Larry McDonald: Private Credit Is This Cycle's Subprime — And Retail Investors Are Holding the Bag

Summary

• Private credit is this cycle's subprime equivalent: opaque, over-leveraged, with bad marks (mark-to-myth), and already a crisis. Retail investors were sold quarterly liquidity on an inherently illiquid asset class.
• The private credit crisis is causing a "truth bleed" similar to 2007-08; sell-side research initially called issues "idiosyncratic" but is now shifting, and insurance companies (e.g., Met Life) are potential bag holders.
• Stagflation is the defining macro theme for 2026, driven by sticky energy inflation (due to Middle East supply chain damage) and an emerging economic slowdown (energy costs act as a ~1% tax on GDP).
• The 60/40 portfolio is broken; the historical negative correlation between stocks and bonds has broken down since 2022, meaning both can sell off together in the current regime.
• A "Great Migration" out of financial assets (paper certificates) and into hard assets (energy, copper, gold) and the companies that own them is underway, estimated to be only in the "second or third inning."
• Money is rotating out of the Mag 7 (down 15%+, led by Meta and Nvidia) into industrials, materials, and energy stocks, which were only ~9% of the S&P but are now ~13%, mimicking the 1968-81 period.
• Natural gas equities (e.g., FCG, TER) are a top multi-year bullish idea due to "trapped gas" in Canada/Texas and demand from relocating data centers facing NIMBY and cooling issues.
• After a tourist-driven pullback, gold and silver miners are a buy near the 100-day moving average; household ownership of hard assets is still historically low (~1.25% vs. 3% in the 80s).
• Made a first-ever Bitcoin purchase, citing a favorable Bitcoin-to-gold ratio (~13 vs. high 30s) and currency debasement themes, expressed via ETFs like IBIT for broad accessibility.
• The UK (and France) is an under-the-radar systemic risk due to high energy costs hitting consumers, slowing growth, and challenging bond issuance amid large deficits.
• The US fiscal picture is dire (6% deficits, 125% debt-to-GDP), leading to long-term dollar debasement, but the dollar remains the "cleanest dirty shirt" and will see counter-trend rallies during global flights to quality.
• The AI/data center buildout is hitting cost overruns (energy, DRAM from Micron, Caterpillar shortages), crushing Mag 7 profit margins and slowing the investment boom.