#763: The Everything Bubble Is Ending with Nick Nemeth

**Marty Bent** (0:07)
You've had a dynamic where money's become freer than free.

**Nick Nemeth** (0:10)
When you talk about a Fed just gone nuts, all the central banks going nuts.

**Marty Bent** (0:16)
So it's all acting like safe haven.
I believe that in a world where central bankers are tripping over themselves to devalue their currency, Bitcoin wins. In the world of fiat currencies, Bitcoin is the victor. I mean, that's part of the bold case for Bitcoin. If you're not paying attention, you probably should be.

**Marty Bent** (0:36)
Nick Nemeth, it's a pleasure to meet you in person, sir.

**Nick Nemeth** (0:39)
Yeah, it's good to see it's been two months since our first conversation.

**Marty Bent** (0:42)
What has happened since? I was telling you, it seems like the whole systemic credit contagion headlines that were in the news when we first spoke have left the headlines, but it seems like there's still progression on the back end in terms of redemptions, redemption gating, and actually saw, we wrote about in the newsletter yesterday, private credit issuance and underwriting is down like 40 percent month on month.

**Nick Nemeth** (1:06)
Yeah.
It's like in March, if you're looking at the AI token numbers, they were just going up, but AI stocks were falling off the cliff. So there's a little bit of, it's not making sense, right? Because if you look at the defaults, redemptions, everything's going up, but the narrative, people get tired of hearing about it until the next shoe drops. During something like this that's deteriorating, it's almost like a shark attack maybe, like the shark will nibble you and get your calf and it'll go swim off and you think you're fine. Then it comes back and takes your leg.

**Marty Bent** (1:44)
Well, what's new on the default front? What sectors are defaulting?

**Nick Nemeth** (1:49)
It's actually really interesting. I've done a lot of work into this and I keep on expecting software to be up at the top and it's not. It's like healthcare and consumer. So software is basically at average levels. And again, a lot of it's HIC payment in kind, which is these guys just, instead of paying your credit card minimum every single month, they're just like, okay, just keep on rolling it up. And if you don't have any cash commitment, you can't default. I mean, maybe they'll call it quits, but the Medallia, you remember hearing the Medallia story, your audience probably knows that.
I'll get like really specific.

**Marty Bent** (2:27)
What is the Medallia story?

**Nick Nemeth** (2:28)
So Medallia had half cash, half pick.
So they had some cash component and they actually were EBITDA positive by $200 million, but they defaulted on their debt because one, EBITDA is not cashflow, but two, they wanted to ask Blackstone like, hey, can we switch this over to pick? And Blackstone was like, nah, we're not really going to do that for a business that's likely not growing.

**Marty Bent** (2:56)
And for those who are unaware, these payment and kind loans, they come with egregiously higher carrying costs too.

**Nick Nemeth** (3:02)
Yeah, it's like 14%.
So if you look at US equities, the S&P 500 is much higher quality equities with motes. There's some junk in there, there's some value traps in there, but generally speaking, these are some of the best companies in the world. What's in these private equity and private credit portfolios? If you look through Toma Bravo, I'm like, what are these companies? I'll see a couple of cyber companies that I'll know, like McAfee or whatever, and the narrative that they go out and say, these are quality companies, these are great companies. I'm looking through and it's like, and plural site, that's check for tech-ish employees to learn how to use a CRM.

**Marty Bent** (3:51)
Now, they're just prompting Claude, that kind of way.

**Nick Nemeth** (3:53)
Exactly. They're just like, Claude, go do that. There might be some value in infrastructure of software, but that value is likely in the public markets.
Databricks is in the private markets might be a great one, but there's definitely a lower quality in software, and we haven't even seen that in defaults yet. So when that picks up and joins the consumer and the healthcare, we're already seeing 2008 level defaults. So I mean, people don't seem to care until they do care, but-

**Marty Bent** (4:29)
Defaults from a rate of default perspective or magnitude of defaults?

**Nick Nemeth** (4:34)
I want the rate of default, but I wonder on the magnitude. It's definitely more because the asset class is bigger.
But I wonder just as segmenting out, is the lower middle market doing worse than the middle market, doing worse than the big software companies? That's something I don't have off the top of my head. Good idea though.