The credit market appears healthy based on tight average spreads, but this is misleading. A strong top 90% of the market pulls the average down, while the bottom 10% faces severe distress, with loans "dropping like a stone." The weight of prolonged high borrowing costs is creating a clear divide between healthy and struggling companies.

Instead of treating private credit creation as a black box, analyze it by tracking corporate bond issuance in real-time and observing whether the market is rewarding high-debt companies over quality names. A rally in riskier firms signals a positive credit impulse.

The market is focused on potential rate cuts, but the true opportunity for credit investors is in the numerous corporate and real estate capital structures designed for a zero-rate world. These are unsustainable at today's normalized rates, meaning the full impact of past hikes is still unfolding.

Thinking about leverage as simply "on" or "off" is limiting. A more advanced approach views any asset with a lower expected return as a potential liability. One can effectively "borrow" it (i.e., short it) to finance the purchase of an asset with a higher expected return, aiming to capture the spread.

The expected wave of M&A and LBOs has not materialized, leaving the deal pipeline thin. This lack of new debt supply provides a strong supportive backdrop for credit spreads, allowing the market to absorb geopolitical volatility more easily than fundamentals would otherwise suggest.

While low rates make borrowing to invest (leverage) seem seductive, it's exceptionally dangerous in an economy driven by debt management. Abrupt policy shifts can cause sudden volatility and dry up liquidity overnight, triggering margin calls and forcing sales at the worst possible times. Wealth is transferred from the over-leveraged to the liquid during these resets.

Instead of an imminent collapse, the credit market is likely poised for a final surge in risk-taking. A combination of AI enthusiasm, Fed easing, and fiscal spending will probably drive markets higher and fuel more corporate debt issuance. This growth in leverage will sow the seeds for the eventual downturn.

Contrary to intuition, a gradual pace of Fed rate cuts is often preferable for credit markets. It signals a stable economy, whereas aggressive cuts typically coincide with significant economic deterioration, which hurts credit performance despite the monetary stimulus.

Enormous government borrowing is absorbing so much capital that it's crowding out corporate debt issuance, particularly for smaller businesses. This lack of new corporate supply leads to ironically tight credit spreads for large borrowers. This dynamic mirrors the intense concentration seen in public equity markets.