Wall Street Week | Soft US Jobs, Swedish Defense Spending, Private Credit Woes
Speakers
Summary
- The US labor market is softening, with job creation substantially lower than previous years, while productivity increases driven by companies "battening down the hatches" and anticipating AI efficiencies.
- European defense contractors are experiencing a massive surge in demand, with Saab increasing output 4-5x, driven by a structural shift in European security posture and a goal to source 50% of procurement locally by 2030.
- Private credit has grown rapidly to fill gaps left by traditional banks, but faces a "yellow alert" due to opaque valuations, retail investor liquidity mismatches, and unknown macroeconomic leverage risks.
- Geopolitical conflicts are altering traditional safe-haven dynamics; inflation risks make US Treasuries less attractive, driving capital toward gold and the US dollar.
- Unprofitable software companies funded by Annual Recurring Revenue (ARR) private credit loans face significant refinancing risks and potential solvency issues.
Trade Ideas
"There were a lot of loans made to particularly software companies, what we call ARR loans... They're made on the basis of revenues as opposed to profits. Revenues don't necessarily mean you're solvent." Software companies that relied on easy private credit funding based on top-line metrics rather than actual cash flow will struggle to refinance. Combined with the anticipatory disruption of AI, the sector faces a painful reckoning. AVOID. Unprofitable tech and software sectors face dual headwinds from tightening private credit markets and shifting enterprise spending due to AI. AI-driven productivity gains accelerate profitability for these software companies faster than their debt matures, allowing them to easily refinance.
"I think Treasuries are more complicated because the war creates inflation, and inflation is bad for Treasuries... gold until recently and silver also until recently have been so strong that those are normally indicators of a lot of fear." Traditional safe-haven assets like long-duration bonds are compromised by the inflationary nature of modern geopolitical conflicts. Investors seeking portfolio protection will structurally allocate away from fiat debt and into hard assets. LONG. Gold serves as a superior hedge in an environment where rising inflation, deficit spending, and geopolitical risks undermine US Treasuries. A sudden deflationary shock or aggressive central bank rate hikes that drive real yields higher and strengthen the US dollar excessively.
"I think if I look at our company, we have probably four to five-folded output from before the war started... European defense company stocks are surging, with other major players like Rheinmetall and Leonardo reporting record years." Europe is structurally rearming and shifting procurement to domestic suppliers (targeting 50% by 2030). Companies with existing manufacturing capacity and NATO integration will capture this massive, multi-year fiscal tailwind. LONG. European defense primes are entering a long-term supercycle of government spending, expanding their shareholder base and integrating rapid battlefield innovation. Political shifts in Europe that reduce defense budgets, or supply chain bottlenecks that limit production capacity expansion.
"We should be on yellow alert... it's both the opaqueness of the valuations of many of these investments, because there's no price discovery for these illiquid loans, and the fact that the regulators are not helping the rest of us poke through that opacity." The massive influx of capital into private credit has created hidden leverage and liquidity mismatches, particularly as retail investors enter the space. If a macroeconomic shock occurs, the inability to mark-to-market accurately could trigger panic selling and regulatory crackdowns. WATCH. Alternative asset managers heavily exposed to private credit face growing scrutiny, potential retail redemptions, and valuation stress tests. Default rates remain historically low, and these firms successfully navigate the credit cycle without significant markdowns or liquidity crises.
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Speakers: Steve Rattner, Micael Johansson, Dan Tarullo · Tickers: IGV, GLD, SAABF, RNMBY, FINMY, APO, KKR, OWL