Official liquidity measures like Fed balance sheet levels are too slow to be tradable. A better approach is to monitor the symptoms of liquidity conditions in real-time market data. Indicators like SOFR spreads, commercial paper spreads, and unusual yield curve shapes reveal the health of private credit creation.

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.

Traditional credit rotation strategies based on beta and starting spreads have become ineffective. Analysis now shows a sector's net supply—the volume of new debt issued versus what's maturing—is the most critical factor determining its relative performance, making technicals more important than fundamentals.

Credit spreads are becoming an unreliable economic signal. The shift of issuance to private markets reduces the public supply, while the Federal Reserve's 2020 intervention in corporate debt markets permanently altered how investors price default probability.

The AI boom's funding is pivoting from free cash flow to massive bond issuances. This hands control to credit investors who, unlike vision-driven equity investors, have shorter time horizons and lower risk appetites. Their demand for tangible near-term impact will now dictate the market's risk perception for AI companies.

Judging the credit market by its overall index spread is misleading. The significant gap between the tightest and widest spreads (high dispersion) reveals that the market is rewarding quality and punishing uncertainty. This makes individual credit selection far more important than a top-down market view.

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.

Tech giants are no longer funding AI capital expenditures solely with their massive free cash flow. They are increasingly turning to debt issuance, which fundamentally alters their risk profile. This introduces default risk and requires a repricing of their credit spreads and equity valuations.

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.