Money Is Flying Out of Private Credit. That’s Bad News for Wall Street.
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What is causing money to pour out of private credit?
Money is pouring out of private credit, and some investors are finding it's complicated to pull their cash.
Redemption started to go up, and then all of a sudden, investors, at least some of them, woke up to the fact that, oh wait, I might not be able to get all my money out. When I want it, I better put in for it now. And then it just kind of built and built.
Plus, a federal judge throws out subpoenas issued to the Federal Reserve in a heavy blow to the Justice Department's criminal investigation into Jerome Powell. And the Pentagon is moving more troops and ships to the Middle East. It's Friday, March 13th. I'm Alex Osola for The Wall Street Journal. This is the PM edition of What's News, the top headlines and business stories that move the world today. Two data points are out today from the Commerce Department on the U.S. economy. GDP for the end of last year was revised down to 0.7 percent growth, well short of the 1.4 percent pace initially reported.
Why are investors rushing to redeem their investments now?
And the Personal Consumption Expenditures Price Index, the Fed's preferred measure for inflation, was 2.8 percent in January. That's a slight decline from December, but still above the central bank's target. And those numbers are, of course, before the Iran war, which has raised energy prices. WSJ economics reporter Matt Grossman says that because of the war, this inflation data isn't as helpful to economists and policymakers.
As everyone who's driven in the last couple weeks knows, gas prices are already a lot higher. So I think this report best serves as a baseline for where things stood before the war. Things were already a bit hotter than the Fed wanted in January, and economists are on the edge of their seat to see how much of an increase we get once we get the March data.
Matt says the war may affect the Fed's thinking.
How does private credit differ from traditional banking?
The Fed in January felt their policy was in a decent place to watch inflation gradually fall back to that 2% level over the course of the year. And maybe they could find opportunities for a cut or two. Of course, that was before we knew this war in Iran was coming. The fear would be that not only does that translate into higher gas prices, but Higher prices for everything else, too, because so much of what we buy has to get shipped. So at the margin, traders have seen the war news as being more on the pessimistic side for actually getting those rate cuts this year.
The continuing war in the Middle East and worries about its economic repercussions weighed on stocks today and pushed up oil prices. Brent crude, the global oil benchmark, rose 2.7 percent to more than $103 a barrel. Since the attacks between the U.S. and Iran started nearly two weeks ago, Brent prices have surged more than 40 percent.
What role does investor psychology play in financial markets?
The Nasdaq led the day's losses in the U.S. stock indexes, falling 0.9 percent. All three indexes finished lower for the week, with the Dow posting the steepest losses. It ended down 0.2 percent. Private credit has, in recent years, powered massive growth on Wall Street. Now, though, that engine has been sputtering. Investors are trying to pull money out of big funds, endangering firms' future profits. For more on what's driving the run on private credit, I'm joined now by Matt Wertz, who covers credit for The Journal. Matt, to remind people, private credit is loans made by private fund managers to corporations, financial institutions, and sometimes even consumers that were traditionally made by banks.
So why this rush of redemptions?
What impact is the Iran conflict having on the economy?
Why is this happening and why now?
Well, on Wall Street, they love to say, what inning are we in? And I think this is a reflection of broader investor angst. There's a sense that valuations are quite high, that maybe we're in the seventh or the eighth inning of this boom in both credit markets and also in equity markets. What makes private credit different is that it's mostly sold to individual investors through these funds that, unlike mutual funds, limit the speed at which you can withdraw your investment. And that's because the assets in the funds are these private loans that are actually kind of hard to sell.
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Chapters
8 chapters
1
What is causing money to pour out of private credit?
0:00–1:00
2
Why are investors rushing to redeem their investments now?
1:00–1:49
3
How does private credit differ from traditional banking?
1:49–2:52
4
What role does investor psychology play in financial markets?
2:52–3:37
5
What impact is the Iran conflict having on the economy?
3:37–4:27
6
Why did a federal judge dismiss subpoenas against the Federal Reserve?
4:27–5:20
7
How are prediction markets changing Oscar betting?
5:20–6:15
8
What trends are emerging in Oscar betting this year?
6:15–11:24