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It’s a bloodbath across Asian markets this morning with Asia being the world’s largest oil-importing region. Based on a Goldman analysis of the impact of higher oil on real GDP growth (chart below), China is the most insulated from supply-driven oil price increases compared to other emerging Asian economies, with $15/bbl higher crude oil prices leading to 0-0.1pp lower GDP growth and 0.1-0.2pp higher headline CPI inflation. This resilience is partly due to the country's economic structure and the potential for government intervention to dampen the pass-through of global price increases to consumers. Increased oil stockpiling last year - some estimates put China's strategic oil resere at 1.5 billion barrels - and very low inflation over the past few years also make China less vulnerable to rising energy prices.

Conversely, Singapore, followed by Taiwan and Korea, will bear the brunt of it with a -1.6% hit to GDP growth and this is only assuming $85 oil. Brent has now crossed the $100 handle with risks to the upside. 

Seen in this light, it is probably not a big surprise that South Korean President ?Lee Jae Myung ?said on Monday that authorities would ?cap domestic ?fuel prices for the ?first time ?in nearly 30 ?years to contain a spike in prices after ?the conflict ?in the Middle East ?sent ?global crude prices sharply higher.

Speaking at an emergency ?cabinet ?meeting, ?Lee said in the ?government would "swifly implement ?and ?boldly impement" a maximum price ?system ?on ?petroleum products.

The current crisis "is a significant burden on ?our economy, which is highly dependent on global trade and energy imports from the Middle East," Lee said in opening remarks.

He added ?that South Korea will also look for sources of ?energy beyond supplies shipped via the Strait of Hormuz.

Having emerged as the most cartoonish "market" in the world - whether it is stocks, crypto, or oil, and where even the smallest downtick has to be stabilized by the government or else watch the momentum-chasing lemmings run over the cliff - Lee said a 100 ?trillion ?won market stabilization programme should be expanded if needed, and called on the government and the central bank to prepare additional measures to respond to the volatility of ?the financial and ?foreign exchange ?markets.

South Korean shares slumped 8% on Monday to activate circuit breakers for a second ?time this month on the escalating Middle East ?conflict, ?while the won dropped more than 1% to trade near a key psychological barrier of 1,500 per dollar. The Kospi plunged 12% last Wednesday before surging by 12% on Thursday. 

Sure enough, shortly after Korea's announcement, the Commercial Times reported that Taiwan would set a weekly cap on oil-price increases as it seeks to cushion the economy from the impact of the Middle East war. 

The Taipei-based newspaper reported the limit on Monday, citing Premier Cho Jung-tai and unidentified officials. Cho had previously told reporters on Sunday that the government had activated a price-stabilization mechanism to absorb oil price increases. That came after the Ministry of Economic Affairs said the day before that domestic fuel prices would only rise about 5% this week.

On liquefied natural gas, Taiwan’s Economy Minister Kung Ming-hsin told reporters the island only needs to find two more cargoes for March and April. “We won’t have a power shortage, and no additional coal-fired generation will be needed in March and April,” he said on Monday. “We can proceed as planned and safely navigate the period.”

Taiwan’s unleaded gasoline prices rose by as much as 5.5% after the government activated stabilization measures, the ministry said in the statement. Under the floating oil-price adjustment mechanism, prices should have climbed by as much as 19.7% this week, it said, with the government absorbing costs to reduce the impact on households and businesses and maintain domestic price stability.

How long can Taiwan keep prices artificially low, thus ensuring that the snapback will be especially brutal? According to officials cited in the Commercial Times repor, there are currently no concerns that Taiwan will run out of crude oil or natural gas, which simply means that nobody has done the math. The government plans to increase oil and gas purchases from outside the Middle East, and coordinate with Asian countries such as Japan and South Korea to swap LNG cargoes to ensure stable supply, the newspaper reported.

While one can debate the prudence of such price controls until one is blue in the face, the reality is that unless oil stabilizes and reverses, expect similar price caps all across the world coupled with strategic petroleum reserve releases, because a 25% one-day surge in the price of oil - if sustained - not only guarantees a global recession, but it also ensures social unrest, as well as a comprehensive sacking of every incumbent politician. 

Authored by Jim Bovard

In his recent comments justifying a preventive war against Iran, President Donald Trump declared, "In 1983, Iran’s proxies carried out the Marine barracks bombing in Beirut that killed 241 American military personnel." Secretary of War Pete Hegseth has invoked that attack numerous times. The 1983 Beirut barracks attack is one of the most cited and least understood pretexts for the new war with Iran.   

That bombing was one of President Ronald Reagan's biggest foreign debacles. Lebanon had been wracked by a brutal civil war for seven years when, in June 1982, Israel invaded in order to crush the Palestinian Liberation Organization (PLO). US troops were briefly deployed in August 1982 in Beirut to help secure a ceasefire to facilitate the withdrawal of the PLO forces to Tunisia.

US troops exited Beirut after the PLO withdrawal was largely completed. However, in mid-September 1982, the massacre of more than seven hundred Palestinian refugees threatened to plunge Lebanon into total chaos. Lebanese Christian Phalangist militia butchered residents of the Sabra and Shatila refugee camps. The militia was armed, aided, and fed by the Israeli Defense Force, which surrounded and blockaded the camps.

The Lebanese government appealed to President Reagan to send American troops back to Beirut as a stabilizing factor, and Reagan quickly obliged. As fighting escalated between Christians, Muslims, Syrians, and Israelis in Lebanon, the original US peacekeeping mission became a farce. The US forces were training and equipping the Lebanese army, which was increasingly perceived as a pro-Christian, anti-Muslim force. (Most Lebanese were Muslim, though possibly a thin majority at that point.)

On April 18, 1983 a delivery van pulled up to the front door of the US embassy in Beirut and detonated, collapsing the building and killing forty-six people (including sixteen Americans) and wounding over a hundred others. The US embassy was a sitting duck for the terrorist assault: unlike many other U.S. embassies in hostile environments, it had no sturdy outer wall. Newsweek noted, "Delivery vehicles are supposed to go to the rear of the building. Why Lebanese police guarding the embassy driveway would have made an exception in the case of the black van remained a mystery." The attack lacked novelty value, since the Iraqi and French embassies had been wrecked by similar car bomb attacks in the preceding eighteen months.

Five days later, on April 23, 1983, Reagan announced to the press:

"The tragic and brutal attack on our embassy in Beirut has shocked us all and filled us with grief. Yet, because of this latest crime we are more resolved than ever to help achieve the urgent and total withdrawal of all American forces from Lebanon, or I should say, all foreign forces. I'm sorry. Mistake."

But the actual mistake was a US policy that would cost hundreds of Americans their lives.

By late summer 1983, the Marines were being targeted by Muslim snipers. Reagan administration officials seemed surprised at rising attacks on American soldiers. The Reagan administration responded to sniper potshots and scattered mortar attacks on US troops with a massive escalation. On September 13, Reagan authorized Marine commanders in Lebanon to call in air strikes and other attacks against the Muslims to help the Christian Lebanese army. Defense Secretary Caspar Weinberger vigorously opposed the new policy, fearing it would make American troops far more vulnerable. Navy ships repeatedly bombarded the Muslims over the next few weeks.

At 6:20 A.M. on Sunday morning, October 23, 1983, a lone, grinning Muslim drove a Mercedes truck through a parking lot, past two Marine guard posts, through an open gate, and into the lobby of the Marine headquarters building in Beirut, where he detonated the equivalent of six tons of explosives. The explosion left a thirty-foot-deep crater and killed 243 marines. A second truck bomb moments later killed 58 French soldiers.

Colin Powell, who was then a major general, commented in his autobiography, "Since [the Muslims] could not reach the battleship, they found a more vulnerable target, the exposed Marines at the airport." A surprise attack on a troop concentration in a combat zone does not fit most definitions of terrorism. However, Reagan perennially portrayed the attack as a terrorist incident and the American media and political establishment accepted that label.

Reagan administration officials scrambled to assert that the administration was blameless. White House press spokesman Larry Speakes declared on the day of the attack that the bombing "definitely was a difficult situation for us" since "people come out of nowhere and perform these acts." Vice President George H.W. Bush rationalized, "It’s awfully hard to guard against that kind of terrorism." Defense Secretary Weinberger announced that "nothing can work against a suicide attack like that, any more than you can do anything against a kamikaze flight." Actually, during World War II, the U.S. Navy quickly responded by placing rows of antiaircraft guns on the sides of its big ships.

In the aftermath of the Marine barracks bombing, Reagan made a mockery of the truth. In a televised speech four days after the bombing, the president portrayed the attack as unstoppable, declaring that the truck “crashed through a series of barriers, including a chain-link fence and barbed-wire entanglements. The guards opened fire, but it was too late.” Reagan claimed the attack proved the U.S. mission was succeeding: “Would the terrorists have launched their suicide attacks against the multinational force if it were not doing its job?…It is accomplishing its mission.” He warned that an American withdrawal could result in the Middle East being “incorporated into the Soviet bloc.” Reagan also declared that the United States was involved in the Middle East in part to secure a “solution to the Palestinian problem.”

Reagan sent Marine Corps commander Paul X. Kelley to Beirut. Kelley quickly announced that he was “totally satisfied” with the security around the barracks at the time of the bombing. Upon returning to Washington, Kelley was summoned to Capitol Hill and bragged to Congress that “In a 13-month period, no marine billeted in the building [destroyed by the truck bomb] was killed or injured” from incoming fire. Kelley inaccurately testified that the Marine guards had loaded weapons and that two of them had been killed in the attack. When congressmen persisted questioning, Kelley became enraged and shouted, “We’re talking about clips in weapons, but we’re not talking about the people who did it. I want to find the perpetrators. I want to bring them to justice! You have to allow me this one moment of anger.”

Even though there had already been numerous major car bombings in Beirut that year and scores of other suicide attacks, Kelley told the committee that the truck bombing “represents a new and unique terrorist threat, one that could not have been anticipated by any commander.” Kelley denied the Marines received any warning of an impending attack. However, on the morning of Kelley’s second day of testimony, The New York Times reported that the CIA specifically warned the Marines three days ahead of time that an Iranian-linked group was planning an attack against them.

Other military officials involved in Lebanon also denied any culpability. Vice Admiral Edward Martin, the commander of the Sixth Fleet, declared, “The only person I can see who was responsible was the driver of that truck.” Martin stressed in an interview, “You have to remember that prior to Oct. 23, there hadn’t been any real terrorism threat.” A New York Times investigation concluded:

“Marine officers in Beirut and the admirals and generals in the chain of command above them did not consider terrorism to be a primary threat even after the embassy bombing, and even though Beirut had been full of terrorists for years.”

Shortly after the bombing, Reagan appointed a Pentagon commission headed by retired Admiral Robert Long to investigate. The commission report, finished in mid-December 1983, concluded that military commanders in Lebanon and all the way back to Washington failed to take obvious steps to protect the soldiers. The commission suggested that many fatalities might have been prevented if guards had carried loaded weapons. The report stated that the only barrier the truck overcame was some barbed wire that it easily drove over. The commission also noted that the “prevalent view” among U.S. commanders was that there was a direct link between the Navy shelling of the Muslims and the truck bomb attack.

When the White House saw the final version of the commission’s report, they issued a stop order. The Washington Post reported that the White House “delayed release of the report for several days, allowing Reagan to respond to its criticism before it became public, and then attempted to play down its impact by vetoing a Pentagon news conference on the document.” On December 27, 1983 Reagan revealed that “we have never before faced a situation in which others routinely sponsor and facilitate acts of violence against us.” Reagan sought to make the report “old news”:

“Nearly all the measures that were identified by the distinguished members of the Commission have already been implemented and those that have not will be very quickly.”

Reagan announced that the Marine commanders in Beirut “have already suffered enough” and should not “be punished for not fully comprehending the nature of today’s terrorist threat.” Reagan then effectively declared that no one would be held accountable. “If there is to be blame, it properly rests here in this office and with this president,” he announced, just before leaving Washington for a vacation in Palm Springs, California.

The Reagan administration blamed its anti-terrorist failures on the Carter administration. White House press spokesman Larry Speakes announced:

“We don’t quarrel with the fact that the CIA and other intelligence-gathering agencies have been crippled by decisions of the previous administration, and we are in the process of rebuilding capabilities. But it takes time…to re-establish our intelligence-gathering methods.”

The following September, shortly after a suicide bomber again obliterated much of the poorly-defended U.S. embassy in Beirut, Reagan blamed the debacle on Carter administration CIA cutbacks. “We’re feeling the effects today of the near destruction of our intelligence capability in recent years before we came here,” Reagan said, falsely asserting that the Carter administration had “to a large extent” gotten “rid of our intelligence agents.”

Reagan quietly withdrew U.S. combat troops from Beirut in early 1984. During the 1984 presidential election, the Reagan administration also responded to its Beirut debacles by attacking the patriotism of Democrats. In the vice presidential candidates debate, George H. W. Bush denounced Democratic candidate Walter Mondale and his vice presidential pick, Geraldine Ferraro. “For somebody to suggest, as our opponents have, that these men died in shame, they had better not tell the parents of those young marines,” he said. Neither Mondale nor Ferraro had said that the Marines “died in shame.” Bush denounced Mondale for running a “mean-spirited campaign,” saying “We’ve seen Walter Mondale take a human tragedy in the Middle East and try to turn it to personal political advantage.” But Mondale’s criticisms of the Reagan administration’s failures in Lebanon were less strident than Reagan’s criticisms of Jimmy Carter for the Iran hostage crisis during the 1980 presidential campaign.

Muslims also responded to U.S. troops by seizing American hostages. Reagan sent military equipment to Iran as a means to entice the Iranians to exert pressure to get hostages released. After the “arms for hostages” deal became public (along with the illegal funneling of the proceeds to the Nicaraguan Contras), Reagan’s credibility was devastated. Reagan went into such a tailspin after the crisis broke that his new chief of staff, Howard Baker, briefly examined invoking the Twenty-Fifth Amendment to remove Reagan from office because of medical unfitness. The Tower Commission report on the debacle concluded, “The arms-for-hostages trades rewarded a regime that clearly supported terrorism and hostage-taking.”

The 1982-84 deployment of U.S. troops in Beirut achieved nothing. The Israelis were far more aggressive against perceived opponents in Lebanon than were the American troops. But even the Israelis were effectively driven out of Lebanon over a decade and a half later, after failing to suppress Hezbollah and losing more than twice as many soldiers there as it lost during the 1967 Six-Day War.

The United States got dragged into a Mideast conflict and then recklessly failed to defend it own troops or American national interest. The 1983 Beirut barracks bombing does not prove that Iran has always been a deadly enemy. Instead, it shows how folly and deception pervaded even a presidency much less imprudent than subsequent administrations.

An 80-year-old nonprofit that advises conscientious objectors says its phone is "ringing off the hook" as American service members who object to the US-and-Israel-initiated war on Iran are seeking guidance on how to avoid being a part of it. Ominously, the group's executive director says the breadth of force mobilization is much like the run-up to the ground invasion of Iraq.  

"Phone has been ringing off the hook," wrote Center on Conscience & War executive director Mike Prysner on X. "A LOT more units have just been activated for deployment than the public knows about." Founded in 1940, the Center on Conscience and War provides guidance to military service members pursuing a conscientious objector (CO) status or a discharge. The group also opposes military conscription.

Service members: If you agree Trump’s war on Iran is wrong, you don’t have to participate. We can help you explore your options. Call 1-800-379-2679 pic.twitter.com/LOAA7k9ElX

— Center on Conscience & War (@CCW4COs) February 28, 2026

In a post on the group's account, the Center said it received a call from someone who is on deployment orders and who "reports widespread opposition to Iran War within their unit...In particular, they conveyed disgust at the US massacre of the girls’ school as well as the attack on the Iranian frigate in international waters."

The US military is reportedly responsible for killing some 150 schoolgirls in Minab, Iran during the opening of the war. In another incident, a US Navy submarine torpedoed an Iranian ship that was departing a largely ceremonial naval event in India that involved 18 countries. Compounding the controversy over sinking a lightly-armed vessel 2,000 miles from the war theater, the Americans apparently left surviving sailors to drown in a violation of the Geneva Convention -- that is, a war crime. At least 87 died. 

Under US military policy, CO status is defined as “a firm, fixed, and sincere objection to participation in war in any form or the bearing of arms, by reason of religious training and/or belief.” That would seemingly exclude service members who stand ready to defend America, but who view the war on Iran as an amoral enterprise being carried out solely to advance Israel's agenda in the region. 

I just spoke with the mother of a service member in this unit. They were given one last call home before having to turn in their phones. He told his mom the were going “boots on the ground” tonight. pic.twitter.com/3OCupSfp9Q

— Mike Prysner (@MikePrysner) March 7, 2026

However, the group helps service members pursue other avenues for opting out of the latest US regime-change war in the Middle East. For example, in a Friday night post, the Center said service members who are in their first year in any branch "can *easily* get out just by reporting 'failure to adapt'...The evidence bar is low." 

Prysner, who took on the executive director role on March 1, joined the US Army shortly before 9/11, and was part of the 2003 invasion of Iraq. After discharging, he became an activist against the war. He said what he's hearing from callers indicates a major mobilization on par with the final weeks before the catastrophic invasion of Iraq: 

I was part of the buildup to invasion of Iraq. What I’ve heard today from troops & families is so reminiscent of Feb-Mar ‘03. Doesn’t prove the US is invading, but that they are definitely preparing to. Will they? Probably weighing many factors… and our resistance is one of them

— Mike Prysner (@MikePrysner) March 7, 2026

Prysner also said the mother of a service member in a deployed unit relayed a disturbing account from her son: His commander attempted to build enthusiasm for the mission by saying it would bring about the second coming of Jesus Christ. That account parallels those publicized earlier this week by the Military Religious Freedom Foundation. As described by ZeroHedge contributor blueapples, just a few days into the new war, MRFF had already received more than 100 complaints from troops in 40 units who said leaders were pushing theological rationalizations for war on Iran. One commander allegedly said Trump has been “anointed by Jesus to light the signal fire in Iran to cause Armageddon and mark his return to Earth.”

Some ZeroHedge readers may know Prysner as the filmmaker who has collaborated with journalist Abby Martin on the Empire Files, a series of documentaries and videos that include "Gaza Fights For Freedom," which profiled the 2018 Great March of Return, a protest that saw Palestinians who approached the Israeli border wall shot by IDF snipers -- with 62 slaughtered on a single day. 

Prysner just became the Center's executive director on March 1 -- one day after Israel and the United States initiated an unprovoked war on Iran. "With the first US dead in another immoral war, more troops will be questioning their role," said Prysner at the time. "Our job is to find them, defend them, and help them come home." 

Authored by Martin A. Perryman via RealClearDefense,

In February, the Republican President, after conducting military operations against the government of a foreign power, appealed directly to the armed forces and to the citizens to rise and overthrow the regime. While this sounds ripped from Saturday’s headlines, it occurred in 1991, the President was George H. W. Bush, the foreign power was Iraq, and the encouragement was directed to the Kurdish population of the northern provinces.

The Kurds answered the call, believing the regime was ripe for change. In March and April, the uncoordinated uprising, consisting of several disgruntled factions, enjoyed initial success but failed to consolidate and organize. The regime, still formidable, rebounded and crushed the rebellion, leaving tens of thousands dead and nearly two million displaced. The U.S., after encouraging the uprising, stood quietly by.

While it is likely that the majority of U.S. citizens have long forgotten this incident, it is equally likely that the majority of the people in the Middle East have not.

This past weekend, President Trump, in coordination with Israel, ordered military strikes on military and leadership targets at multiple sites in Iran. Reports have confirmed that the Iranian Supreme Leader, Ayatollah Ali Khamenei was killed and there may be more leadership casualties in the wreckage. Like President Bush before him, he made a similar appeal to the Iranian military and people, once these initial strikes subside, to rise and overthrow the government.

This is unlikely to happen.

First, the Iranian regime is far from devastated. The 86-year-old Ayatollah most certainly had a succession plan in place, and the regime has a fairly deep bench. While the loss of critical leadership in its foreign proxies has dramatically limited its ability to conduct operations abroad, that does not hold true domestically. There are plenty of loyalists ready to fill any leadership gaps left by U.S. and Israeli strikes. While degraded, the regime will remain effective and solidly in power.

Second, the Iranian people have not forgotten the lesson learned by the Kurds, therefore an uprising is extremely unlikely. If it did take place, it would need logistical support, organization, and leadership to succeed. These appear to be in short supply. The U.S. is powerless to assist with more than token support.

This is because, unlike President Bush, who chose not to use the significant forces, to include ground forces available in the region, President Trump has limited forces and no ground forces available. He must rely on bluster and bombs. Air power, be it conventional, missiles, or drones, in isolation, has never achieved a strategic objective.  The resulting mismatch in capabilities and objectives creates strategic over-reach.

This reality of geography helps explains several things. Iran is a large country, roughly the size of the U.S. state of Alaska. A sizable portion is mountainous. Those mountains define the borders of the country and help explain the longevity of political and cultural Persia across millennium. The territory is extremely difficult to invade and would be almost impossible to control for any amount of time. It is the reason this most recent incident will not expand into a larger regional war of any significance.  It dramatically limits U.S. and Israeli strike options, and it precludes any significant external assistance to an internal insurgency.

The most likely scenario is a few more rounds of bombing back and forth.  A few Americans serving in the region will die and so will many Iranians. Then the President will declare victory, rinse and repeat. There is no scenario where the U.S. will commit sufficient resources to a force a change in the internal dynamics of Iran. If those resources were to ever be sent for that purpose, recent history regarding Iraq and Afghanistan teaches us that it is most likely doomed to fail.

Martin A. Perryman, a retired U.S. Army Colonel, is a defense and foreign policy expert.

Submitted by Peter Tchir of Academy Securities

Credit

'Hey, hey, A, yeah, yahhh... you make me wanna shout!!'

After a tumultuous week, if there was one thing we could do for you, it is put a song in your head that hopefully makes you smile. Seriously, a song featured in Animal House and Wedding Crashers should make you smile, at least for a moment.

This week’s T-Report follows up last weekend’s Is Credit Whispering? Or Shouting?

We examined the risks to credit markets, from several angles, and explored potential vulnerabilities. The main focus was on the risk of potential “contagion” (though we didn’t use the word) of “selling what you can” instead of what you might want to.

On a “housekeeping” note, we often use ETFs in T-Reports. Whether we are just pointing something out, or taking a view, one way or another, it is meant to be a “badge of honor” to the ETFs selected (except single stock leveraged ETFs, but that is another story). We use ETFs when we feel they “represent” a market or a sector well. Especially when there is no “index” that people follow that tracks that sector. ETFs have multiple advantages over obscure indices. Everyone can see them trade in real-time during market hours. You can see their holdings, their volume, their NAV, etc. You can even trade them. Like any other stock, “price charts” don’t do a good job with dividends/total return, but we try to highlight that, when total return is the focus.

Iran

We will continue to keep you as informed as possible of our views on the conflict in the Middle East and the market ramifications.

• Webinar from last Sunday night.

• Three Themes Driving Markets from Tuesday.

• Tuesday’s Iran War Update SITREP.

• The Spider Web podcast from Thursday. We don’t actually call it that, but I think it is “catchy.”

• Finally, with reference to Mrs. Robinson, we published NFP and Plastics on Friday. Jet fuel was also featured.

• I had the pleasure of going on Bloomberg TV on Monday morning (the 52:25 mark). Why Markets Will Move Past Iran, on the Schwab Network, from the NYSE, also on Monday. Finally, on CNBC, Attacks on LNG Facilities Worry Me, from Thursday, via laptop from a weirdly set up hotel room in D.C.

• Our Academy in the News webpage has links to General Deptula on CNN, General Spider Marks on CNN (multiple times), General Robeson on Bloomberg TV, and Joe Zacks (former CIA Deputy Assistant Director) on CBS Face The Nation.

As of Sunday morning, with an immense amount of input from the Geopolitical Intelligence Group, we are still looking for the parties to find some sort of “off-ramp” soon. Soon being measured in days, and maybe weeks, but definitely not months. We could be wrong, and will know more by Monday morning and will update you if our timing or view changes.

We seem to be at the lower-end of the “fear spectrum” on this issue. Worried, concerned, and cannot rule out a lot more pressure on markets and the global economy, but that is not our base case.

A Little Bit Quieter Now

Yes, the song says “softer” but that could be interpreted as negative, and there were some positive developments this week, at least with respect to my concerns.

The software sector, as represented by this ETF, reclaimed levels above its post-Liberation Day lows. It was up every day this week, including Friday. A technical bounce, or re-thinking the software is “doomed” narrative? A bit of both?

Given the relative importance of the software sector in private credit, this could provide welcome relief!

We saw BDCs bounce this week as well. I track BIZD, a $1.5 billion ETF, as a proxy for this market. While higher on the week, it closed below Monday’s close and is well off the week’s highs that occurred on Monday.

Unfortunately, several of the stocks that are categorized as “private credit” related companies finished the week poorly, in some cases at 52-week lows.

Everybody Shout Now

If it weren’t for you meddling headlines. 

There is always the risk that headlines massively overstate the problem(s). Headlines and titles are designed to do that. You can’t create “click bait” without some aggressive headlines.

So, part of me wants to downplay the headlines. But the headlines seemed to write themselves this week.

Limiting redemptions. Limiting withdrawals. Even the dreaded 4-letter word – GATE – crept into conversations and stories.

• These products were not designed to be liquid. Some of the limits were always in place, but they just weren’t a limiting factor until recently. Some still aren’t a limiting factor. So, these headlines versus reality are skewed towards too much fear! But they seemed to cause markets to move, which is not comforting. In a “healthy” market, we’d absorb inflated headline risk, but we are clearly still in the “where there is smoke, there is fire” part of the narrative.

Defaults, fraud, and jump to default. If you didn’t see any headlines around defaults and frauds this week, you did well. I heard more “cockroach” stories this week than I needed to, or wanted to (please don’t bring up cockroaches during dinner – it doesn’t make the meal more enjoyable in any way, shape, or form).

• Jump to default has a “special place” in my heart. Jump to default refers to the potential for a bond (or loan) to go from “money good” or “near-par” or “unstressed” overnight. I’ve been in credit a LONG time, and jump to default takes up more time than has ever really been warranted.

• Was there a day when “jump to default” occurred? Sure. When loans sat on bank balance sheets in accrual accounting books, with no capital relief for treating them as mark-to-market. Extend and Pretend ruled the world. Problems would be put off as long as possible and in some cases the problems fixed themselves over time (markets changed, etc.). With enough “extend and pretend” when the banks could not “extend and pretend” (the recovery values would be low and on the accounting side of things), it looked like a “jump to default.” But it was really more about accounting than anything like “last month this loan looked good, and today it looks bad.”

• With fraud this can happen (and it seems to have happened in a few recent cases).

• Has “jump to default” really existed in the past few decades? A few months ago, I would have argued vehemently that it didn’t. The leveraged loan market has become robust. It trades regularly in the secondary market. There is price discovery. You can see loans trade down and then sometimes back up. The high yield bond market has changed to include big, large, well-known, and often public companies, where there are “lots of eyes” on the bonds and price discovery works. It doesn’t mean you don’t have defaults, it just means that you rarely have “large gaps” and certainly not from 100 to 0 “overnight.” For the life of me, I think there was only one case that I can remember where a bond quite literally went from near-par to bankrupt (and a low price) almost overnight. If my memory is correct, it was a company that had one product (glass for cell phones) and only one customer, and that customer dropped them. So, until recently, I would have fought the concept of “jump to default” kicking and screaming the whole way.

• NCAA bonds are more common. I had no idea what the desk meant when they made fun of a bond that went NCAA. It meant No Coupon At All. In the high yield market, with semi-annual coupons, it meant that from time of issue to the first coupon, in 6 month’s time, the company wasn’t able to pay. I rarely see it, but I’ve seen it happen in the wild.

  • If you include bonds that elect to PIK (Pay In Kind) in that category, it is less rare. Still not common. Also, since the company has the right to PIK, it doesn’t even seem that unnatural to me that some would choose to PIK. Having said that, the usage of the term PIK has “picked” up in recent conversations about the market.

• The loan that went from par to 0 in a few months. That was a headline that hit. Is that the norm? Heck no, if it was, it wouldn’t have generated so much interest. But am I rethinking defending the “impossibility” of jump to default?

  • A little. Just a little. Smaller loans with only a handful of investors who have read the documents, and understand the company, are less likely to face “price discovery” every day. It is price discovery that prevents “jump to default” from happening. Without price discovery, then yes, we can see jump to default (though no recovery seems pretty extreme).

Mark-to-market is always tricky in credit. It can be tricky in every asset class, but I find credit to be susceptible to "liquidity” events, where prices go below “reasonable” levels. The most extreme example (and there was forced selling involved) was the “super senior” tranches of synthetic CDOs. If you look at the 10-year CDX IG tranches, I think it is still accurate to say that NEVER has there been a loss in the mezz tranche (losses start at 3% of portfolio losses and get absorbed until 7% of portfolio losses). That is for well over 20 years now. Yet super senior (call it 15% loss absorption) traded at incredible discounts. This is both meant to be:

• Soothing – prices in credit can be far lower than any economic reality indicates, purely because of the nature of credit market liquidity.

• Scary – prices in credit can be far lower than any economic reality indicates, purely because of the nature of credit market liquidity.

If the credit risk is already mispriced too aggressively, then we have nothing to fear. If we haven’t reached that stage, then we have a lot to fear, which is what my concerns about “Sell what you Can” are rooted in.

A Little Bit Louder Now

The first “true line of defense” in whatever is going on in private credit is likely going to be the leveraged loan market.

While not a “true” proxy for private credit, it is probably the “best proxy” for those looking to shed “similar” risk-reward instruments in their private credit holdings.

BKLN ($6 billion) finished higher on the week, though off its highs. SRLN ($5 billion) finished a touch lower on the week, and off its highs of the week. While I consider HYG and JNK largely interchangeable on the high yield bond side of things, BKLN and SRLN are quite different in terms of portfolio construction.

According to Bloomberg both ETFs were trading about 0.6% below NAV. Is that accurate? I’m not sure. (It is harder to get a good NAV calculation for loans compared to bonds, and in turn, far more difficult to get for bonds than for equity-based ETFs). Keeping a close eye on this as I’m an adherent to the ETF Spiral™ theory, that the “arbitrage” tends to push markets in the direction of the arb (in this case lower) at least during the early stages of a real NAV discount developing (again, I’m not sure we have that here, but want to highlight).

Both leveraged loan ETFs had outflows on the week, though BKLN still has more shares outstanding than in late April (post-Liberation Day) and in early October (presumably peak rate cut fears).

Which brings us to one odd point:

• Is floating rate good or bad?

  • It is good for those who are borrowing the money as they pay less.

  • It is bad for lenders as they receive less.

  • Do the two things just cancel each other out?

    • In theory, somewhat. If people are already looking to sell an asset class because of credit concerns, then 50 bps of rate cuts might cause them to want to sell due to lower returns if the 50 bps of hypothetical cuts isn’t viewed as helping credit quality that much.

    • Investors are likely to reduce exposure ahead of cuts, while the companies don’t benefit until the cuts actually occur.

I am keeping a close eye on this market and it isn’t “shouting” (or screaming) but it is “a little bit louder now.”

Remember When LCDX Traded Worse than HY CDX?

If I lost you with that title, it is completely understandable. LCDX was a leveraged loan CDS index. I think it died a well deserved death a long time ago. HY CDX still exists and is traded to this day.

So, we had an index that was referencing senior secured loans (LCDX).

There were a large number of companies that were in both indices (their unsecured bonds were referenced in HY CDX and their Senior Secured Loans in LCDX). On this overlapping set of names, you would certainly expect the loans to recover more in the event of a Credit Event (default in CDS language).

I guess in theory, the non-overlapping loans in LCDX could have a higher likelihood of default than the non-overlapping bonds in HY CDX (but I don’t remember that being obvious). I guess in theory, despite seniority in the cap structure, the non-overlapping loans that defaulted could have lower recoveries than the non-overlapping bonds (recovery can depend a lot on industry, but I don’t remember that being obvious at the time).

What was obvious (or seemed obvious at the time) was that there was a giant unwind going on.

• Own 2X of LCDX and short 1X of HY CDX (or some leveraged ratio). Makes a lot of sense. It was positive carry and historically, it worked well on the downside too. It was a bit tricky if spreads tightened as LCDX was somewhat capped in price terms as the underlying LCDS could cancel if a loan was refinanced at better terms. If you were bearish, this was a good way to get paid to have some downside risk protection – in theory.

  • But it didn’t work and stories about the size of the unwind looming (or ongoing) pushed levels to what seemed like absurd levels. I remember wanting to load up on LCDX (having done a lot of the credit work, rel val of names, etc., and being a contrarian in general) but not being allowed to, because senior people were “scared” of this unwind.

I only recite this story because it fits my concerns that credit can get oversold, but it still hurts while it is being oversold, and it can be very difficult to get people to stand in the way of a falling knife. I certainly wouldn’t have managed to time the “bottom” of that relationship, but it was close and when it reversed course, it reversed course rapidly, because it was so obviously mispriced.

“Obvious” mispricing (too low) can occur in credit, even if it seems “obvious” at the time, and not just in hindsight. So yes, I remain wary of “selling what you can” becoming a reality with broader ramifications for credit markets.

Bottom Line

On credit, I remain wary of “selling what you can” becoming a reality with broader ramifications for credit markets. Not pounding the table bearish, but very cautious and defensive here. If Academy is correct on reaching a conclusion in the Iran war, credit markets should bounce, which is a large mediating factor in “only” being cautious/defensive. If we are having the same conversations next Friday as we had this past Friday, credit will suffer from the economic damage being done – again, far from being our base case, but a possibility.

On equities, conflict resolution would set up for a nice rally. Will continue to watch IGV closely as a “tell” that the market is done with the “AI is killing software” narrative.

Weirdly, I’m probably less cautious on equities than credit – the relief rally will be bigger, but then the risk that the credit fears persist could return – which would hit credit first, but would also drag equities along for the ride. XLE finished up on the week, but down from Monday’s highs, when we might have seen “the end of short covering.” I still really like the energy sector long term (globally), but heading into this past week we recommended taking profits here. We were clearly early as Monday trading kept pushing things higher, but now it seems to be settling into a pattern that could lead us lower fairly quickly in the event of conflict resolution.

On rates, last weekend we were indifferent at 10s below 4%, but now we’d be buying.

We continue to hope that the events in the Middle East lead to a peaceful resolution, putting the Iranian people on a better path to prosperity and freedom, while minimizing the loss of life for everyone in the region. And our best wishes and support to all those involved in our military and intelligence efforts!

One of the big themes to come out of China over the past several months (and even years) has been Chinese President Xi Jinping's (apparently ongoing) sweeping purge of PLA military command ranks on the basis of "corruption" - or rather what is most probably perceived disloyalty.

Already there's been several top dismissals including the firings of multiple members of the Central Military Commission (CMC) and dozens of generals - some even placed under house arrest, as well as a broad purge of the Chinese Communist Party.

Xi this weekend hinted there could be more to come, freshly warning Saturday during a speech to delegates from the People’s Liberation Army (PLA) and the People’s Armed Police that disloyalty to the party - or else selfish dealings and corruption - will not be tolerated.

"There must be no place in the military for those who are disloyal to the party, nor any place for corrupt elements," Xi said.

He then called for strict oversight in "key areas such as fund flows, the exercise of power, and quality control" during the country's next five-year plan which is set to be approved later this month.

Here's more of what he said via Chinese state sources:

It is essential to fully strengthen the Party's leadership and Party building in the military, and make Party organizations at all levels even stronger, Xi said, stressing the need to translate the Party's leadership strength into development momentum.

It is important to consolidate the ideological foundation that ensures officers and soldiers follow the Party and its guidance, and ensure that modern weaponry and equipment are placed in the hands of politically committed personnel, Xi said.

A former CIA analyst who follows Chinese elite politics, Christopher K. Johnson, recently told the NY Times of the ongoing purge trend:

"This move is unprecedented in the history of the Chinese military and represents the total annihilation of the high command."

The PLA has seen significant internal turmoil, especially since the Communist Party’s 20th Congress in late 2022. Several top military figures - including Defense Ministers Li Shangfu and Wei Fenghe, and CMC Political Work Department head Miao Hua - have disappeared or been removed, and many more followed.