Fault Lines
Current Assessment — June 2026
Seven Cracks in the Economy. Six Are Slowly Growing. One Is Healing.
A “fault line” is a geology term; it’s a crack in the earth where pressure has been building for a long time, and where an earthquake is most likely to happen. This piece borrows that idea for the economy: these are seven places where pressure has been quietly building (or, in one case, easing) for a while.
Here’s the headline picture:
Federal debt: $39 trillion
$1 trillion in commercial property loans coming due this year
Private equity firms sitting on $3.5 trillion in losses they haven’t officially admitted to yet
The Iran conflict: a peace agreement was just signed, but it’s not finalized yet
Signal: HIGH. Six of these seven problems are still building pressure. None of the seven is fully resolved yet, including the one that’s improving.
Fault Line 1: The Government Is Borrowing an Enormous Amount of Money
The U.S. now spends more on interest than on its military
Here’s a number worth sitting with: the U.S. government now pays more each year just in interest on its debt than it spends on national defense. That has never happened before in American history.
The total debt has hit $39 trillion. A government office that tracks long-term budget numbers (the CBO) projects the interest payments alone could double to $2 trillion a year by 2034, if nothing changes.
Why this connects to inflation: countries that borrow in their own currency (like the U.S. does) don’t go bankrupt the way a person or company would. Instead, they can effectively make their money worth less over time, a process called “debasing” the currency. With Japan (a major buyer of U.S. debt) becoming a less reliable customer, the government either has to offer higher interest rates to attract new lenders or rely on the Federal Reserve to create more money to cover the gap, and the second option tends to fuel inflation. In other words, the debt problem and the inflation problem aren’t really two separate issues; they’re the same issue, just viewed from two different angles.
The numbers
Total federal debt: $39 trillion, growing by about $1 trillion every 100 days at the current pace.
Annual interest payments: over $1 trillion, more than the entire defense budget, for the first time ever.
Debt compared to the size of the whole economy: about 124%, above the level that historically tends to slow down long-term economic growth.
The 10-year forecast: interest payments could hit $2 trillion a year by 2034 if nothing changes. The math doesn’t work out without either much stronger economic growth, higher inflation, or some kind of restructuring.
What this means for your money: real, physical assets like gold (often bought through funds like IAU or GLD) tend to hold up well when a currency is being slowly devalued. Locking money into long-term government bonds (a fund like TLT, for example) right now carries real risk, since this debt problem feeds directly into the inflation story.
Fault Line 2: The Bond Market Never Actually Recovered
2022’s bond crash was paused, not fixed
In 2022, the bond market had its worst year in U.S. history, a major bond index lost more than 13% in a single year, worse than any year during the Great Depression. The reasons that caused that crash haven’t actually gone away. Inflation is still above target. The Fed is still cautious about cutting rates. And separately, Japanese investors pulling money out of U.S. bonds (explained in the Fed Rates piece) is pushing long-term rates up on its own.
Why this matters for the classic “balanced portfolio” idea: a common rule of thumb is to hold a mix of stocks and bonds, the idea being that when stocks fall, bonds usually rise, balancing things out. But that only works when inflation is low. When inflation is high, stocks and bonds can fall together, which is exactly what happened in 2022, and the conditions for it happening again haven’t disappeared.
What to watch
The 10-year Treasury rate: when this rate rises, the value of existing bonds falls. If it climbs past 5% while the Fed isn’t raising rates, that’s a sign forces outside the Fed’s control (like Japan selling) are driving the bond market.
What investors expect inflation to be in 5 years: if this number rises alongside other rates, it means inflation is winning the fight. If it suddenly drops, that’s actually a different warning sign (falling prices, explained in the Price Regimes piece).
The extra interest rate riskier companies have to pay (compared to safe government debt): This gap is currently smaller than it probably should be, given how many companies are actually defaulting on their debt. If that gap widens sharply, it means investors are finally pricing in real risk that they’ve been ignoring.
What Japan’s central bank decides to do: Every time Japan raises its own rates, it accelerates investors pulling money out of U.S. bonds. Right now, Japan’s decisions matter almost as much to U.S. bond markets as the Fed’s own decisions do.
Stress showing up in private equity or private credit (covered in their own sections below): Both of these are quietly competing for the same lending capacity as everyone else, companies, the government, and commercial real estate. If either one starts struggling to refinance or sell off holdings, it adds even more pressure to a bond market that’s already stretched thin.
What this means for your money: very short-term, safe savings (a fund like SGOV, used throughout these pieces) are currently a better bet than locking money into long-term bonds (a fund like TLT). The bond market isn’t behaving like the safe cushion it’s supposed to be right now.
Fault Line 3: Private Equity Firms Are Sitting on Hidden Losses
$3.5 trillion in losses that haven’t been “made real” yet
Private equity firms (companies that buy other companies using a mix of investor and borrowed capital, hoping to sell them later for a profit) are currently valuing many of their holdings at 2021 levels, when interest rates were much lower and company values were much higher.
The problem: the usual ways these firms cash out (selling a company publicly through an IPO, selling to another company, or selling to another investment firm) don’t really support those old, higher prices anymore, not with today’s higher interest rates. Big institutional investors, like pension funds, have also had to pull back on investing new money in private equity because their existing private equity holdings became a larger share of their overall portfolios than intended, simply because other investments (like public stocks) fell in value.
These firms have a lot of money sitting around, ready to invest, but they can’t easily cash out of older investments to free up more capital. The pressure builds toward 2026 and 2027, when a large batch of these investment funds reaches the end of their typical holding period and is forced to sell, whether market conditions are good or not. When that forced selling happens, it ripples outward, affecting pension funds, university endowments, and a meaningful chunk of commercial real estate that these firms also own.
What to watch
How many companies are going public (IPOs): When this is low, private equity firms have one less way to cash out, which pushes them toward distressed, fire-sale-style exits instead.
Discounted resale prices for private equity stakes: When investors who want out sell their stakes to other investors at a steep discount (more than 20% off the stated value), that’s a sign of real stress. Big firms like Blackstone, KKR, and Apollo will show early signs of this in their earnings reports.
Pension fund reports: When major pension funds start cutting back on private equity or admitting losses, that’s an early sign the hidden losses are becoming real, recorded losses.
The 2026-2027 deadline wave: funds raised between 2018 and 2020 typically have 7 to 10-year holding periods, meaning many are reaching their deadline right in this window. Watch for these funds asking for extensions; that’s a sign they can’t exit at the returns they promised investors.
What this means for your money: Avoid locking money into hard-to-sell private equity investments at today’s prices. If you already have money in private equity, understand when those specific funds were started and when they’re expected to need to sell.
Fault Line 4: A Wall of Office Building Loans Is Coming Due
$1 trillion in commercial property loans need to be refinanced this year, at much higher rates
Office buildings are in real trouble. A record 12.34% of office loans are seriously behind on payments. Regional banks (smaller, local banks) hold a huge share of these loans, 44% of their total lending is tied up in commercial real estate.
Here’s the core problem: about $1 trillion worth of these loans come due in 2026, and they’ll need to be refinanced at interest rates 4 to 5 percentage points higher than when they were originally taken out. For a lot of these properties, the math simply doesn’t work anymore at the new, higher rates.
When a loan like this comes due and doesn’t work financially anymore, there are basically three outcomes: the building’s owner hands the keys back to the bank, refinances anyway at a real loss, or sells the building at a steep discount. The bank holding the loan has to either pretend everything’s fine and extend the loan (kicking the problem down the road), accept the loss now, or in the worst case, fail outright. A bank failure in 2023 (Silicon Valley Bank) was an early preview of what this kind of stress can look like, though that case had different specific causes.
This connects directly to the private equity problem above, since private equity firms own a lot of commercial real estate and face the exact same squeeze at the same time. There’s also a third pressure: new rules allowing companies like X to offer 6% savings rates are pulling deposits away from smaller community banks just when those banks can least afford to lose them.
What to watch
Office loan trouble rate: currently a record 12.34%, and rising. As more companies make remote and hybrid work permanent, the chances of office buildings recovering their old value keep shrinking.
The $1 trillion calendar: This isn’t a guess; these loans have actual due dates on the calendar, regardless of what the market is doing when they arrive.
Bank earnings reports this summer: watch for banks writing down the value of their commercial real estate loans. Any small community bank needing a government-arranged rescue merger would be an early warning sign that the “extend and pretend” strategy has run out of road.
A specific bond market that tracks this risk: the prices of bonds backed by commercial property loans tend to move before the actual bank write-downs show up, usually by one or two financial quarters.
The new banking competition starting July 18: as companies like X start offering 6% on savings, community banks already stressed by office loans now also face customers pulling their deposits out.
What this means for your money: Be cautious with real estate investment funds and smaller regional bank stocks. Investments tied specifically to office buildings (through certain types of mortgage-backed bonds) are especially risky right now, since prevailing interest rates on these don’t seem to reflect their actual risk.
Fault Line 5: Are AI Companies’ Profits Real?
The money being spent is real. Whether it’s actually paying off yet is the real question.
In the first quarter of 2026, big companies reported their best earnings beat (meaning: they made more profit than expected) since 2021. The companies leading the AI boom are generating genuinely real cash, not just promises about the future, which makes worries about “circular financing” (companies investing in each other in a way that artificially props up the whole picture) a smaller concern than some headlines suggest.
The bigger, more honest question is this: companies plan to spend between $650 and $700 billion this year building AI infrastructure. Is that spending actually turning into real demand and real profit fast enough to justify it? Right now, lenders are charging a noticeably higher rate to companies spending heavily on AI without clearly proving it’s paying off yet, a sign the market is already asking this same question.
(Full details on this topic, including both the optimistic and pessimistic arguments, live in a separate, more detailed piece on Earnings Quality.)
Fault Line 6: A Giant, Mostly Invisible Lending Market
A $2 trillion market that regulators admit they can’t fully see into
“Private credit” means loans made directly by investment funds, outside of regular banks and outside of public bond markets. This market has grown to somewhere between $1.5 and $2 trillion globally, on track to pass $2 trillion this year, with some forecasts suggesting it could reach $4 trillion by 2030.
Here’s the genuinely concerning part: in May 2026, an international financial regulator (the Financial Stability Board) openly said that this market is too opaque to properly monitor the risks within it. The data needed to really understand what’s happening is scattered, locked behind paywalls, or simply doesn’t exist in a usable form.
This is different from private equity (which owns and runs companies directly). Private credit lends money to companies, often the very same companies private equity firms own, and increasingly, to fund the AI data centers mentioned in the fault line above. And importantly, regular banks aren’t separate from this market; they’re actually inside it, providing financing to the funds that do this direct lending. That kind of hidden interconnection between banks and risky lending is part of what made the 2008 financial crisis so hard to see coming.
The numbers
Total market size: $1.5 to $2 trillion, expected to grow toward $4 trillion by 2030.
How much banks are exposed to this market: about $2.5 trillion, including money banks have committed but not yet handed over. In one stress-test scenario at a major bank, 30 to 40% of this exposure is held by the riskiest types of these funds.
What regulators can actually track directly: somewhere between $220 and $500 billion. That wide range itself is part of the problem; nobody has a precise number.
Estimated default rate: somewhere between 1.6% and 4.7%, a wide range because the market is too opaque to calculate one single, reliable number.
A warning sign that already happened, and got bigger. In March 2026, a major private credit fund run by Blue Owl saw investors request withdrawals of 40.7% of shares from its technology-focused vehicles and 21.9% from its credit income funds, far more than the typical pace. Worth being precise about what that number means: redemptions themselves are capped at 5% of NAV per quarter by design, so a request to redeem isn’t the same as money actually walking out the door. But the surge in requests, even if most can’t be fulfilled immediately, is a real-time signal of shifting investor sentiment and is exactly the kind of pattern this fault line flags as appearing before defaults do.
This is genuinely a disputed topic, not a settled one
To be fair, not everyone thinks this is a crisis waiting to happen. Major banks like J.P. Morgan argue that the fear is overblown, citing relatively low default rates (around 2%) among publicly traded versions of these funds. A major real estate firm, CBRE, argues this looks more like a normal, contained credit slowdown than anything resembling 2008. Even the regulator raising the alarm isn’t claiming a crisis is definitely happening, it’s specifically saying nobody can fully verify *either* the optimistic or pessimistic case, because the data just isn’t there. That lack of visibility is itself the actual risk being flagged, not a confirmed disaster.
What to watch
How publicly traded versions of these funds are priced compared to their stated value: when investors trust a fund’s own math less than the fund manager does, the gap between the market price and the “official” value widens.
More funds restricting investor withdrawals: Blue Owl’s March 2026 move described above is the pattern to watch for elsewhere. This kind of restriction tends to show up before actual loan defaults, like a warning light blinking before the engine fails.
How much banks are lending to these funds: If this number rises sharply, the hidden interconnection between banks and this market is getting deeper, not safer.
The AI data center connection: Some of the redemption pressure at Blue Owl specifically has been tied to nervousness about AI-sector loan concentration, since the firm invests heavily in technology loans, a direct, current link between this fault line and the AI capex question in Fault Line 5 and Earnings Quality, not just a theoretical one.
What this means for your money: Be cautious of investment products marketed to everyday investors that involve this kind of private lending, especially given the real example of a fund restricting withdrawals. If you already have exposure through some kind of investment fund or an advisor’s recommendation, ask directly what percentage of the underlying loans are valued using the fund manager’s own opinion versus an independent, outside check. The lack of clear information here is the actual danger, not just an inconvenience.
Fault Line 7: The War in Iran (The One That’s Actually Improving)
Cooling down, but not over yet. The peace deal still has to actually hold.
This conflict began on February 28, 2026, when the U.S. and Israel struck Iran, including killing its top leader. Oil prices roughly tripled, jumping from about $64 to a peak of $120 a barrel, after Iran shut down a critical shipping route (the Strait of Hormuz) that normally carries about a fifth of the world’s oil and natural gas trade.
A ceasefire on April 8 didn’t fully hold, and the U.S. responded with a naval blockade against Iran. But as of June 19, 2026, a peace agreement has been signed, aiming to reopen that shipping route, lift the blockade, and formally end the conflict within 60 days. The U.S. actually lifted its blockade the day before signing. Oil has fallen from its peak back down to the mid-$80s, and gas prices dipped below $4 nationally for the first time since March.
A reason for caution, though: this is real improvement, but it’s not a done deal yet. The U.S. and Iran have already given conflicting accounts of what the agreement actually says, within days of signing it, and this conflict has missed deadlines and broken ceasefires before. Markets seem to be celebrating this as resolved, even though the actual agreement hasn't been fully locked down yet.
The numbers
Oil’s wild ride: from about $64 a barrel before the war, up to a $120 peak, back down to around $85 now, still well above where it started.
When the deal was signed: June 19, 2026, after being announced five days earlier.
The naval blockade: lifted June 18, one day before the deal was signed, alongside a statement from Iran’s leadership about being open to direct talks with the U.S.
Gas prices: dipped below $4 a gallon nationally, the first time since March, but still about 25% higher than a year ago. This is relief, not a full reversal.
How long this has gone on: from February 28 to now, over three and a half months, including one ceasefire that didn’t fully hold.
What to watch
Whether the agreement actually sticks: the two sides have already disagreed publicly about the details. One U.S. official reportedly put the odds of it holding at around 80%, not a sure thing.
Actual ship traffic through the key shipping route: a signed agreement on paper is different from oil tankers actually moving safely through that route again. Watch real shipping activity and insurance costs, not just diplomatic statements.
What happens to oil prices if the deal falls apart: if this breaks down the way the April ceasefire eventually did, expect oil prices to jump back toward $100 or higher fairly quickly. Betting that this de-escalation will last isn’t risk-free.
The 60-day countdown: the agreement specifically aims for a full resolution within 60 days of signing, roughly mid-August 2026. That’s the date that will reveal whether this was a real turning point or just another pause.
What this means for your money: Don’t completely abandon protections against rising energy prices just because this one piece of news is positive. One lasting effect won’t go away even if the war fully ends: during the conflict, Iran started accepting payment for shipping tolls in Chinese currency through an alternative payment system, separate from the usual U.S. dollar-based system. That’s a real-world example other countries can point to and copy later, and it doesn’t un-happen just because this particular war ends.
How All Seven of These Connect to Each Other
These seven problems aren’t sitting in separate boxes; they feed into each other, like a row of dominoes that don’t fall in a perfectly straight line, but do bump into each other.
Here’s roughly how the chain works: the government’s debt problem feeds inflation. High inflation keeps the Fed cautious about cutting rates. That keeps borrowing costs high. High borrowing costs make it harder for office building owners to refinance their loans. That stresses the regional banks holding those loans. Stressed banks lend less to small businesses. That slows the broader economy. A slower economy raises the odds of a real recession. And a recession is exactly when more people end up needing programs like Medicaid and food assistance, the exact pattern this publication separately tracks as a sign of strain spreading from lower-income households upward.
Private equity firms are tangled up in almost all of this at once; they own a lot of office real estate, they borrow money at the same high rates everyone else does, and they’re stuck because the same conditions squeezing everyone else are also squeezing their ability to sell their investments.
The AI spending question adds another layer, since AI companies issuing new debt to fund their growth are competing for the same pool of available capital that office buildings and the federal government also need. If AI-related lending gets shakier, it could push borrowing costs higher for everyone else, too, not just AI companies.
The hidden, hard-to-see lending market (Fault Line 6) connects to almost everything else: it lends to the same struggling companies that private equity owns, it’s one of the funding sources behind the AI building boom, and because banks are quietly tangled up inside this market too, if something goes wrong there, it could hit the same regional banks already struggling with office loans.
The Iran conflict is the odd one out; it’s improving instead of building. But its ripple effects don’t simply disappear: it pushed inflation up earlier this year, which fed directly into the Fed’s more cautious, “maybe we need to raise rates” stance described in Fault Line 1. And the new payment system Iran used during the war remains a real example that reinforces a bigger, slower story about other countries looking for ways to rely less on the U.S. dollar.
And running underneath several of these at once: new rules letting companies like X offer better savings rates are pulling money out of smaller community banks, right as those same banks are already absorbing losses from office loans. It’s one pressure landing on top of several others, right when they’re all already stretched thin.
A few more numbers tying it together
Total household debt: $18.8 trillion, with nearly 5% of all debt currently behind on payments. Americans have added almost half a trillion dollars in credit card debt alone since 2021.
Federal debt: $39 trillion, with interest payments now exceeding the entire defense budget for the first time ever, and projected to keep climbing.
Office building loan trouble: a record 12.34%, with $1 trillion in loans due this year at much higher rates than when they were originally taken out.
Private equity’s hidden losses: roughly $1 trillion in losses not yet officially recorded, according to one estimate, with more than 60% of pension funds now holding more private equity than they originally intended, simply because other investments lost value around it. These losses eventually touch the retirement savings of ordinary people, even if those people never directly invested in private equity themselves.