In a previous post, we explored how the credit cycle, as described by Clément Juglar, tends to end when the system reaches a limit in its ability to absorb new capital.
At its core, “absorption of capital” simply means the system’s capacity to take on new credit. Late in the cycle, that absorption doesn’t happen through the safest or most regulated channels. Instead, it migrates toward increasingly fragile parts of the financial system.
Historically, this showed up in 19th-century U.S. “wildcat banks” or country banks. Today, the modern equivalent is found in non-depository financial institutions—entities operating outside the traditional banking core.
Cost of Capital and the Weakest Links
The ability of these institutions to absorb credit is highly sensitive to the cost of capital. When funding conditions tighten, their capacity to extend new credit deteriorates quickly.
And it is clearly apparent in the BDCZ chart. A plunging stock index price means higher cost of capital from the sector which was supposed to absorb incremental capital.
The message from the market is straightforward: conditions are worsening for capital absorption.
Credit Spreads Are Starting to React
As expected, if new capital can not be financed, the music goes on the path of “stop”. It begins to propagate.
One of the clearest signals is the widening of credit spreads—particularly in the lowest-quality segment of the market. CCC-rated debt, the riskiest tier of corporate credit, is already seeing spreads move higher.
This is a classic late-cycle development: first the marginal borrowers lose access, then the price of risk rises across the board.
The Next Phase: Consumer Deterioration
The cycle doesn’t stop with financial institutions. It moves into the real economy—specifically, the consumer.
We are now beginning to see rising delinquencies among households. This was not unexpected. Earlier, we noted that tariffs act as a regressive force, disproportionately affecting lower-income consumers by raising the cost of goods.
That dynamic aligns with warnings from thinkers like Nassim Nicholas Taleb, who has emphasized how hidden fragilities often surface when systems are stressed at the margins.
4.8% of all household debt is delinquent, the highest overall delinquency rate in nearly a decade, per NY Fed.
Early Cracks: Securitization Markets
Another early indicator has already flashed: consumer credit securitization.
Issuance in this space has dropped sharply from its peak. These markets tend to turn before broader credit conditions deteriorate, making them a useful leading signal.
When securitization slows, it constrains the ability of lenders to recycle capital—further tightening credit availability.
The Unwinding of “Minsky Garbage”
All of this points toward the next stage: the unwinding of what Hyman Minsky famously described as fragile or speculative finance.
Late-cycle excess—what some might bluntly call “Minsky garbage”—begins to break down under tighter conditions. Assets that depended on easy credit and optimistic assumptions start to fail.
This is not a sudden event, but a process. It begins at the edges, spreads through credit markets, and ultimately feeds back into the broader economy.
Conclusion
The sequence is unfolding as theory would suggest:
- Weak credit channels lose absorption capacity
- Cost of capital rises
- Credit spreads widen
- Consumer stress increases
- Securitization declines
- Fragile financial structures begin to unwind
We are no longer at the peak of the cycle. The transition phase is underway—and the signals are becoming harder to ignore. And with the War in Iran? No relief on the long end of the curve ladies and gents.