The Bear Stearns Moment | Ben Hunt on How Private Credit Unravels

Summary

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Excess Returns Podcast Summary

Episode: "The Bear Stearns Moment | Ben Hunt on How Private Credit Unravels"

Date: October 19, 2025
Hosts: Matt Zeigler (B), Jack Forehand, Justin Carbonneau
Guest: Ben Hunt (A) – Founder, Epsilon Theory

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Episode Overview

This episode dives into the unfolding risks in the private credit markets, drawing direct parallels to the lead-up to the 2008 global financial crisis. Ben Hunt, noted for his expertise on financial narratives and game theory, examines the structural vulnerabilities, the rise of "flow machines" in shadow banking, and the critical role of trust — with particular reference to recent defaults at Tricolor and First Brands. The episode explores systemic risk, market psychology, and how narrative shifts can trigger crises, culminating in a discussion of Ben’s methods for tracking financial narratives in real time.

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Key Discussion Points & Insights

1. Parallels Between 2007-2008 and Today’s Private Credit Market

• Main point: Ben sees a strong similarity between the collapse of trust in banks leading into the 2008 GFC and what’s happening now in private credit.
  • “There was hidden leverage in the system of loans to Tricolor and the warehouse facilities and all like that. There was hidden leverage in the system of loans to First Brands. When that trust is broken...that is the moment where reality hits. That's the moment where narrative stops.” (00:00)
• Trust is eroded when defaults and bankruptcies surface, regardless of the ultimate size of those failures.

2. The Godfather Reference — Fraud as Betrayal

• Ben frames recent private credit failures through the lens of the Godfather’s Tessio — the betrayal from within.
  • “All frauds are betrayals. What always happens at the end, they go to someone who trusts them and says, ‘Hey, I’ve got a great deal for you.’ It’s always someone you trust...It deserves some heightened scrutiny.” (04:43)
• Not every deal is a betrayal, but current conditions require extra skepticism.

3. How "Flow Machines" Increase Systemic Risk

• Shadow/alternative asset managers (e.g., Apollo, Blue Owl, Blackstone) have become “flow machines” — businesses built to maximize the volume (not necessarily quality) of loans processed and sold.
  • “The goal...is to create this machine—a flow. And once you create a machine of flow, the goal then becomes just push as much fuel—that is, capital—through that machine...as is humanly possible.” (09:34)
• Complexity and opacity are engineered to maintain an information advantage, thereby attracting investor trust—until trust fails.

4. The "Chuck Prince" Moment — Dancing Until the Music Stops

• Reference to Citigroup CEO Chuck Prince's 2007 quote: "As long as the music is playing, you've got to get up and dance."
• Describes market incentives: risks are ignored while things hold together, but everyone scrambles when liquidity dries up.
  • “Everyone knew that the mortgage backed securities market was horribly overextended in 2007. Just like today, you're nervous as an investor in these for your clients. But...as long as that day is not today, you've got to get up and dance.” (14:18)

5. The Mechanism of Crisis: Information Asymmetry and Hidden Leverage

• Systemic opaqueness means investors underestimate their real exposure ("hidden leverage").
  • “It's what you don't know that creates the hidden leverage.” (28:09)
• Narrative breaks, and reality asserts itself when banks or funds are forced to acknowledge losses, causing investor pullback and potentially sparking a funding cascade.

6. Common Knowledge and the Dynamics of Trust Collapse

• Events like the Tricolor and First Brands defaults, or Zions Bank’s loan issues, function as "common knowledge" catalysts–moments where everyone simultaneously realizes there’s a problem.
• Analogies to political moments (e.g., Biden debate; Ceausescu’s fall) highlight how rapid shared perception changes drive market behavior.
  • “The crowd starts to hear the crowd respond...That's what drives this common knowledge formation.” (22:26)

7. Why Nominal Default Size is (Mostly) Irrelevant

• Even small defaults can trigger chain reactions because it's about lost trust and narrative—like Bear Stearns' funds in 2007.
  • “The size of these defaults doesn't really matter. It's the trust in this broader flow process that we have to be tracking.” (27:56)

8. The “Doom Loop”—How Real and Financial Economies Interlock

• When Wall Street seizes up (“runs on the bank”), credit dries up, feeding back into real-world defaults and further market stress—cyclical doom loop.
  • “Our economy, our real economy, depends so much on the credit that is extended to us by Wall Street that if that credit stops, then it creates more defaults, more problems in the real world, which creates still more problems on Wall Street. This is what I mean by the doom loop.” (39:18)

9. The Warning Signs: Monitoring Narrative Shifts

• Modern narrative tracking (via Ben's Perseant Pro) scans global news to measure how negative perceptions build, providing clues to whether we face a mere sector correction or a systemic freeze.
  • “We can track with pretty shocking precision when those stories start to grow, and they are growing today...That’s what we’re able to do.” (49:19)

10. Other Emergent Narratives and Macro Trends

• Beyond private credit, Ben tracks narrative momentum in areas like housing (still tilting toward a buyer’s market), gold (as a unique safe haven), inflation, employment, and AI CapEx.

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Notable Quotes & Memorable Moments

• On the Irreplaceability of Trust:
  "In the financial world, you can be insolvent forever, but you can't be illiquid for a moment. You can't renege on your promise to make a cash flow, not for a second." – Ben Hunt (00:45 / 23:29)

• On Hidden Leverage:
  "It's what you don't know that creates the hidden leverage. What's the system of loans of which your deal is only one small part? I think there's a lot of hidden leverage here." – Ben Hunt (28:09)

• On Information Asymmetry:
  "Unless you're invited to sit on the Working Capital group... you're not going to have that information to say, 'Oh, I, I think actually First Brands is a real problem here.'" – Ben Hunt (25:52)

• On the Endurance of Narrative Over Reality:
  "I think it's much less reality than it is what our collective perception of the reality is. And that's what we can measure." – Ben Hunt (49:56)

• On the Current Risk:
  "It feels to me like we've got some catalysts and it's an open question as to whether these alternative asset managers, whether they are more robust than the commercial banks were in the mortgage business in 2007." – Ben Hunt (35:55)

• On Systemic Fragility:
  "You can have 18 interest free credit cards... and you're one layoff or bad job day or whatever missed bonus away from it all coming crashing down." – Matt Zeigler (33:28)

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Timestamps for Important Segments

• Opening analogy: Hidden leverage, broken trust
  • 00:00–02:15
• Exploring the Godfather / Tessio analogy
  • 02:15–06:36
• Parallels: 2007 Shadow Banking vs Today’s Private Credit
  • 07:19–14:15
• "Chuck Prince" moment — Have to keep dancing
  • 14:15–17:51
• The trust mechanism and narrative shift (Biden debate, Ceausescu analogy)
  • 18:36–22:44
• Recent defaults, what matters isn’t size but trust
  • 22:51–28:09
• Systemic risk, hidden leverage, gearing to OPM, and Jamie Dimon's critique
  • 28:09–36:16
• Doom loop explanation, market seizures vs real-world defaults
  • 36:16–41:50
• Comparison: SVB collapse vs potential Wall Street credit freeze
  • 41:50–46:14
• Tracking financial narratives with Perseant Pro
  • 47:41–54:09
• Other stories: housing, gold, real data vs. government stats
  • 56:46–59:23

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Conclusion & Takeaway

Ben Hunt argues that although the surface “smoke” in private credit markets (via defaults like First Brands and Tricolor) may appear manageable in scale, the real risk lies in a sudden, collective collapse of trust—a “Bear Stearns moment.” Such a shift, he claims, is not just possible but may be underway, enabled by hidden leverage, information asymmetry, and over-optimized “flow machine” business models. The lesson for allocators and investors: Don’t be distracted by the nominal size of defaults; instead, watch for shifts in trust and narrative, as these are the true drivers of systemic crises.

For ongoing monitoring, Ben recommends tracking narrative changes with data-driven technology (like his Persiant Pro), not just headlines or sentiment, to gauge whether we’re heading into a sector correction or a 2008-style financial crisis.

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Transcript

[A]

There was hidden leverage in the system of loans to tricolor and the warehouse facilities and all like that. There was hidden leverage in the system of loans to first brands when that trust is broken. And there was a clear moment when the trust was broken in 2007, just like I think there's a clear moment today where the trust has been broken. Then. All of us funders of the system, we get nervous when you have bankruptcies, when you have defaults, that is the moment where reality hits. That's the moment where narrative stops. In the financial world, you can be insolvent forever, but you can't be illiquid for a moment. You can't renege on your promise to make a cash flow, not for a second.

[B]

You're watching excess returns. I'm Matt Zigler. Ben Hunt, founder of epsilon theory, Persian and a whole bunch other p words you're about to hear much more of in the coming weeks is with me. You know him for analyzing financial markets through the study of narratives, game theory and all the socio psycho behavioral perspectives, I. E. Not just fundamentals. In this recent piece, it's the smart move. Coupled with his shadow banking presentation that he did for Persian pro members. I saw these. I said, we have to talk about this on excess returns. Welcome back, Ben.

[A]

It's so great to be back, Matt. And man, you do the best intros. There's no one better than you for interest.

[B]

Well, we gotta. We gotta keep it a buck here, I think is how the kids are saying it these days. So I'm an advisor. I'm an allocator. We've been using private credit for years. And for the last couple of years, we've started to be worried about private credit because these nagging little stories would come out about. You were really. And you'd hear about a fund going into, you know, Malaysian motorcycle lease financing and stuff. And you go, what?

[A]

Really? Why not?

[B]

Yeah, why not? But it's like there's been smoke and a little fire and not much. And then first brands and tri color happens. You launch this piece, and I know you mean business when we lead off with the Tessio funeral scene. And it's the smart move. Tessio was always smarter. Unpack the godfather reference. I have to start there.

[A]

Well, thanks for noticing the godfather reference. It's been a while. I mean, I kind of cut my teeth with epsilon theory with lots of godfather references. So it's been a minute since I've been able to implement one successfully. So I was really pleased with this. So look, you know, Tessio of course, is the, the traitor within the family. And I think we're all kind of familiar with, with the scene that Vito, the godfather, before he dies, tells Michael, you know what? Whoever inside our family comes to you and says, let's meet up with Bartzini, the external villain, he's going to be the traitor. And sure enough, it's Tessio. Tom Hagen, the consular, he says, yeah, I always thought it would be Clemenza, the other lieutenant for Vito the Godfather. And Magnus says, no, no, it's the smart move. Tessio was always smarter. And of course they figure it out. Tessio gets what's coming to him. And at the very end, I just love this line too. After Tessio asks Tom Hagen, hey, can you, can you get me off for old times sake? Tom says, sorry, Sally, no can do. And Tessio, last lines, says to Tom Hagen, tell Mike it was only business. I always liked it. And I thought of this because when it became clear that both First Brands and Tricolor were betrayals in the same way that Madoff was a betrayal, Sam Bankman Fried was a betrayal, Elizabeth Holmes was a betrayal. All frauds are betrayals. And I thought about Tessia because it, it hit me that in all of those cases, Sam Bankman Fried, Madoff, Elizabeth Holmes, First Brands and Tricolor, and this is true for every fraud. And I've looked at a lot of them and written about a lot of them that what always happens there at the end, they go to someone who trusts them and says, hey, I've got a great deal for you. Madoff did this, Sam Bankman Fried did this. They all do it. It's always someone you trust and they always come to you with this great deal that's going to get them out of trouble. And it really struck me that this is the time where we all need to be. I'll say, have some. Our spidey sense up and some when people come to us with deals in this environment, after the shocks we've had, the real economic shocks that basically drove both Tricolor and First Brands to desperation and bankruptcy, I think now's the time to be a little, you know, I'm not saying that whoever comes to you with the deal these days is a Tessio. I'm saying it deserves some heightened scrutiny.

[B]

It's interesting that it's now that we're at this part of the phase and most of the time when somebody comes to me with a 2000 or 2008 or a 2006 even reference, I want to check it out the door but in this case, and we're going to flash a bunch of the slides from this presentation as we go here. So watch. If you're not watching this on YouTube, you want to be on YouTube for this one. The same script, this slide. You're talking about Shadow banking then versus now and how financialization of different sectors parallels 2008 here. This is the first time I feel like this is warranted in a minute here. So unpack what's going on in shadow banking then versus now.

[A]

It's such the same dynamic because what always happens in this later stage of any financial cycle is that the firms themselves and this would have been the commercial banks in 2007. Today it's. We used to call them shadow banks and I think today they prefer the term alternative asset managers. The. So for example, Apollo would be an example. Blue Owl would be kind of probably the best two known in that world. Alternative asset managers. Blackstone for sure. What always happens at this stage and by this stage I mean we're kind of long in the tooth. Right? You know, you mentioned we've. If you're a financial advisor, if you deal with other people's money at all, you are pitched these deals, private credit deals I'm referring to constantly, probably multiple times a week if you're at a big shop. And this has been going on for years now, for years. And there are all sorts of vehicles and different ways you can play it and types of offerings that come your way. BDCs be a funder for a lending facility, buying loans out of a warehouse facility, giving money to a manager who's going to create a portfolio of such and such characteristics. All these kind of deals. We're late in the game. And what always happens when you're late in the game is that the banks, shadow bank or commercial bank, they build their business to be, I like to call them flow machines. Flow. Flow machines. That is, it's not just about making a loan and then oh, I keep that. I made a good loan. Good, that's, that's a, that's a good investment for me. That's not where the money is. The money is being a one stop shop to do every step along the way. Originating the loan, negotiating and structuring the loan, funding the loan and then most importantly selling the loan, getting it off your balance sheet, selling it to someone else. That's what all these companies have done. They have become these flow machines where you know, making good loans to private companies, that's nice if it happens. But the goal here is to create this machine just a flow. And once you create a machine of flow, the goal then becomes just push as much fuel that is capital through that machine that you've built as is humanly possible. What has happened, and this happened in from 05, 06 and 07, culminating in 08, also been happening here for actually more years, is that there's an intentional complexity and muddiness, opacity to the structuring of this, of the system, for example, of loans to A First Brands. It's intentional because it creates informational asymmetry between the Apollo or the Blue Owl, the entity that knows all the pieces and all the players. And you now, you understand this, we're not stupid. We know that we're on the wrong side of that informational asymmetry. And we have this level of trust with the entity, whether it was that commercial bank, the Wachovia, the WaMu, the city, the Wells Fargo, the Countrywide, which, you know, became part of B of A. So we have some trust that this entity is not going to do us wrong. But the big similarity here is that when that trust is broken, and there was a clear moment when the trust was broken in 2007, just like I think there's a clear moment today where the trust has been broken, then all of us funders of this system, we get nervous and we wonder, A, is the next deal that's offered to me being offered to me by Tessio or B, you know, the people that I have money with, have they been played for a fool by A Tesio? Either way, you pull back as an investor, as a buyer of these deals, and that is what creates this chain reaction starts in the real world. Delinquencies, foreclosures in homes. In 07 today, first brand tricolor, whatever the two failures that Zions and the other bank, regional banks were talking about yesterday, starts in the real world and then it goes into the financial world. And that's where it is right now, where the investors, the buyers of these deals are looking at it and saying, I don't know, I don't think I'm going to be participating in this next deal. So that's where we are. And the question is going to be, are these alternative asset managers today as geared for capital velocity and as vulnerable to a slowdown in that capital velocity as the commercial banks were in 2007?

[B]

Because inherent to that question is back to this flow story.

[A]

Right, Exactly. I think we've got a picture here of Chuck Prince, who was the Citigroup CEO as we went into the great financial crisis. And his famous quote was that so long as the music is playing, you've got to get up and dance. Everyone knew that the mortgage backed securities market was Horribly overextended in 2007. Just like today, you're nervous as an investor in these for your clients. Everyone's nervous all fund. You know, I think bank of America did a survey asking fund managers where do you think the next big crisis could come from? And something like 57% said private credit, private equity, that's going to be the source. It was the same in 07 about mortgage backed securities. But even if you know that one day there's going to be hell to pay, so long as that day is not today, you've got to get up and dance. You've got to get up and dance. If you're immersed in that market. If you're like Citigroup was with mortgage backed securities in 07 or if you're like one of these alternative asset managers today, you've got to get up and dance. If you're a financial advisor. You know this Matt. The risk for a financial advisor is not doing poorly when everyone else is doing poorly. The risk when you lose your clients is when you don't do as well as another financial advisor. When you're not getting up and dance and participating in one of these overextended markets. Let me tell you the last similarity if I can Matt, between please what 07 and today. So similar type of catalyst. In 07 it was the bear Stearns had these two high yield funds based on mortgage that went bad, went bankrupt because of the mortgages inside. Today we've got the catalyst of tricolor, first brands, some other cockroaches, as Jamie Dimon would call it. You've got the same overextended market where even the players who are immersed in it know it's overextended. We've got a situation where everybody feels like we got, we still gotta dance as long as the music is playing. All of the people who were immersed in it in 07, I remember this so vividly. All of the analysts in Wall street who would cover this, all of the management teams for the big banks, they would all tell you like say yeah, there's, it's going to be a problem one day but we've got time. We've got time. That same quote from Chuck Prince, he's saying, yeah, when the, when the liquidity stops, there'll be some complications but they'll be manageable. Ring fence manageable.

[B]

They're really.

[A]

So that what you're, what you're going to hear from analysts, what you're going to hear from management is that, yeah, there's some problems, but it won't get out of hand and it won't deteriorate too fast. And that, I think, is because they are underestimating the degree to which those of us who are on the other side, the ones who are investing in these deals, they are terribly underestimating the degree to which we feel betrayed, the degree to which we do not trust, and the degree to which we will pull our funding.

[B]

I want to draw a connection because there's a common knowledge aspect to this. And I want to take us back for a second to a breaking news that we recorded with, with Jack Forehand on this, too. And this was the Biden, the Biden debate that went awry. And you said, emperor has no clothes. Everybody now knows that. Everybody knows. And that changes the complete dynamic, even though that feels like a relatively minor incident, because that's the trust mechanism. That's the, all of a sudden, everybody knows we don't believe this a story. And all of our neighbors are saying the same thing.

[A]

I was watching this, and I'm saying, okay, I know what I think about Joe Biden's cognitive abilities, his mental competence for the job. But I, you know, I'm still, I'm still kind of leaning towards the guy, honestly. And then we all saw what we all saw, and you could just see the common knowledge change around you. And it changed, it changed everything about how. I think that was the point of our breaking news episode last week, that I had already gotten to the point was, sorry, I can't do it anymore. I can't do it anymore. I can't support the guy. And that same sort of realization, which is very sad and just terribly, I think distressing was felt by millions of people. But that's exactly the process, Jack, you're exactly right.

[C]

It was interesting to me, too. Like, how important. And you touched on this on Twitter.

[A]

How important? How important?

[C]

The reaction, like John King on CNN was like, what they did right after the debate was over. It wasn't just what we had all seen. It was, you know, Democrats are scrambling behind the scenes, they're trying to replace him. You know, Barack Obama's on the phone, like, can you talk about that, how important that was?

[A]

Yeah. So, you know, my, our friend Tom Morgan wrote a note and he was, he was tweeting me about this the other day about a great example of that, of the crowd starting to respond in the middle of the speech, because I don't know about you, if you're watching. A lot of people watched it in a small group. We knew that we were part of an enormous crowd. We knew that there were how many tens of millions of people watching it. And we also mostly watched it with other people, right? Our family, friends, people would go to a watch party, something like that. So you are part of a crowd, and you're. You're. You're starting to. To feel the crowd around you, respond to what happened. Just almost immediately, for me, it was my. My Twitter feed started blowing up. I started making a few tweets also. I mean, just three minutes in, it's like, oh, my God, what is going on here? And you could. Maybe you got it from your social media. Maybe you got it from somebody texting you, hey, are you watching this thing? Maybe you were watching it with. You started to hear the murmurs of whatever group you were with watching the debate. So the crowd starts to hear the crowd respond. And I mentioned our friend Tom Morgan, because he was tweeting me about another case like this, which was Nicolas Ceausescu, the dictator of Romania. This is 1989. He starts giving a speech. It's a televised speech, and the audience starts yelling back at him, and he starts. They start heckling him, and he starts yelling back at the audience. And this is all being televised. And within, like, a week, the government falls. It's done. It's done. And it's all because the crowd, that crowd at the Palace Square, whatever it was called in Romania, in Bucharest, it gets televised to the much larger crowd. The crowd sees a crowd responding in a certain way, and that's what drives this common knowledge formation.

[B]

What are we seeing here that rhymes with that type of common knowledge moment.

[A]

You saw it in? I'll call it market action yesterday. So yesterday, when Zions and the other regional bank came out and said, yeah, we've got some cockroaches, too, in our loan book. It wasn't that everybody said, oh, my God, Zion's bank has a $50 million loan that went bad. We've got to, you know, sell Zions immediately. Sell all the regional banks over a $50 million loan. It's not about the loan. It's about that.

[B]

You.

[A]

And by you, I mean all of the banks, commercial, regional, and the shadow banks most of all, have been telling us, no, our loans are good. Irelands are fine. It's all good. When you have bankruptcies, when you have defaults, that is the moment where reality Hits. That's the moment where narrative stops. It's probably the only moment. It's probably the only moment. And you know, one of the things I love to say is in the financial world, you can be insolvent forever, but you can't be illiquid for a moment. You can't renege on your promise to make a cash flow, not for a second. Because when you do, that's when all the narratives stop and the reality kicks in of bankruptcy and default. Same catalyst in 07 for there it was really focused on Bear Stearns. Today we're going to see the same thing. We're already seeing the same thing. Oh, it's just focused on these couple of companies. Maybe Jeffries got out over their skis. But it's just them. It's just them. What you saw yesterday was announcement, hey, it's not just them. It's more than just First Brands and Tricolor. And now my belief is that everybody is on edge because we just don't know. And we don't know because the structuring of these deals is intentionally opaque and complex. It's done intentionally to create this asymmetry of information so that the Apollos and the Blue Owls, yeah, they may be moving most of these loans through their machine, but they have such good information. They say, well, maybe I'll keep this one for my own balance sheet. Apollo was short First France. Apollo was short the bonds of First France. They took the short position and then.

[B]

Turned around and took it.

[A]

Right?

[B]

Yeah, that was the idea. They got to see it said we're not going to participate and we're going to.

[A]

They were invited participate in a working capital group for first brands back in 2024. I don't know how much they were taken over the wall and all this other kind of stuff, but they saw the documents that invitees to a Working Capital group would receive and they decided we're going to short the hell out of these bonds. So that's what I mean by an asymmetric information flow. Unless you're invited to sit on the Working Capital group and you're not, you know, you're not going to have that information to say, oh, I, I think actually First Brands is a real problem here. But, but, but pricely, because there's this asymmetry of information and we all know it and we know that we're on the wrong side of it. We don't trust people. We don't trust people. They may be a Tesio like the First Brands and Tricolor guys were maybe they're just being played for a fool by other Tessios. Either way, I'm not playing the game. And that's what creates the next domino to fall, which is when the funding stops. So that's what we got to watch for now, Matt, is whether or not these alternative asset managers are as vulnerable to a hiccup in funding as the commercial bank flow machines were in 2007.

[B]

I want to put the highlighter on this point that the size of these defaults, because I've already seen lots of people talking about the nominal size of these defaults and comparing it against how big the industry is and blah, blah, blah. Hundreds and hundreds of billions over here. There's 70 or 80 billion at Blackstone alone. And you're worried about these, you know, 20 odd billion here and this other stuff, 50 million there.

[A]

Yeah.

[B]

Putting the highlighter on this. Just say this one more time. The size of these defaults doesn't really matter. It's the trust in this broader flow process that we have to be tracking.

[A]

Yes. And so I think that the. The size of These look a $50 million loan that Zions has or Wachovia or whoever, you know, that that is. That's not big, but it's indicative of a market that's got, you know, billions of dollars of loans to it. Tricolor is pretty big. $10 billion? Yeah. First Brands was a little bit bigger. 11 and a half, $12 billion. It wasn't just that it was 10 to $12 billion for each of them. It was that the participants in these loans, they didn't think it was anywhere near that big. There was hidden leverage in the system of loans to Tricolor and the warehouse facilities and all like that. There was hidden leverage in the system of loans to First Brands. Leverage that doesn't seem to be there if you're just looking at that one individual deal. You're a advisor for your clients, you've been pitched some deal. You look at it, they're not lying to you about the characteristics of the deal or the leverage that's in the deal. They're not lying to you. It's what you don't know that creates the hidden leverage. What's the system of loans of which your deal is only one small part? I think there's a lot of hidden leverage here and more than just hidden leverage in terms of size, it's leverage in terms of vulnerability. In terms of what other obligations do you have that you've got to make good on when you have real world shocks like our deportation policy, created for Tricolor, who made loans to a lot of undocumented people. When you have tariff policies that create shocks for an auto parts supplier like First Brands, these are real world events that you can't wish them away. First Brands, the impact of the tariffs was that they had about. They had to spend about $200 million in cash to build up inventory in advance of the tariffs coming into place. Doesn't seem like that $200 million would be enough to tip the company over into bankruptcy. But the problem for First Brands was that they had a larger financing that they needed to complete this summer, about a $6 billion financing which would have made all the problems go away. They weren't able to complete that financing. So it's that, it's that old line of. For the one of a nail, a shoe is lost. For the one of a shoe, the horse is lost. For one of the horse, the rider is lost and the rider, the battle, et cetera. There is a cascading effect that can happen in highly, in companies that are highly optimized for capital flow where they got to get that financing done, they got to get that funding done because they owe and there's a ticking clock on something. So I hear the questions about well, there's not as much leverage. True. That said, I think there is both hidden leverage in the system of these lendings. I also think that operationally there is such gearing towards the next funding and the next refinancing that this has been optimized so great with such great precision that when there's an external shock like we're experiencing all over the world today, there's a cascading effect. So even something that seems small, and who could say, I mean $20 billion is not small, it can absolutely trigger this sort of cascading effect. It's a great question, but that's my answer to this about why even seemingly small numbers can matter a lot.

[B]

And I think most profoundly both in looking at the deal graphic and then the entity graphic that you shared in the piece. Because now you see that function of what you owe in the context of is always going to be driven by flows.

[A]

Yep.

[B]

You can have 18 interest free credit cards and be playing the game and spinning it all and your, your one layoff or bad job day or whatever missed bonus away from coming crashing down on your shoulders.

[A]

And that's it exactly. Matt. We've, we've got. I. My strong sense is that particularly for, I call it companies and enterprises that are outside of the magical world of AI where It is truly silly money and seems to be object. I think that in real world businesses like auto parts and car loans, construction, housing, anything facing the consumer, I think we're working on pretty thin margins. And I think that the financial companies that grown, the alternative asset managers, they have very little margin for error. And I know this to be true because this is Jamie Dimon's big complaint about private credit and the shadow banks and the alternative asset managers. Jamie Dimon saying, look, they're drinking our milkshake, you know, to use the, There will be blood. So they're drinking our milkshake of making loans into the real economy because they don't, they don't have the regulatory and capital requirements that we commercial banks do. Now Jamie Dimon can cry me a river, right? I mean he, he cannot fail by edict of the American government and he's a billionaire because of it. But he's got a point when it's a good point, which is that we've given over the necessary function of lending to mid market companies to private credit, these alternative asset managers, and we've made their managers very, very wealthy by building these flow machines to just keep pumping the stuff through. It feels to me like we've got some catalysts and it's an open question as to whether these alternative asset managers, whether they are more robust than the commercial banks were in the mortgage business in 2007.

[B]

Talk me through. I'm going to call these the doom loop diagrams, because I don't know if there's a better word to describe them. These sort of circular flowcharts that you put together between 2008 and the housing crisis and today with private credit. And I want to point out this too, as we see the CLOs and the private credit ETFs and the jamming of products into things to go like retail can take some of this. That's the other part where my earlobes start itching again.

[A]

Yes, yes.

[B]

Because the pitch comes in and I forget who said this first. It's like you hear these pitches and you go, I'll either see you with your Nobel Prize in economics or I'll see you on the other side of the prison bars. This doesn't feel good.

[A]

No, it doesn't feel good, does it?

[B]

Explain these doom loops to me.

[A]

Well, I, I think what broke the world in 2008, yes, it was what happened in housing and nationwide decline in home prices. But what broke the world was Wall Street. What broke the world was Wall street because we had, we had developed a system, a financialized system where the mortgage market became more weaponized and powerful to shatter our economy than the homes themselves. So, and this is the part that I think people are kind of missing again when they say, well, there's not a lot of leverage here or oh, you know, it's not that much money in the grand scheme of things. All of which is true. But it also wasn't much money, you know, in those Bear Stearns high yield funds that went belly up in summer of 07. It's like a couple of billion dollars less than First Brands alone. But what happens is that when Wall street seizes up, when there's a buyer strike, a funder strike, which happened to Bear Stearns, right? So people got nervous about Bear Stearns. And I was a, my hedge fund, Bear Stearns was our prime broker. I loved Bear Stearns, I loved those guys. But I took my fund out. I, I removed my funding from Bear Stearns by removing my hedge fund from their prime brokerage. And I did it early again, not because I thought that they were bad guys, I didn't think they were Teosos, but I thought they were being played for fools by Tesla's that were out there. It's that run on the bank. And runs on a bank don't just have to happen with depositors taking their money out. It can happen as it did with Bear Stearns hedge funds saying, I don't want you, I'm going to take my business somewhere else. That's a run on the bank. And once that happens, it creates this incredible distrust in all the other banks. And I'm using the quotation marks now. And when Wall street has these sort of moments, you get a credit freeze, lending into the real economy stops. And lending credit into the real economy, that is our oxygen. And that's what I mean by a financialized economy. Our economy, our real economy depends so much on the credit that is extended to us by Wall street that if that credit stops, then it creates more defaults, more problems in the real world, which creates still more problems on Wall Street. This is what I mean by that. I like the phrase, you know, the doom loop. And I think what people miss is that it's not limited to what happens in the, the real economy. What happens is that the real economy has these outsized impact in the financial world which leads to these financial players not being able to or not being willing to extend loans, credit into the real economy, which breaks us sadly. That's our world where our real world, our real economy depends on Wall street to Keep that credit flowing. That's the similarity, Matt, and that's what I think we're not adequately grappling with next. We've had the real world shock. Now we need to see do we have a seizing up in Wall street because if we do that will have impact then into the real economy again and it feeds on itself.

[B]

I want to rewind clock for a second because I think this is, we're going to jump into Persian Pro and how this can help with tracking these narratives. I want to go back to 2022. I want to go back to the rate hiking cycle when we were on it, turmoil and bonds and you had flagged around Silicon Valley bank and all that stuff going, going wrong then basically pointing out that, you know, here's, here's an indication of this forming problem we're seeing in if credit seizes and you moved off of that one. I don't want to say really quickly you said the problem's still here, but this isn't the point where clearly the common knowledge hasn't tipped.

[A]

Yep.

[B]

Can you differentiate between that event and what we just saw here too?

[A]

Sure. So the, there was a classic run on the bank for Silicon Valley bank and then a slightly less classic, but still pretty classic for a couple other of the regional banks there were. Our system though is pretty good at stopping these classic runs on the bank. And you do it just like you did and it's a wonderful life. You just shovel the money out there. You get a. JP Morgan says no, will take it. You, you get the, the Fed, the office controller of the currency say no. No. The bank regulators say no. We're putting you together, we're going to put these troubled banks into a big safe and sound bank. We'll give you all the, the funding you need to, you know, get through this. That's what central banks are for. Right. And they're very good at that. So you saw some efforts to kind of create this narrative that oh, your money's not safe at, I don't know, bank of America. That was one that some people were talking about and it didn't go anywhere. And we could track that, we could see that that narrative's not picking up steam. What we're looking at today though is kind of inside Wall street runs on a bank. Like in 07 there was a run on the bank by hedge funds taking their money out of Bear Stearns, of which I was one. That's the sort of thing that you're not going to be able to fix in the same way that the Fed and the big can fix kind of these old fashioned depositor runs on a bank. So that's the sort of thing that I'm really trying to monitor now, looking for those signs of stress inside Wall street with the funding of the alternative asset managers. That's, that's what I think we can really track and I think that's, that's what we're trying to figure out. What does a run on the bank look like for one of those companies? Where do we start to see mentions of that in the financial press? That's the stuff I think we're really good at picking up on. And so that's where we're focused. I'm not saying the doom loop is here. I'm saying we had the catalyst. I'm saying we've had some initial reactions and now we've got to see if we get a seizing up of one of these funders. That's what we've got to track really carefully. If it doesn't happen, great, then this will be a inconvenient thing. It'll be a bear market for these alternative asset managers and the regional banks. Fine. It won't be a great financial crisis if we get a seizing up, if we get a problem internal to Wall street, that's what can have this sort of looping effect into the real economy.

[B]

My mental visual is like the Chuck Prince jukebox. And it's like you get a traditional run and it's like the song ends and all of a sudden you hear the TV in the corner of the bar and you're like, oh yeah, the Price is Right is on over there. And then somebody walks over, pops in a few more credits, the music comes back on and there's a big difference in that. When all of a sudden like mid song, the jukebox gets unplugged, refuse blows and you gotta go hunting for it.

[A]

Yeah, that's exactly right. So the, I don't think we necessarily need more defaults to trigger something. I think we've had some big ones. You saw the price action yesterday, investor. The investment world's very nervous about this. It's going to come out, we'll see, you know, over the next weeks, probably take some months. But is this a. And my personal belief, it, it feels too much like this. It's just riving too much for me. And so I, I, my personal view is that we will start to see some sputtering in these financial companies that have been geared, optimized to be cash capital flow machines. I Think we'll see some problems there, but I don't know. That's what we got to watch for.

[B]

Okay. Over on Persian Pro. Okay, first off, because you look at these things through this framework called a storyboard. What is a storyboard? Let me start there.

[A]

What we've built is the, the technology. And this is something I've done my whole professional career. Yeah, I've been involved in this for 35 years, which is trying to find the structure in unstructured data. Kind of highfalutin phrase. What that means is what are the, what are the underlying storylines in the news of the world? Not what's the headline, but what is it saying? And can you track narrative storylines that you care about? Can you track them through all the news of the world? And the answer is say yes, you can. So what we're able to do now is we're able to read news, the news, any language, any country, all of it. So our archive is hundreds of millions of articles and documents and transcripts and all like that, and then analyze it for stories like. Investors are increasingly concerned about alternative asset managers or funding for private credit deals is problematic. It's not word search and it's not sentiment. It's actually looking for the very specific meaning of those two sentences I just said. And we can track with pretty shocking precision when those stories start to grow, and they are growing today, we can see if they keep growing, do they taper off, do they slow down? That's what we're able to do. So we're able to read the news of the World, to track the narratives of the world. And it's a totally different way of thinking about the world because I don't know what is actually happening at any one of these companies. But the thing is, I don't think that's what really matters. I think it's much less reality than it is what our collective perception of the reality is. And that's what we can measure. So that's what we tried to do in the story. We call them not dashboards, but storyboards, because we can measure this daily, report it weekly. So we can all track these questions because like I say, I don't. I know what I think, but I'm a curmudgeonly short selling kind of guy. So yeah, of course I'm going to kind of think it's kind of going to be a bad case. That's what I think. What I know is what I can see in the data, and that's what I'm going to be Looking for.

[B]

I want you to define another word relative to this. True signatures, semantic signatures specifically. But what do you mean when you say a signature?

[A]

I'll use that interchangeably with. I mean narrative is such a big word, right? It's also become kind of a bad word. Oh, that's just your narrative, man. And what we mean by semantic signature is like a, it can be a big political narrative. It can be, but it can also be something very specific. Like funders are concerned that there are more bad loans out there than that advertised in private credit portfolios. There's a meaning to that statement. I say it's not word search, it's all there. There are a million different ways to express what I just said. Concern about bad loans in a portfolio. You said it a million different ways. What we're able to track, and this is what semantic means is getting at that core meaning not doing word search, you know, not doing sentiment. Are you saying mean words or nice words about a loan portfolio? No. What are words that when you put them together have that meaning? That's what AI, generative AI is really good at doing. But the trick is you can't just ask it these open ended questions for ChatGPT or Claude or whoever. You won't get good results because you'll ask it a second time, you'll get a different answer. To get real good data on this, you've got to put that genie into this very tight bottle where you only let it read. You chop up the articles, you, you don't let it go off and find them, you chop them up into little pieces. You tell it how to think and then you check your work check, you judge its results carefully and you do it at enormous scale. So we're, we're processing, you know, hundreds of billions of tokens. It's, which is crazy now what's available to you to do. But, but, but, but, but that's what we do. And so we call them semantic signatures. You can think of it as a narrative, but it, it can be something as tight and focused as investors thinking about bad loans within a particular set of portfolios. That's what a semantic signature is meaning and focused on. That's what we do.

[B]

Not to keep torturing this analogy, but this is what's clicking in my brain right now is I see the Chuck Prince jukebox, I see that album and I see the signature being, you know, whatever the song is that's on there. And what you're saying is we can take that song and not just know, is this Song does it exist on this, in this jukebox, in this, in this player. But then we can see how much it's being played. We can see how much is this getting.

[A]

Matt? That's right. There's even more than that. Right. So this is a particular song, it's got a particular title. Yes. You could look up how many times that particular song is being played but it's, it's R and B, it's jazz, it's, there's, there's a type of music and what you're really interested in is or it's a sad song or it's a happy song or it's a three quarter time song. What you might, you're probably really interested in is how much are happy songs played, how much are R and B songs played? That's what we mean by semantics. So it's not just the title of a song, it's the meaning of a song. And all the different dimensions of meaning that a song can have. We can track those dimensions of meaning. That's what a semantic signature is.

[B]

And able to log into a portal to some degree customize what you're looking at and to drill into these sections. Is that the dream of what the Purse Unit Pro tool evolves to over time?

[A]

Well, yeah, so that's what our technology does now. We offer it to different people at different levels of depth. So if you want that sort of customized bespoke. Oh, I'm interested in all these sectors and these 500 narratives, we'll do that for you. Perseant Pro is what we think are the most interesting things happening for a professional investor. It's not bespoke, it's not customized but it's storyboard on private credit, storyboard on AI CapEx, storyboard on core macro things, storyboard on safe haven assets, storyboard on tariff rationales. So we cover a lot of waterfront and it's designed for that. I say professional investor. Yes, professional investor, but somebody who, if, if, if you're involved with your money, investing your money on a day to day basis. I think this is something for you.

[B]

Looking across some of this data. What are some of the other things? So we spent a lot of time talking about private credit here.

[A]

Yeah.

[B]

And there's, there's a world to mine and monitor if nothing else. Because like post Silicon Valley bank you want to know if this story is going to ebb or if this is going to keep going up. What are some of the area other areas? I'm thinking about gold, I'm thinking about tariffs I'm thinking about AI Capex. Give me some others that are flagging interesting signals right now.

[A]

Well, one that's interesting to me and I think, Matt, you wrote an article about, this is about housing, right? So the, you know, we've got a housing storyboard where the dominance of this being a buyer's market over a seller's market, it's come off its, its peaks, Matt, from when you wrote that, an article a month or two ago, couple months, but it's still, it's still phenomenally high. And so there are all sorts of aspects of housing, mortgage applications, rent versus Own. I'm finding that stuff really interesting. I'm increasingly concerned's not too strong a word. I'm very concerned that whether you're an investor or just a human being, we have increasingly little insight into, into what is actually happening in the real economy. That the, the data, whether it's unemployed, obviously this is impacted by government shutdown and all like that. But even before the government shutdown, our unemployment data was for, for, was for shit, right? It was terrible. Ditto. I don't trust the inflation data and the like. What I think is that if you read what the world is actually saying about employment or inflation or the like, or housing, that actually gives you a lot clearer and more accurate view of what's happening in our economy than the numbers that we're given. So I, I'm really excited that I use this stuff every day to try to get that comprehensive view of what's actually happening right now in our economy. And I think that's the biggest value of it.

[B]

Any other areas, I'm just going to hit this one more time. Any other areas that are surprising to you for how they're reading right now or presenting themselves?

[A]

I mean, gold is certainly surprising. I think that what we're seeing in our data, it's not a debasement trade. I know that's what the phrase that goes along, maybe it used to be a little bit of that, but that's not what it is today. It's a safe haven asset in a world where traditional safe haven assets like U.S. treasuries, the U.S. dollar, the Japanese yen, are not seen as safe havens. So what we're seeing is less that, oh, there's some magical reappreciation of gold as it is that I'll call it gold alternatives. In terms of a safe haven asset, in terms of an insurance policy, when things are going badly in the world, those other, I'll say similarly traditional insurance policies, the narrative around that is profoundly negative and poor treasuries.

[B]

$Yen Ben, you've got a lot going on these days. People want to find the Internet. They want to see more of this stuff, try things out. Where should they look you up? Where should they bug you? Where do you want to send people?

[A]

So I want to send you to two places. Epsilon Theory is always there. I'm Epsilon Theory on Twitter. Epsilon Theory, we publish, I think, a lot of great stuff. Our Perseant website leading to our professional Perseant Pro, our other offerings, those more bespoke, more involved applications of our technology. That's also there. That's where it's in people. I'm always on Epsilon Theory. I think we're always doing some really interesting work there. And then increasingly I'd love for people to come check out Perseant Pro and perseant.com.

[B]

Being able to access so many of these storyboards, track these narratives, play around with them. I've had my hands in this data set now for a while. I've been able to write a couple posts using it. And it is. It's something else to be able to explore this and not just talk through them with you. Because I'm going to keep going back to that 2022 scenario where we see these things crop up. We want to know if they're going to keep carrying forward. And that matters both with our clients, ourselves, our families, what we're looking out for. Ben, you always do a great job presenting this. Thanks so much for coming back on Excess Returns.

[A]

My pleasure, Matt. Thank you very much.

[D]

Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess returns [e-mail] if you have any feedback or questions, you can contact [e-mail] no information on this podcast.

[B]

Should be construed as investment advice.

[A]

Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.