Warsh Did It
Warsh did it. On 16 September the FOMC raised the funds rate 25 basis points to 3.75–4%, the first hike in more than three years, on a unanimous 12–0 vote. His line at the press conference: inflation has been “too high for too long.” Sixteen of eighteen participants expect another increase this year; four think two. Warsh himself declines to submit a dot.
So the tug of war I wrote about in August resolved the way the hawkish read said it would. He was not bluffing.
The bond market did the rest. The ten-year went through 5% on 14 September for the first time since 2023, and has kept going — 5.10% this week on a 13 basis point day, the largest single-day move in about eighteen months and the highest yield since 2007. The drivers are exactly the three I named earlier this month: inflation with a war premium on energy, corporations issuing debt to fund AI buildouts, and a government issuing to cover everything else. Nothing exotic. Just three large borrowers and one pool of savings.
Which puts us in the part of the cycle I have been waiting on. Rates this high, held this long, eventually find whatever was built assuming they would stay low. So I have been scanning the horizon for cracks — and this is the kind of work I now hand to AI first, because it will read a hundred filings, delinquency series and rating agency notes in the time it takes me to read three.
It found one, and it is not the one I expected. Not commercial real estate, though that is bad and getting worse — CMBS office delinquencies have gone from 6.5% at the start of 2024 to 11% today, and mid-sized banks carry CRE at roughly 190% of their tier-one capital, with the worst quintile above 350%. Everyone knows about CRE. It has been telegraphed for two years.
The one that got my attention is private credit. The default rate hit 6% in April by Fitch's count, in a market that has grown to roughly $2 trillion with almost no public price discovery. And the stress is concentrated in corporate direct lending — specifically, in software.
Sit with that for a second. The most levered corner of the credit market is concentrated in the one sector AI is actively disrupting. These are companies that borrowed at low rates against recurring revenue everyone assumed was permanent, and are now refinancing at 5%-plus into a market where their product may be a feature in someone else's model. That is not a rate problem alone. It is a rate problem arriving at the same moment as a business model problem.
The contagion path is not a bank run. It is slower: defaults accelerate in direct lending, the losses surface in regional banks, insurers and pension funds that bought the paper for yield, and those institutions pull back everywhere at once. Nothing breaks loudly. Credit just quietly stops being available to anyone who is not investment grade.
I have no position here and I am not shorting anything. But it changes what I am watching. If private credit is where this cracks, the tell will show up in regional bank disclosures and BDC marks well before it shows up in the S&P. That is now on my weekly list.
Positioning unchanged: long the AI names, large cash, gold. If this is the crack, cash is what lets me buy the good companies that get sold alongside the bad ones.