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There is no better macro market call for me to make to highlight Freud’s Narcissism of Small Differences.

Let me start by saying that over the last few years, and the last few months in particular, I have been closely following the news around the private credit market. This is an industry segment close to home. I have family and friends actively playing leadership roles in this space. I am sure they won’t like what I have to say; many of them read this letter.

From a $300 billion industry around the time of the financial crisis, we are now around $1.8 trillion. It is not my style to produce a full takedown on all the specifics of why this industry is facing redemptions that have stormed the gates.

I will leave the deep dive to fundamental research analysts, human or otherwise.

I am yet to meet someone who won’t take money from someone offering credit when they cannot get the credit from a traditional lender, even if it is more expensive. I am not here to debate the merits of whether there is a role for such credit. Of course there are good reasons on a case-specific basis. That is the point; the fact that there is legitimacy is part of the narrative that has jet-fuelled the industry against the backdrop of a yield-starved capital market.

Just like subprime, the industry has been financially engineered in more ways than a German automobile factory. Because of the way that loans have been packaged as part of bigger pools of credit, they have created a lot of distance between specific loans and the end investor.

This has a way of keeping things smooth. The fact that liquidity is illiquid is part of the sales pitch. The problem is that when liquidity becomes a necessity, the sales pitch has a hollow sound, the kind you hear just before the gates get stormed.

The facts on the ground are that some cracks have become noticeable.

In a recent Bloomberg article, they discuss the fact that on Friday BlackRock halted withdrawals on their $26 billion fund at 5%. Other major players are experiencing similar redemption requests and are having to pause withdrawals. The chart below gives a clear visual on the increase in redemptions. Non-Traded Business Development Companies (BDCs) are just an industry name for how part of the industry is financially engineered.

Now let me get to Freud and share my interpretation of how his analytical views on society have played a role in the growth of this industry. I have been chewing on this for a while. The theory I am about to share lends itself to many areas of the financial markets and geopolitics. However, I have waited for one use case to speak to me before sharing.

This is a story about narratives. They do not merely attract capital. Eventually they begin to attract consensus and consensus has its own psychology.

Sigmund Freud made a very profound psychological discovery during the World War I era (1910-1930). He noticed that:

Groups that are very similar often become the most hostile towards each other.

The hostility arises not from vast differences, but from small differences that threaten identity. Neighbouring cultures, rival factions, or competing elites often fight more intensely than completely unrelated societies.

Freud believed these conflicts serve a psychological purpose:

They reinforce group identity.

I originally wanted to introduce people to The Narcissism of Small Differences in the context of today’s political milieu. But it felt even more nuclear than the threat from the Middle East, so I have brought a more focused application.

One of the reasons why a trend develops is because of its powerful narrative. There is also another reason. That reason is that the "other", as Freud refers to it, the object of the projection, is silenced, excluded or scapegoated.

The “other” in Freud’s framework is not necessarily wrong. That is not the point. The point is that the group cannot tolerate the discomfort created by the deviation.

The deviation threatens the narrative.

And narratives are powerful things in markets.

Once a narrative takes hold, investors do not merely allocate capital to it. They begin to identify with it. It becomes part of how they explain the world, part of how they explain their own success.

Private credit has developed such a narrative.

It is the elegant solution to a modern capital markets problem. Pension funds need yield. Banks are constrained by regulation. Private credit steps into the void, providing capital to companies that would otherwise struggle to obtain it.

The narrative is not absurd. In fact, like most powerful narratives, it contains a large amount of truth.

But powerful narratives have another characteristic. They begin to resist criticism.

At first, dissent is tolerated. Then it is dismissed. Eventually it becomes unwelcome.

When someone quietly raises questions about liquidity, about valuations, about how risk is actually distributed through the system, the reaction often becomes disproportionate to the question being asked.

This is the moment Freud would have recognised. The group begins defending its identity. The dissenting voice becomes the "other".

In markets, this often manifests in subtle ways. Analysts questioning the structure are brushed aside. Sceptics are accused of misunderstanding the asset class. The narrative closes ranks.

But this is precisely the point at which investors should start paying closer attention.

Because confident systems tolerate disagreement. Fragile ones suppress it.

This is not a call that private credit will collapse tomorrow. Markets rarely reward that kind of theatrical certainty. But it is a reminder of something far more useful.

When dissent begins to provoke unusually strong reactions, it often tells you something about the psychological state of the market. It tells you the narrative has become important.

And when a narrative becomes important enough that it must be protected, the crowd may already sense — consciously or not, that it is more fragile than it appears.

Freud called it the Narcissism of Small Differences.

In financial markets, it may simply be another way of recognising when a consensus trade has become a belief system.

And belief systems, as history repeatedly reminds us, can grow very large before they finally encounter their moment of truth.

I invite you to go have a coffee with your wealth manager and ask them their thoughts on private credit, especially if you have exposure, and see how they react.

Crude oil futures go back to the 1980s. The chart below highlights the sharp shocks this market is prone to experience. It is the ultimate expression of geopolitical tension from a world highly dependent on energy.

I have nothing to add to where oil is likely to trade in the near or long term. What I do know is that inflation forecasts for February, soon to be released, are expected to come out around 2.5%, which is well above the Fed’s inflation target.

This is all before Epic Fury even got cross. With that in mind, I think it is safe to say that inflation is highly unlikely to drop into the target range anytime soon.

The chart below, put out by Anthropic, helped provide me with some context of the AI automation revolution in practice. I cannot begin to tell you how deep I am involved in the AI automation space. I am even starting to act robotically.

Almost all my waking hours are deeply immersed in this area of revolution. I have lots more to share on this subject. Some of it is not as dark as I thought before, but it’s going to be hands down the biggest technological revolution mankind has ever had to deal with, and I am arming myself for battle.

We are talking about a “thinking being”. Yes, thinking. That is not an exaggeration. People at the coalface know this. That is why Anthropic is suing the Department of War. That is why top engineers from OpenAi are joining Anthropic, demanding that more oversight and control be placed on companies “birthing” sentient beings and letting them run loose.

Silver didn’t even get a mention in the financial press, but it produced the highest Z-score (+5) in my database.

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