Leading credit strategist Larry McDonald warns that beneath record-high stock prices, early signs of a credit crisis are emerging as 2026 approaches. He notes a growing divergence between optimism in the equity markets and a more pessimistic risk repricing in credit markets.
Larry McDonald’s Warning on the Credit Crisis
McDonald, founder of The Bear Traps Report and former Lehman Brothers trader, believes the credit cycle has already turned, even though stock prices remain calm. According to him, this mismatch between growth expectations and actual financing conditions cannot be ignored, as it appears in areas where volatility was previously considered unlikely.
Signals in Credit Markets
As warning signs, McDonald points to price collapses in certain credit instruments: for example, First Brands’ debtor-in-possession (DIP) debt traded in the 30s despite top-tier collateral. He interprets this as a sign of broken underwriting and deteriorating confidence in collateral.
Another signal is the repricing of Coreweave bonds, which currently yield close to 12%. McDonald links this to a reassessment of assumptions for AI-related infrastructure and notes that many data center developers have negative free cash flow amid high capital expenditure expectations.
Additionally, he highlights the structure of private credit: approximately $300 billion of private credit assets offer investors quarterly liquidity, even though the underlying loans are illiquid. He believes this liquidity mismatch creates systemic risk if redemptions accelerate.
Capital Rotation in 2026
McDonald anticipates a major capital rotation in 2026: he notes that the Nasdaq 100 index has grown to roughly $32 trillion in market capitalization, and even moderate reallocations could significantly impact less well-backed sectors. As a result, capital may shift toward "undervalued" segments of real assets.
He identifies commodities and infrastructure assets as key capital inflow areas: energy, copper, coal, and infrastructure-related stocks. The article also mentions a $350 million deal involving Erebor, reflecting interest in regulated crypto banking and related fields.
Conclusions and Forecasts
In McDonald’s view, credit stress is already delivering its verdict, even if stocks don’t show it. He allows that a strong credit shock could temporarily increase market correlations, but potential central bank interventions would ultimately emphasize the long-term advantage of real assets over long-duration growth rates.
Why This Matters
If credit conditions truly tighten, it affects the ability to finance large projects and borrowing terms for companies supporting infrastructure and energy. Even if you don’t invest directly in bonds, changes in project financing can impact resource availability, energy costs, and related markets.
For miners with any number of devices in Russia, this means: monitor not only cryptocurrency prices but also signs of worsening financing in energy infrastructure and equipment suppliers. The capital flow shift toward commodities and infrastructure assets may influence demand and prices for the physical resources and services you rely on.
What To Do?
- Assess liquidity: verify cash reserves to cover expenses and potential downtime, especially if some income depends on external financing.
- Reduce borrowing dependence: avoid short-term floating-rate loans where possible and manage debt levels carefully.
- Check counterparties: ensure electricity providers and services have stable financing and aren’t tied to risky credit schemes.
- Diversify risks: keep part of your assets in more stable or liquid instruments and update equipment reserves as needed.
- Monitor credit markets and yields: signals like sharp price drops on certain loans or rising bond yields can warn of growing systemic stress.
FAQ
What is Larry McDonald warning about for 2026? He believes a credit incident has already begun beneath seemingly calm stock markets and points to early signs of stress in credit markets.
Why is private credit considered a risk? Many private credit funds offer quarterly liquidity despite underlying loans being illiquid, creating a risk of rapidly intensifying redemptions.
What signals are currently visible in credit markets? The article highlights DIP loans trading in the 30s at First Brands and Coreweave bonds yielding close to 12% as signs of credit risk repricing.
