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 came back with a list. These are its findings, not my convictions — I have not verified every number myself and I hold no position against any of them. But they are worth writing down:
- Private credit. Default rate at roughly 6% as of April by Fitch's count, in a market grown to about $2 trillion with almost no public price discovery. The stress is concentrated in corporate direct lending — and within that, in software.
- Commercial real estate. CMBS office delinquencies from 6.5% at the start of 2024 to about 11% now. Well telegraphed, but still deteriorating.
- Regional bank concentration. Mid-sized banks carrying CRE at roughly 190% of tier-one capital, with the worst quintile above 350%.
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.