MW If you own a 'safe' investment-grade bond fund, better check the holdings

By Charlie Garcia

The credit market is lying to you - and Jamie Dimon says as much

Count your fund's BBB-rated bonds and the percentage of assets sunk into them.

When Jamie Dimon sees cockroaches, believe him.

"When you see one cockroach, there are probably more." JPMorgan Chase $(JPM)$ CEO Jamie Dimon wasn't dispensing pest-control advice when he dropped this wisdom on investors. He was talking about the cascading fraud in subprime auto lending.

And if Stephanie Pomboy is right (and she usually is, even if she's early), we're still standing in the kitchen with the lights off.

Pomboy is the founder of MacroMavens, a boutique research firm renowned for its contrarian, forward-looking macroeconomic analysis. She began her career with Ed Hyman at Cyrus J. Lawrence and later ISI Group, where she advised top institutional investors. Pomboy launched MacroMavens in 2002, quickly building a reputation for calling seismic market trends, like the housing bust, years ahead of consensus.?

I've subscribed to MacroMavens' research for years now. At roughly three cases of '09 Château Latour annually, it's not a casual expense, but neither is losing your portfolio to risks you didn't see coming.

Pomboy is one of the most consistently ahead-of-the-curve macro analysts in the business, which means she's often right long before the market admits she's right. You'll question the subscription while waiting. Then the market catches up, and you remember why you pay.

Her latest report had me laughing at my desk. Not because credit-market contagion is funny, but because her analogy was perfect.

The Jerry Seinfeld theory of financial fraud

Subprime auto frauds are just the warm-up act. Wait until you see who else has been faking it.

Remember the "Seinfeld" episode where Elaine confesses to Jerry that she "faked it"? Jerry's ego implodes. He embarks on a frantic archaeological dig through past relationships, suddenly questioning every romantic triumph. Was it all a lie? Were the others faking it too?

As Steph brilliantly frames it, welcome to the subprime auto-lending sector, circa late 2025.

When revelations surfaced that First Brands, Tricolor and PrimaLend had been exaggerating their financial "virility," the industry went full Seinfeld. Ego shattered. Frantically reviewing past deals. Shock! Disbelief! How could this happen?

As Pomboy notes, these weren't skilled fraudsters. They were the worst actors, literally and figuratively, far less adept at deception than seasoned companies who've mastered hiding problems in footnotes and "non-GAAP adjustments." These three weren't special. They just got caught first.

The "tour of embarrassment," as she calls it, is just beginning. And it extends far beyond auto loans.

The debt wall isn't coming - it's here

Here's what happens when a decade of zero rates hits reality.

Take Dow $(DOW)$, the BBB-rated chemicals giant. The company has $750 million in 3.85% notes maturing in June 2027. When it refinances, it faces brutal math: Dow just completed a $1.4 billion bond offering in September at 4.80% (2031) and 5.65% (2036) - a jump of 95 to 180 basis points.

That's an extra $7 million to $13 million in annual interest on just this one maturity. Multiply that across Dow's $8 billion debt pile. Moody's cut the company's credit rating to Baa2 from Baa1 in July. Fitch followed with a BBB+ to BBB downgrade.

Oh, and did I mention that Dow's free cash flow has been negative through the third quarter of 2025?

The margin for error? Gone. Vanished.

Here's the math that should keep you awake

Who stamped all this debt 'investment grade'? The same rating agencies that gave us AAA-rated subprime mortgage bonds.

Dow's not alone. S&P 500 SPX companies account for $2.1 trillion of the $3.2 trillion BBB market. Rating agencies have $387 billion in BBB debt on negative outlook - the highest level since 2010 outside the pandemic - with another $50 billion likely downgraded this year. The refinancing crisis isn't coming. It's here.

If you own a "safe" investment-grade bond fund, check the holdings. Dow's $8 billion debt pile is probably in there, along with dozens of similar BBB names that are just one bad quarter from junk.

Who stamped all this debt "investment grade"? The same rating agencies that gave us AAA-rated subprime mortgage bonds in 2007. Same conflicts, same incentives, different asset class.

That's like handing whiskey and car keys to teenage boys and expecting mature judgment because you called them "responsible drivers" on a form. The wreckage isn't shocking. It's structural.

Even the Federal Reserve can't make a bad business good - it can only make it expensive to let it fail.

Here's the math that should keep you awake: 63% of speculative-grade debt must roll over in the next four years, versus one-third of investment-grade debt. But much of that "investment-grade" paper is one earnings miss from junk; $5 trillion of the $9.2 trillion investment-grade universe sits at BBB. That's not a rounding error. That's systemic risk in a three-piece suit.

Yes, Fed rate cuts will help. No, they won't save everyone. The Fed will try. They always do. But even the Federal Reserve can't make a bad business good - it can only make it expensive to let it fail. Some companies deserve what's coming. Most of them know it. They're hoping the Fed doesn't.

The shadow banking system: Because we learned nothing

When you hear that private-credit problems 'only affect sophisticated investors,' understand this: Your bank is the sophisticated investor.

If you thought banks cleaned up after 2008, you're adorably optimistic. They stopped lending directly to risky borrowers and started lending to the shadow lenders who lend to risky borrowers, instead.

Commercial bank lending to these nonbank lenders surged 53% in the past 12 months, according to Federal Reserve data. The biggest 25 U.S. banks now have 14% exposure to this shadow banking sector. So when you hear that private-credit problems are "contained" or "only affect sophisticated investors," understand this: Your bank is the sophisticated investor. When shadow lenders start defaulting, your bank holds the bag.

The S&P BDC Index peaked in 2021 and hasn't recovered, despite the everything rally in stocks. That's not a leading indicator. It's evidence. Business development companies (BDCs) lend to midmarket companies that can't tap public debt markets, and those borrowers are under genuine stress right now. The index isn't warning about tomorrow's problems, it's documenting today's reality while everyone else celebrates paper gains.

The American consumer: Out of cash, out of options

Then there's the U.S. consumer, whose "resilience" gets trotted out every time economic data look shaky. The University of Michigan's consumer-sentiment survey for September showed long-term inflation expectations spiking to 3.9% - the highest in three decades - while a record share of Americans expected their real incomes to fall.

Desperate people do desperate things. In the second quarter of 2025, 60% of refinancing activity involved equity withdrawal, with borrowers tapping an average of $94,000 and accepting monthly payment increases of $590. They're not refinancing to save money. They're refinancing because they need cash now. And the credit scores? Lower than straight refis. Which means the broke are borrowing against the roof over their heads to make it to next month. That's not resilience. That's a fire sale on your future.

Where the cockroaches are hiding

When broke people stop buying Big Macs and Americans stop overpaying for guacamole, the consumer is tapped out.

Beyond autos, here's where to look for trouble:

Retail and fast food: When McDonald's $(MCD)$ offers "$5 meal deals" and chain stores are promoting like it's 2009, margins are dying. McDonald's CEO admitted that visits from lower-income customers dropped "double digits" in this year's second quarter. Meanwhile, Chipotle $(CMG)$ reported a "significant pullback" from households earning under $100,000 - 40% of its customer base - with traffic down for three straight quarters. When broke people stop buying Big Macs and Americans stop overpaying for guacamole, the consumer is tapped out.

Consumer discretionary: Credit-card delinquencies have hit Great Recession levels, with 22.8% of low-income card debt now 30-plus days past due. Auto-loan delinquencies for subprime borrowers reached 6.43%- the second-highest level on record - and 2.2 million vehicles were repossessed in 2025, the most since 2009. Housing isn't immune: Home prices are falling in nine of 20 major metros tracked by the Case-Shiller index.

Commercial real estate: Close to $1 trillion in debt matured in 2025. Office vacancy sits at 19.4% nationally, while 42% to 69% of office properties that traded in major cities since 2023 sold at a loss. Multifamily apartment delinquencies nearly doubled to 6.59% from 3.33% last year. Private equity smells blood: Milestone Group, for example, just closed a $1.1 billion fund targeting distressed properties.

The Fed's impossible choice

Every financial crisis since 2008 has been met with expanded Fed balance sheets and aggressive monetization. Bet on that playbook again.

When this credit stress goes mainstream - not if, but when - the Federal Reserve faces a choice: let the dominoes fall and risk contagion, or fire up the money printer and bail out corporate America, while savers and retirees watch their purchasing power evaporate.

Every financial crisis since 2008 has been met with expanded Fed balance sheets and aggressive monetization. Bet on that playbook again.

MW If you own a 'safe' investment-grade bond fund, better check the holdings

By Charlie Garcia

The credit market is lying to you - and Jamie Dimon says as much

Count your fund's BBB-rated bonds and the percentage of assets sunk into them.

When Jamie Dimon sees cockroaches, believe him.

"When you see one cockroach, there are probably more." JPMorgan Chase (JPM) CEO Jamie Dimon wasn't dispensing pest-control advice when he dropped this wisdom on investors. He was talking about the cascading fraud in subprime auto lending.

And if Stephanie Pomboy is right (and she usually is, even if she's early), we're still standing in the kitchen with the lights off.

Pomboy is the founder of MacroMavens, a boutique research firm renowned for its contrarian, forward-looking macroeconomic analysis. She began her career with Ed Hyman at Cyrus J. Lawrence and later ISI Group, where she advised top institutional investors. Pomboy launched MacroMavens in 2002, quickly building a reputation for calling seismic market trends, like the housing bust, years ahead of consensus.?

I've subscribed to MacroMavens' research for years now. At roughly three cases of '09 Château Latour annually, it's not a casual expense, but neither is losing your portfolio to risks you didn't see coming.

Pomboy is one of the most consistently ahead-of-the-curve macro analysts in the business, which means she's often right long before the market admits she's right. You'll question the subscription while waiting. Then the market catches up, and you remember why you pay.

Her latest report had me laughing at my desk. Not because credit-market contagion is funny, but because her analogy was perfect.

The Jerry Seinfeld theory of financial fraud

Subprime auto frauds are just the warm-up act. Wait until you see who else has been faking it.

Remember the "Seinfeld" episode where Elaine confesses to Jerry that she "faked it"? Jerry's ego implodes. He embarks on a frantic archaeological dig through past relationships, suddenly questioning every romantic triumph. Was it all a lie? Were the others faking it too?

As Steph brilliantly frames it, welcome to the subprime auto-lending sector, circa late 2025.

When revelations surfaced that First Brands, Tricolor and PrimaLend had been exaggerating their financial "virility," the industry went full Seinfeld. Ego shattered. Frantically reviewing past deals. Shock! Disbelief! How could this happen?

As Pomboy notes, these weren't skilled fraudsters. They were the worst actors, literally and figuratively, far less adept at deception than seasoned companies who've mastered hiding problems in footnotes and "non-GAAP adjustments." These three weren't special. They just got caught first.

The "tour of embarrassment," as she calls it, is just beginning. And it extends far beyond auto loans.

The debt wall isn't coming - it's here

Here's what happens when a decade of zero rates hits reality.

Take Dow (DOW), the BBB-rated chemicals giant. The company has $750 million in 3.85% notes maturing in June 2027. When it refinances, it faces brutal math: Dow just completed a $1.4 billion bond offering in September at 4.80% (2031) and 5.65% (2036) - a jump of 95 to 180 basis points.

That's an extra $7 million to $13 million in annual interest on just this one maturity. Multiply that across Dow's $8 billion debt pile. Moody's cut the company's credit rating to Baa2 from Baa1 in July. Fitch followed with a BBB+ to BBB downgrade.

Oh, and did I mention that Dow's free cash flow has been negative through the third quarter of 2025?

The margin for error? Gone. Vanished.

Here's the math that should keep you awake

Who stamped all this debt 'investment grade'? The same rating agencies that gave us AAA-rated subprime mortgage bonds.

Dow's not alone. S&P 500 SPX companies account for $2.1 trillion of the $3.2 trillion BBB market. Rating agencies have $387 billion in BBB debt on negative outlook - the highest level since 2010 outside the pandemic - with another $50 billion likely downgraded this year. The refinancing crisis isn't coming. It's here.

If you own a "safe" investment-grade bond fund, check the holdings. Dow's $8 billion debt pile is probably in there, along with dozens of similar BBB names that are just one bad quarter from junk.

Who stamped all this debt "investment grade"? The same rating agencies that gave us AAA-rated subprime mortgage bonds in 2007. Same conflicts, same incentives, different asset class.

That's like handing whiskey and car keys to teenage boys and expecting mature judgment because you called them "responsible drivers" on a form. The wreckage isn't shocking. It's structural.

Even the Federal Reserve can't make a bad business good - it can only make it expensive to let it fail.

Here's the math that should keep you awake: 63% of speculative-grade debt must roll over in the next four years, versus one-third of investment-grade debt. But much of that "investment-grade" paper is one earnings miss from junk; $5 trillion of the $9.2 trillion investment-grade universe sits at BBB. That's not a rounding error. That's systemic risk in a three-piece suit.

Yes, Fed rate cuts will help. No, they won't save everyone. The Fed will try. They always do. But even the Federal Reserve can't make a bad business good - it can only make it expensive to let it fail. Some companies deserve what's coming. Most of them know it. They're hoping the Fed doesn't.

The shadow banking system: Because we learned nothing

When you hear that private-credit problems 'only affect sophisticated investors,' understand this: Your bank is the sophisticated investor.

If you thought banks cleaned up after 2008, you're adorably optimistic. They stopped lending directly to risky borrowers and started lending to the shadow lenders who lend to risky borrowers, instead.

Commercial bank lending to these nonbank lenders surged 53% in the past 12 months, according to Federal Reserve data. The biggest 25 U.S. banks now have 14% exposure to this shadow banking sector. So when you hear that private-credit problems are "contained" or "only affect sophisticated investors," understand this: Your bank is the sophisticated investor. When shadow lenders start defaulting, your bank holds the bag.

The S&P BDC Index peaked in 2021 and hasn't recovered, despite the everything rally in stocks. That's not a leading indicator. It's evidence. Business development companies (BDCs) lend to midmarket companies that can't tap public debt markets, and those borrowers are under genuine stress right now. The index isn't warning about tomorrow's problems, it's documenting today's reality while everyone else celebrates paper gains.

The American consumer: Out of cash, out of options

Then there's the U.S. consumer, whose "resilience" gets trotted out every time economic data look shaky. The University of Michigan's consumer-sentiment survey for September showed long-term inflation expectations spiking to 3.9% - the highest in three decades - while a record share of Americans expected their real incomes to fall.

Desperate people do desperate things. In the second quarter of 2025, 60% of refinancing activity involved equity withdrawal, with borrowers tapping an average of $94,000 and accepting monthly payment increases of $590. They're not refinancing to save money. They're refinancing because they need cash now. And the credit scores? Lower than straight refis. Which means the broke are borrowing against the roof over their heads to make it to next month. That's not resilience. That's a fire sale on your future.

Where the cockroaches are hiding

When broke people stop buying Big Macs and Americans stop overpaying for guacamole, the consumer is tapped out.

Beyond autos, here's where to look for trouble:

Retail and fast food: When McDonald's (MCD) offers "$5 meal deals" and chain stores are promoting like it's 2009, margins are dying. McDonald's CEO admitted that visits from lower-income customers dropped "double digits" in this year's second quarter. Meanwhile, Chipotle (CMG) reported a "significant pullback" from households earning under $100,000 - 40% of its customer base - with traffic down for three straight quarters. When broke people stop buying Big Macs and Americans stop overpaying for guacamole, the consumer is tapped out.

Consumer discretionary: Credit-card delinquencies have hit Great Recession levels, with 22.8% of low-income card debt now 30-plus days past due. Auto-loan delinquencies for subprime borrowers reached 6.43%- the second-highest level on record - and 2.2 million vehicles were repossessed in 2025, the most since 2009. Housing isn't immune: Home prices are falling in nine of 20 major metros tracked by the Case-Shiller index.

Commercial real estate: Close to $1 trillion in debt matured in 2025. Office vacancy sits at 19.4% nationally, while 42% to 69% of office properties that traded in major cities since 2023 sold at a loss. Multifamily apartment delinquencies nearly doubled to 6.59% from 3.33% last year. Private equity smells blood: Milestone Group, for example, just closed a $1.1 billion fund targeting distressed properties.

The Fed's impossible choice

Every financial crisis since 2008 has been met with expanded Fed balance sheets and aggressive monetization. Bet on that playbook again.

When this credit stress goes mainstream - not if, but when - the Federal Reserve faces a choice: let the dominoes fall and risk contagion, or fire up the money printer and bail out corporate America, while savers and retirees watch their purchasing power evaporate.

Every financial crisis since 2008 has been met with expanded Fed balance sheets and aggressive monetization. Bet on that playbook again.

(MORE TO FOLLOW) Dow Jones Newswires

November 06, 2025 08:55 ET (13:55 GMT)

MW If you own a 'safe' investment-grade bond -2-

The Fed will cut rates. Some companies will live. Some will die. The rest will limp along, pretending they didn't see it coming. Your bonds get paid back in full, in dollars that buy half of what they used to. You win on the principal, lose on the purchasing power. That's not a bailout. That's the Fed picking your pocket while shaking your hand.

What investors should do now

Be like Buffett and keep some cash.

Stop believing in "contained" risks and "isolated" incidents. When Jamie Dimon sees cockroaches, believe him. When Steph Pomboy says the tour of embarrassment is just beginning, she's not joking.

If you own investment-grade bond funds and exchange-traded funds, look at the holdings. Count the fund's BBB-rated names and the percentage of assets sunk into them. Check how much debt those borrowers are carrying relative to their equity and cash flow, and when their debt comes due. If you can't do this, your investment adviser should. If your adviser waves this off as unnecessary, fire them. Then find one who can read.

Diversification means owning things that won't all blow up for the same reason at the same time. Stocks, bonds and cash. Quality credit, not junk that's rated investment grade.

Warren Buffett's Berkshire Hathaway $(BRK.A)$ (BRK.B )recently reported that it's sitting on about $382 billion in cash as of the end of September. Berkshire sold about $12.5 billion in portfolio holdings in the third quarter while purchasing $6.4 billion in stock - its 12th consecutive quarter of net selling. Berkshire hasn't bought back a single share of its own stock in five quarters.

Be like Buffett and keep some cash. When the cockroaches start scurrying, the buying opportunities will be excellent. But only if you aren't the idiot holding their debt.

The subprime auto frauds weren't the problem. They were the first roach. When you turn on the lights in a filthy kitchen, you don't find one cockroach. You find an infestation.

Credit markets have been lying about their financial health for a decade. The auto lenders just got caught first because they were bad at lying. The competent liars are still out there, and their debt is probably in your bond fund right now.

The lights are coming on. Don't be holding the bag when they do.

Charlie Garcia is founder and a managing partner of R360, a peer-to-peer organization for individuals and families with a net worth of $100 million or more.

Agree? Disagree? Share your comments with Charlie Garcia at charlie@R360Global.com. Your letter may be published anonymously in the weekly "Dear Charlie" reader mailbag. By emailing your comments to Charlie Garcia, you agree to have them published on MarketWatch anonymously, or with your first name if you give permission.

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More from Charlie Garcia:

AI has real problems. The smart money is investing in the companies solving them now.

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-Charlie Garcia

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November 06, 2025 08:55 ET (13:55 GMT)

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