Liquidity trap of another sort
June 1, 2025 – Weekly comment
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Private Capital:
Dan Rasmussen of Verdad Capital wrote a piece for the Financial Times (31-May): ‘Is private equity becoming a money trap?’ Succinct and informative, it dovetails with a short Bill Ackman interview (below). The takeaway is that many of the private companies rely on debt, and are cash-flow negative; there is little chance of a graceful exit for those who have over-allocated in this area.
By my estimate, the addressable market for private equity — the companies it could buy — is only about one-tenth the size of the public equity market. Yet a 40 per cent allocation to privates, roughly where Yale’s endowment is, has become increasingly commonplace. This represents a massive overallocation to a very illiquid asset class.
Ackman says the same thing about Harvard: About 80-85% of the stated $53 billion endowment is in [illiquid] private equity, real estate and venture capital funds. He estimates that a sale of private equity would entail a discount of about 40% of carrying value, but importantly notes in his X post, “I am told by an expert I highly respect in this space that my 40% discount is much too high and a 7-15% discount is a better estimate.” In any case, the implication is that rather than selling into an unwelcoming market, Harvard is borrowing, with $7.9 billion of debt.
Larry Fink of BlackRock was WAY out in front (March 31, 2025). From a BBG article:
The world’s largest asset manager now sees part of its purpose as “unlocking private markets,” said Fink, whose firm has committed almost $30 billion in the past year to acquisitions in that area.
In his letter, Fink said the traditional 60/40 portfolio of stocks and bonds may no longer be sufficient for diversification. Instead, Fink said the new normal for portfolios may be 50/30/20, with 20% of investments being in private assets such as real estate, private credit and infrastructure.
Sounds an awful lot like Bernie Madoff sucking the last hapless investors into his Ponzi.
The question is, “If problems reach critical mass in private equity/credit, are those markets large enough to cause serious repercussions across asset classes?” Rasmussen says private equity is about one-tenth the size of public markets. A google search puts that percentage slightly lower.
Jamie Dimon said two weeks ago: “I am not a buyer of credit today. I think credit today is a bad risk.” From a couple of days ago, “You are going to see a crack in the bond market. It is going to happen.” “If you look at economic history, bad things happen. Tectonic plates shift; very hard to see in real time. It is shifting…I just don’t know if there’s going to be a crisis in six months or in six years. I’m hoping that we change the trajectory of the debt…”
Concerns about private equity/credit are one area to monitor. Gov’t finances are another. Many large players have warned about excessive complacency, Dimon being the most recent (in a more macroeconomic sense).
Perhaps a bigger concern should be (down)shifts in the labor market due to AI and robotics.
Business Insider is cutting 21% of employees in part due to AI. One small example. Erik at YourWeekendReading (@erik_ywr) notes in his last missive that Jensen Huang (CEO of NVDA) gave a keynote address on May 19 at Computex in Taiwan. “It was probably the most important speech in the entire financial services industry. It explained everything. It laid out the roadmap for where we are going, and yet no one mentioned it.”
It’s a long presentation, here’s a link:
https://www.youtube.com/watch?v=TLzna9__DnI&t=2846s
At around the 42 minute mark, Huang talks about the Stargate ‘AI factory’. 4 million square feet in Abilene TX. Costing $60 to $80 billion; the computing parts are $40-$50 billion.
The speech is a celebration of advances and computing fabrication prowess in Taiwan. Calling it impressive is an understatement. Around the 1:20 mark the speech covers robotics.
The AI/ robotics revolution will likely entail painful adjustments in employment across many industries. (Payrolls Friday expected 125k from 177k last).
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On the week yields fell, with 5s, 10s and 30’s down 9.3 to 10.5 bps (3.981%, 4.418% and 4.932%). On the SOFR strip greens were the leader, with SFRU7, Z7 and H8 all +11.0 (9665, 9658.5, 9652.5). The peak contract is still SFRZ6 at 9676, up 7.5 on the week. Implied vol was down across rates. MOVE index -8.8 to 92.11 and VIX fell 3.7 to 18.57.
In context to Dimon’s warning about market ‘cracks’: The spring of 2023 is when SVB failed: the regional banking blow-up. 30y yield had reached 3.99 in early March, fell to 3.45 in early April as the crisis unfolded, but then shot up to the high of 5.115% by October as the Fed continued to hike. From July to October the yield rose about 125 bps. I would place that move in the ‘crack’ category. In the October 2023 Quarterly Refunding, Yellen addressed that crack by shifting issuance to bills. From the October 2023 high of 5.115%, the 30y yield fell to 3.95% by the end of December. So when Bessent says the Treasury has a large toolkit to address bond market volatility, I think that means there’s a cap on bond yields at around 5.5%, or at least I hope so.
In the July-August 2024 yen-carry episode, the 30y bond yield was 4.54% on July 24, but sank to 3.93% by mid-September. By mid-January of this year it was 4.97%. On the initial tariff scare in April, the 30y yield was 4.70% on March 27, but fell to 4.41% just after the Liberation day announcement. Now 4.93%. My takeaway is that ‘crisis’ episodes can lead to fairly dramatic long-bond yield declines in the short term, but the trend going into and coming out of the election is marked by higher lows and higher highs. Might a continued move to higher yields precipitate a wrenching adjustment in private equity/lending? Bessent will be tested.
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News this week:
Waller speaks tonight
Monday: ISM Mfg. Since late 2022, only above 50 in two months, Jan & Feb 2025 at 50.9 and 50.3
also on Monday: Powell speech at Board of Govs Internat’l Finance Conference
Tuesday: Factory Orders/ Durables, JOLTS. At 7.192m last, it’s near 2018/19 levels.
Wed: ADP & ISM Services. Watch employment, 49.0 in April and 46.2 in March. BEIGE BOOK
Thursday: Trade and Jobless Claims (Kugler, Harker, Schmid)
Friday: Payrolls expected 125k from 177k. Rate 4.2% vs 4.2 last.
TRADE THOUGHTS
Near one-year SOFR calendar spreads have imploded this year. SFRM5/M6 was -1.5 bp on Jan 10, low settle on April 30 was -110, now -91.25 as we go into June roll. SFRU5/U6 was +6 on Jan 13, settled Friday at -79.0. Low settle for the move was last week at -80.5. SFRZ5/Z6 was +11 on Jan 14. Friday’s settle -56.5. Low settle on Tuesday was -59.0. (9619.5/9676.0). These declines have occurred as expectations for easing have been pushed further back along the calendar. It’s somewhat surprising that on January 27 (the high settle in Jan) SFRZ5 was 9613.5. At that point the Dec contract was 11 months forward. On Friday SFRZ5 settled just 6.0 bps higher at 9619.5, now a six-month forward contract. In between, the high tick associated with Liberation Day was 9709.5. The current price of 9619.5 is 3.805% almost exactly 50 bps lower than the current Fed Effective rate of 4.33%. Two eases.
| 5/23/2025 | 5/30/2025 | chg | ||
| UST 2Y | 397.1 | 391.5 | -5.6 | |
| UST 5Y | 407.4 | 398.1 | -9.3 | |
| UST 10Y | 451.1 | 441.8 | -9.3 | |
| UST 30Y | 503.7 | 493.2 | -10.5 | |
| GERM 2Y | 176.4 | 177.2 | 0.8 | |
| GERM 10Y | 256.8 | 249.9 | -6.9 | |
| JPN 20Y | 252.8 | 239.7 | -13.1 | |
| CHINA 10Y | 169.6 | 170.0 | 0.4 | |
| SOFR M5/M6 | -86.5 | -91.25 | -4.75 | |
| SOFR M6/M7 | -6.5 | -11.0 | -4.5 | |
| SOFR M7/M8 | 24.5 | 24.0 | -0.5 | |
| EUR | 113.65 | 113.49 | -0.16 | |
| CRUDE (CLN5) | 61.53 | 60.79 | -0.74 | |
| SPX | 5802.82 | 5911.69 | 108.87 | 1.9% |
| VIX | 22.29 | 18.57 | -3.72 | |
| MOVE | 100.91 | 92.11 | -8.80 | |
