In psychology, negativity bias describes our brain’s tendency to give more weight to negative experiences and information—a survival instinct from early humans to increase the chances of passing on their genes. Confirmation bias, where we seek out and overweight information that aligns with our pre-existing negative beliefs, reinforces negativity bias, creating a self-reinforcing cycle.

We saw elements of this dynamic play out in real time this week in markets. 

There’s an understandable fear of what many now call the “singularity.” In science the term describes  the unknown nature of a black hole. In technology, it’s the prospect of Artificial General Intelligence (AGI) developing the ability to improve its own code faster than humans can, leading to an "intelligence explosion.” 

Claude, doomsday prophecies on X, and the commentary from many are contributing to the assumption that everything we’ve known about earnings, valuations, cost structures and financial constructs is over. 

To be fair, there have been many rebuttals that argue all this negativity is outlandish and AGI will simply supercharge growth.  

I believe the truth lies somewhere in between. 

Baumol’s cost disease states that costs rise in labor-intensive sectors—such as education and healthcare—because these services can’t easily automate or increase output per worker. In turn, they must raise wages to compete for labor, resulting in higher prices. Meanwhile, policies over time have made goods inflation practically negative. And it’s true, to the point where many people don’t get the healthcare or education they need.

Education inflation has averaged 7%, medical care around 3% and goods (durables) at -1%.

I believe AGI will finally give us the ability to reduce costs in service industries, helping to make life more affordable, and small service businesses more profitable. This is a positive and can be applied to some software companies that can use AI to expand their businesses (though not all of them). But that doesn’t mean the impact of AGI will be all good (the other side of “in between”). It will change the way we work and the technology we use. This will disrupt many businesses in the technology space. Changes to business models could also affect credit markets—including private credit. We first wrote about this in October 2025. 

The world of private credit is now more than $1.8 trillion, up from about $300b in 2010. 

16 years ago, growing private credit interest stemmed from a post-global financial crisis world. Regulations severely limited banks’ ability to lend to private companies, while monetary policy ensured money cost very little to borrow, between QE and 0% Fed Funds rates. You could get equity like returns at 7-9% yields on private loans, with what seemed like lower risk. It took off in popularity. 

Of course, it’s different now. When a lot of money flows in one direction, unintended consequences start to happen. People want in on the profits, so underwriting and covenants get easier. Eventually, once liquidity dries up, things start to crack. This happened in 2007, and started in Q4 2025 with the likes of Tricolor and FirstBrands. 

The recent quotes from Blue Owl (“We think this is a difficult short-term patch”) and the partial sales of what may have been their best loans to their affiliated insurance company, remind me of Lehman in April 2008. At the time they said, “The worst is behind us” and had classified short-term repurchase agreements as "sales" rather than loans called Repo 105 to optically reduce risk. 

Maybe not exactly the same, but something to watch for. Relatedly, FS KKR (ticker FSK), a business development company which issues loans, recently reported earnings and cut its dividend by 30%.

And finally, this risk also now extends to banks. Banks are always going to be creative in the ways they can grow earnings. Banks have adopted new strategies with a focus on growing loans to non-depository financial institutions (NDFIs). According to Moody’s, this reached $1.2 trillion last year for domestically chartered US banks, where about $300 billion of these loans are to private credit providers. While this appears moderate given the size of the banking system ($25Tr according to the Fed), the interconnections between these two types of lenders grew, especially since 2020. And the reporting each quarter on these has not been overly transparent.

Additionally, there are partnerships between banks and funds, to co-finance deals and, critically, sell them complex debt instruments known as Synthetic Risk Transfers (SRTs) (more so in Europe than the US). While banks use SRTs to reduce regulatory capital charges, these instruments are often criticized for their limited transparency, which poses hidden risks to their balance sheets.

Private credit’s growth and bank interconnections have raised its market importance. The shift away from the era of near-zero interest rates and quantitative easing, combined with rapid technological change, could have meaningful implications across markets.. 

Don’t get too negative on the future but always look out for risks, and know what you own.