coming due. And what I thought is banks

were going to just extend and pretend. And now with, you know, the threat of a rate hike,

they're just like, okay, we're done. And I've seen banks do this before. I saw banks do this in

2010 and 11. I bought several apartment buildings for 50% off or more because banks just gave up.

Right. And that's what I'm starting to sense right now. So again, I'm, you know, I'm fortunate

enough that a month ago I went out and raised almost a million bucks to, you know, increase the

kitty. So I'm getting excited for the opportunities that are coming. Yeah. And that's a really good

point. It's important to that you have liquidity. Again, you know, I talked about in the beginning,

at least six months of your expense, but if you're an investor, this is when real money is made,

is when you're, yes, you need a hedge and yes, you need to protect, you know, from the downside

or protect against inflation with some of your portfolio. But if you're an active investor like we

are, you know, you want dry powder, as they say, you want liquidity so that when things are on sale,

and when that fear is high enough that prices are down enough that it makes sense for you, you need

the cash to go take them down, especially in an environment where lenders are going to be nervous

and tight, they're not going to give you as much LTV. So you're going to have to put more money down

in order to capture those deals. And so liquidity is extremely important right now. So don't go spend

it all on things you don't know, you know, in the market, like save some dry powder so that you can

take down deals when they, when they materialize. Yeah. And then the last thing I saw a headline in

the Wall Street journals this morning, basically saying great news real estate investors. If you have

the stomach for political risk, you too can get 30% discount on real estate today. Now in fairness to

the headline, they were talking about folks like stocks like invitation homes. But what I want my

audience to realize is I agree with that statement, right? There are so many people afraid buyers and

sellers that the only people left standing are my people, right? The people that will write

disrespectful offers. They know what an average deal is. This is, this is the time. If there was

ever a time on a to write, like truly disrespectful offers, it's right now. Yeah, absolutely.

We're actually in real estate because there are not a lot of buyers who can buy at, you know,

six plus percent interest at prices where they are today. And so there's more properties being

delisted and taken off the market now than I think ever in history. If I remember correctly,

I don't remember, you know, early 70s, late 70s, but I think we've hit records where there is,

you know, a significant amount of inventory and no buyers. And so your competition is limited.

And therefore, those that really need to sell, you have the best opportunity to get those things

at a really good basis today. You know, where it was harder to do that before. Yeah, this is the time

again. If you again, you got to make sure you have a reserve security six months is on a said,

yeah, you got to make sure you can do what you can to protect your job. But if you are in the

market to shop and invest, go to the Uncle Warren, right? Buy when others are afraid, right?

Get greedy when others are afraid. And it's it's coming. I definitely think it's here in residential.

It's coming to commercial. Yeah. And you know, some of us will take advantage of it. So I hope

that's you. Absolutely. Yeah, this is the time. And that's the thing you have to remember investor

psychology is you're going to be afraid when everybody else is afraid when the news is afraid.

The best thing that I ever did in 2009 when AIG was shutting its doors and I had lost a lot

of money in my 401k and was losing my job. As I said, you know what, I'm going to I'm going to start

buying real estate. I already had real estate, but I'm like, I'm going to buy more and I'm going

to cash flow and I'm going to, you know, and I got properties at great prices and made some cash flow

and then built that up slowly because it was an environment, you know, different today and to

some extent, but I see a lot of similarities. And so being able to run into the fire when

everybody else says, what are you doing? You're crazy. Is really where the wealth is made is

buying cheap. And you can only do that when when there's fear and don't feel like you have to

pick the bottom because if you can get a good deal and you can get it at a basis that makes sense

at an interest rate that makes sense and maybe some creative financing. If it works today,

it's going to be a good deal long term. And if things get cheaper, then hold on to the property

that you bought today and buy more when it gets cheaper. But don't wait to time the bottom,

just like in, you know, in stocks, you want to kind of dollar cost average and keep doing really

good deals. But don't do mediocre deals just to do a mediocre deal. Couldn't agree more.

Anna, where can people find you? Great. You can find me here. You can find me on social media at

on a Kelly REI mom. And for real estate and wealth coaching and consulting, you can find me at

on a Kelly investing.com. Thank you so much. Have a good week. You too.

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