Venture Capital and Private Credit Want to Put Your 401k on 5x Leverage. Don't Let Them
Can fintwit meme a company to death? We can sure try
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Markets have gone full bipolar. QQQ is ripping back to all-time highs barely a month from “Liberation Day” and the multi-week tariff tantrum. Everything is fine now that tariffs on Chinese imports are “only” 30% for the next 90 days.
Wal-Mart trades at a P/E of 40. Apple a P/E of 33. Microsoft a P/E of 35. Okay, Microsoft may deserve to trade at 35x earnings, but it sure ain’t cheap.
The President says Wal-Mart should run at negative profit margins all the while shit like Rigetti Computing (don’t ask) trades at a $3.44 billion market cap. It is up a cool 900% in the past 12 months and does not have a business model.
I have people asking whether they should load up on quantum computing stocks to ride the bull wave. Listen to yourselves! You have lost your marbles. Snap out of it!
Can we get even crazier? Some of us sure are trying.
Let me introduce you to Basic Capital, a fintwit main character this week.
Basic Capital wants you to take your 401k or Roth IRA and put it on 5x leverage. Yes, you read that correctly. Backed by The General (Bill Ackman), Lux Capital, and your favorite venture capitalists.
Here is its introduction advertisement:
Investors? Possibly you…
Basic Capital Wants to Zero Your Retirement Savings
You’ll be surprised to hear that the advertisement does not match up with reality. Here is how Basic Capital is structuring its product:
So your returns need to make up for these headwinds:
$300 a year subscription fee
0.5% management fee of total assets
6.26% floating rate loan (confirmed floating rate on Twitter)
5% of all gains
Jake from the Econompic Twitter account sums it up well. If you see him running numbers in your mentions you probably screwed up big time, FYI.
Which brings us to the next point: what exactly will Basic Capital be investing in?
That’s right, 90% of the portfolio (450% leverage on your retirement savings) is going to be in a private credit fund. Rumor has it this is a fund connected to Basic Capital.
The pitch is taking a 6.25% (floating rate!) loan to buy a pool of debt yielding 8.5%. That 2.25% spread gets you a rough 11% return according to the founder if all goes according to plan. All good, spreads never blow out so I am totally not worried.
However, according to a tweet from the founder that I am shocked is not deleted, he does not understand that default risk is not included in the credit yield. Yikes.
Basic Capital wants to make you think this is like levering up to buy a home. This is wildly misleading.
Jake from EconomPic says it better than I ever could:
Comparing 5x leverage on opaque credit to owning a home with a mortgage is BS. A mortgage historically turned a rising expense (rent) into fixed payment while equity built over time. The liability was fixed and decreasing. In this case, the liability compounds.
But Isn’t There No Margin Call?
The other big pitch from Basic Capital is that you cannot get a margin call. Limited liability! You like that, right?
Here is a direct quote from Basic Capital’s website:
Because there are no margin calls, you’re never forced to sell at a loss. That’s a key advantage of Basic Capital’s structure. It’s built for long-term investing, where steady contributions and time in the market matter more than short-term fluctuations.
Sure, there are no margin calls for you. But someone is taking on the credit risk. That someone is Basic Capital. And if the market tanks or these private credit loans blow up — which could easily happen this year, or next — Basic Capital will start taking on water. Eventually, they will get a margin call.
Then, your retirement savings go to zero.
Sorry for the ranting, but Basic Capital deserves to get nipped in the bud. Like a diseased root in your vegetable garden, we can’t let this virus spread throughout our economy. We have to kill this in the crib.
-Brett