And now on to the main event…

Is it the best or the worst of times in the financial markets? That is the question. In the last days of October, the Dow Jones Industrial Average, S&P 500, and Nasdaq all reached their all-time highs. The Dow is up 12 percent this year; the S&P 500 is up 17 percent; the Nasdaq is up 23 percent this year and 117 percent in five years. Can you catch your breath? And most of the stocks in the so-called Magnificent Seven—Apple, Microsoft, Nvidia, Alphabet, Meta, Tesla, and Amazon—are at or near their all-time highs, too.

Nvidia even hit a market capitalization of $5 trillion this past week. Apple, meanwhile, is worth more than $4 trillion and Microsoft is just behind. The equity markets have been so fuego that the Magnificent Seven is morphing into the Mag 10, with some Wall Street analysts adding Advanced Micro Devices, Broadcom, and Palantir to the club. Of course, Trump and his sycophants are touting these records as prima facie evidence of his noble stewardship of the economy, despite the tariff schizophrenia, the government shutdown, and the rapid evisceration of our democratic norms.

And yet, a lurking insecurity lingers beyond the A.I.-fueled spoils of the Mag Seven, which now account for more than a third of the S&P 500. Indeed, just about half of the index is in the red for the year. In particular, a group of food and consumer staples stocks—which should be the epitome of investing safety—tells a very different story than the one you hear every day on CNBC. The stock of Hain Celestial Group, the maker of Celestial teas and a variety of packaged foods like Terra chips, is down 81 percent in 2025, and now has a market cap of a mere $105 million. Newell Brands, the maker of all sorts of consumer brands, including Rubbermaid, Sharpie, Graco, Yankee Candle, and Paper Mate, is down 66 percent year to date and 81 percent over the past five years. The company’s equity is now worth around $1.4 billion. It used to be a major highflier.

There’s more: Conagra Brands is down 38 percent year to date. Kenvue, the maker of a variety of consumer health brands, such as Band-Aids, that was spun out of Johnson & Johnson, is down 34 percent this year and 46 percent since it was set up as an independent company in May 2023. Brown-Forman is down nearly 30 percent this year, Clorox is down 31 percent, and Campbell’s is down 29 percent. Even the venerable consumer behemoth Procter & Gamble, with a market cap of $350 billion, is down nearly 10 percent this year.

Who can say with certainty why this sector has been getting crushed this year? It could be that investors are just desperate to chase the Mag Seven (or 10) and are giving up on these companies to reallocate their capital. Perhaps Trump’s tariffs, and inflation more generally, have been adding to the cost of the raw materials these companies use to make their products, and they have been unable to pass those costs onto consumers. Or maybe their growth trajectory has slowed and the market is punishing them: After all, consumer spending is cooling for the first time in a few years, as general anxiety about the economy and a weakening labor market starts to pervade personal buying habits. Anyway, it’s indeed beginning to look like a tale of two cities—a divided verdict for a divided nation. (As usual, this is not investment advice.)

It’s not just the equity markets. You will recall all the talk from Jamie Dimon and other worthies about “cockroaches” a few weeks back after the unexpected freefall bankruptcies of First Brands and Tricolor Holdings. Yes, those were deals put together by Wall Street banks, not alternative asset managers. But there’s no question that there’s trouble afoot in the heretofore impenetrable private-credit market as borrowers struggle with their obligations. As Bloomberg reported this week, holders of private credit positions in a variety of companies are increasingly converting those debt positions to equity to preserve the long-term value of their investments that might otherwise be lost.

Converting debt to equity is hardly a new phenomenon, of course. Apollo’s whole premise, when it was first started in 1990 in the aftermath of the liquidation of Drexel Burnham, was that there was a huge opportunity in buying the debt of distressed companies at a discount and then converting that debt to equity. The difference here is that par buyers of the debt—investors who paid 100 cents on the dollar—are converting debt to equity, perhaps in the hope that things will improve. The Bloomberg article gave such recent examples of debt-to-equity conversions as those for Bonhams (the auction house), Dainese (an Italian maker of sportswear), and Netceed (a telecom supplier). Nothing too major, in other words, but not nothing either.

Then there is the growing popularity of payment-in-kind, or PIK, debt issued by companies in financial stress that investors are still buying. Bloomberg dubbed this the “bad PIK” phenomenon, whereby corporate issuers are selling PIK debt—interest payments are deferred and added to the principal amount of the debt, hopefully to be paid later—as a way to preserve badly needed cash.

Why investors are buying this crap paper is a mystery, of course. (Again, not investment advice…) But they are. Both First Brands and Lionsgate pedaled PIK debt, as did both Khoros, a Vista Equity–backed technology company, and Envision Healthcare, once owned by KKR, which used PIK debt before filing for bankruptcy and having ownership transferred to its creditors. Khoros, meanwhile, issued PIK debt at 16 percent interest before being sold earlier this year in a so-called “distressed exit” to IgniteTech, an Austin-based company, and then something like 95 percent of its employees were laid off.

So should we listen to Trump and the other Mag Seven whisperers? The champions of private credit like Jon Gray and Marc Rowan? Or should we follow the trajectory of less sexy, tariff-addled stocks? I rang up Jim Chanos, the legendary short seller, who has been starting to blow the shofar in recent weeks about potential trouble brewing in the credit markets. “With the advent of private credit … institutions [are] putting money into this magical machine that gives you equity rates of return for senior debt exposure,” he told the Financial Times last month, adding that such high rates of return for senior secured debt “should be the first red flag” of trouble for investors.

Chanos told me he hadn’t seen anything yet that seemed systemic, such as an overabundance of poorly underwritten mortgage-backed securities in the years leading up to the 2008 financial crisis. The failures of both First Brands and Tricolor seem like “a series of one-offs” at the moment, and “so far,” he said, credit markets “haven’t gotten concerned.” He noted that credit spreads—the difference between the yield on Treasury securities and the yield on riskier corporate debt—remain tight, indicating to him that credit investors don’t seem particularly worried about the risk of owning riskier debt—something that has always seemed like a “red flag” to me.

But Jim does have two growing concerns about potential problems in the exploding private-credit markets. One is just the general opacity of the promise of getting high equity-like returns for investing in senior debt, which theoretically should be less risky and offer lower returns. But that seems to be the promise of the private-credit market. What could go wrong? “You don’t know how the sausage is made,” Chanos said. “You give them your money as an L.P., and they do all the work and lend money to all these great companies, who somehow magically are paying equity rates of return to borrow money because they have such good businesses. I’m worried when the basics of investing get turned on their head, to the tune of hundreds of billions of dollars.” He warned to “be careful when something is too good to be true,” such as earning equity rates of return for senior debt, or senior secured debt. “What’s really at work here?” he wondered. “What don’t you see?”

Chanos is also worried about the emergence of what is being portrayed as a virtuous circle in which issuing institutions own captive insurance companies that pay out annuities to investors at a guaranteed rate of return. These issuing institutions then get paid fees to invest the annuitants’ money, hopefully in private credit and other loans and securities that provide a return in excess of the interest promised.

Jim watched the same thing happen back in the golden age of Mike Milken and Drexel Burnham, he told me, before the collapse of that investment bank. “Milken was pushing his clients to get their hands on regulated financial institutions,” he recalled. “An increasing number of his biggest clients owned savings and loans, insurance companies, or trust companies.” He said he’s increasingly concerned that the likes of Apollo, Brookfield Asset Management, and KKR have captive insurance companies that provide the capital that the alternative asset managers then invest in their own deals.

Chanos has started to raise his concerns with his clients and the investment committees on which he sits, he told me. “This whole thing is just setting up to be a witch’s brew,” he said. “It’s not blowing up yet, but they’re adding more and more ingredients to the fire. … Be careful in this rush to private credit, because there’s just some things here that don’t make sense and do seem too good to be true, and you’ve got to be asking a lot of questions to the sponsors.”

He’s always the person nobody wants to hear from in these situations, he said, because he’s often the bearer of bad news in the middle of the raging party. But he’s happy to be the one to warn about trouble brewing, even if it’s still a little early. “I don’t think we’re going to be surprised when the cycle turns to see more and more of these funds cut their distributions, or, God forbid, close down,” he said. “But we’re not there yet.”

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