A massive credit bubble has inflated, hidden in plain sight within the shadow banking sector.

Jeff Snider warns on What Bitcoin Did that this non-bank lending, which grew "nuclear" in 2021-22, now shows telltale signs of systemic trouble. After 2008, these unregulated entities stepped in to fund riskier borrowers traditional banks avoided, often backed by regulated banks themselves.

The industry convinced itself it could generate high returns with no risk, a "fatal conceit" common to every debt-fueled bubble. This assumption led to a hyper-extension of private credit, with little basic due diligence or underwriting performed by anyone in the lending chain.

Snider points to recent "cockroaches" such as Tricolor and First Brands, which exposed stunning levels of fraud and unchecked collateral. Lenders and investors simply assumed safety, never verifying the underlying assets. Nobody did their homework.

This lack of oversight means an inevitable reversal of the imbalance will lead to a domino effect: forced selling, distressed selling, then fire selling. While Snider believes this is not a 2008-level event or a 1930s depression, the pattern of human behavior in bubbles is identical.

The problem is substantial enough to cause significant damage across financial markets and the real economy. It will create further misery on top of existing struggles, capable of spilling over into leveraged loans and high-yield corporate credit.

Jeff Snider, What Bitcoin Did:

- Everyone in the space convinced themselves they could generate high levels of return that were essentially risk-free, which whenever you hear that, alarm bells should be ringing because there's no such thing in finance.

- There's no such thing as high rates of return with low risk. It's high rates of return with what are perceived to be low risk until they're not actually low risk.