Lloyd Blankfein, the former CEO of Goldman Sachs who led the firm during the financial crisis, said in an interview on Thursday that he is waiting for another major economic event to occur.
Blankfein noted that historically, the U.S. experiences a 'once-in-a-century crisis' every four to five years, referring to successive crises such as sovereign debt crises, the dot-com bubble burst, and the subprime mortgage crisis in the 1990s and early 2000s.
“There are many one-percent risks, but the risk of something bad happening is not one percent. I mean, it’s bound to happen. And it doesn’t matter if you can’t see where it’s coming from.”
The baseline forecast for most does not include a full-blown financial crisis, with the U.S. stock market currently at record highs and the economy, despite some weakness, remaining broadly resilient.
However, in Blankfein's view, there is a clue suggesting where the next major issue for the U.S. economy might emerge: the credit market.
“It usually revolves around leverage. And at this moment, right now, credit leverage may be appearing in places you don’t see,” he said when discussing the possibility of another significant market event.
Below are some warning signals Blankfein says he sees in the credit sector:
“Mini-stagflation is brewing”: Five new signs indicate that the worst-case scenario for the U.S. economy may be approaching.
Credit spreads are at historical lows, referring to yields relative to benchmark bonds like U.S. Treasuries. “Narrow” spreads imply investors perceive lower market risks, while “wide” spreads suggest investors seek greater compensation for perceived higher risks.
Similar to warnings about complacency when the stock market is at record highs, some market professionals believe that historically low credit spreads, given recent signs of weakness in certain sectors and the broader economy, could be a warning of investors mispricing risk.
The option-adjusted spread of the ICE Bank of America U.S. High Yield Index hovered around 2.84% last week, near historical lows.
Capital inflows into private credit. Private credit refers to investors lending to private companies and has remained robust in recent years, partly because yields on loans to private businesses tend to be higher.
Data cited in a report by JPMorgan Private Bank showed that assets under management in private credit grew by 14.5% year-over-year.
“People are trying to increase returns through some unconventional means of adding leverage,” said Blankfein, pointing to investment activities by some insurance companies active in the private credit space.
“The effects of leverage are starting to show. I’m thinking about places where this is happening,” he added. “If I were an insurance regulator, I might ask: Are these assets really worth what you say they are?”
Nevertheless, Blankfein expressed continued optimism about the markets and the broader U.S. economy.
This is partly because the Federal Reserve appears poised to cut interest rates, a move that could propel the stock market further into a bull run.
He noted that the investment environment also looks “remarkable,” referring to the excitement surrounding artificial intelligence and its potential to drive U.S. economic growth.
“I have these bearish thoughts, but I am still 100% bullish on the stock market. I’ve been through tech booms, and I’ve seen world-changing events. I’ve experienced things that altered our destiny because we overinvested.”
Blankfein's long-term outlook does not differ significantly from the perspective within Goldman Sachs, which he once led. Recently, Goldman Sachs economists stated that they believe the United States is entering a new long-term bull market. In a report, Goldman Sachs strategists noted substantial opportunities for investors in sectors such as technology, services, and manufacturing, while also highlighting diversification opportunities outside the U.S.
