You have probably heard the phrase “canary in the coal mine” before.

A century ago, coal miners used to carry canaries with them deep into the coal mines. The small birds were more sensitive to toxic gases.

If the canary showed distress or died, the miners knew they were in trouble and evacuated.

Incredibly, this practice continued until it was officially outlawed in the UK in 1986!

On Wall Street, a canary in the coal mine refers to something happening in an asset price as a warning sign of danger in the markets.

Some of these signals are technical, some are economic, and others are fundamental. Today we have a brand new one to watch…

A “blue owl” in the coal mine.

And it could tell us something critical about the next phase of today’s stock market.

The Private Credit Boom

I’m referring to one of the leading private capital lenders called Blue Owl Capital Inc.

“Private capital lending” has been thrown around a lot recently, and it simply refers to lending by non-banks.

This market was very small several decades ago. 

But after the Global Financial Crisis, regulatory constraints increased. This reduced the amount of traditional bank lending, and private funds stepped in to make up the difference.

Here is a table showing the tremendous growth in this area.

Source: BNY

The simple way to think about all of this is that the government made it more difficult for traditional financial institutions to lend money in many areas.

So private institutions like Blue Owl stepped in to make the loans.

They are charging more for these loans, but are not subject to the same regulatory requirements.

This is where the concern exists.

These lenders are obviously trying to make loans that they think will be paid off and profitable for their funds.

The reality, though, is that many of the fund operators get paid massive fees whether it works out or not.

They get paid more if the loans work, but they are as motivated by gathering assets as by success.

Ultimately, if they don’t succeed, they may go out of business. But this has not dissuaded asset-gathering businesses in the past.

We have seen this pattern happen over and over in the financial markets over the last century.

Unregulated (or lightly regulated) pools of capital move into lending businesses. They have strong initial success and build a huge loan book.

When the economic environment eventually slows down or turns lower, they are exposed, as their lack of regulation leads them to make bad loans.

This ends badly for their investors (and sometimes the economy) almost every time. The fund managers, on the other hand, always seem to do pretty well.

This brings me back to Blue Owl.

What Blue Owl Tells Us

The company was formed in 2020 through the merger of two previous firms, Owl Rock Capital Group and Dyal Capital Partners.

It went public in 2021 through a business combination with a special-purpose acquisition company or SPAC.

Since then, they have been very aggressive in expanding their business.

Here is a chart from their investor presentation showing their growth in assets under management since their public listing.

Source: Blue Owl Capital

In the last four years, they have grown their assets fivefold and entered many new businesses.

Is there anything wrong with this? Not at all!

If the company can invest this capital and make profitable loans, it can be a great business.

In fact, they have grown earnings from breaking even in 2021 to analyst estimates of almost $1 per share in 2026.

But the stock market is telling us that there might be a problem.

Here is a chart of the stock price since they went public.

The stock soared from a 2022 bear market low of $8 per share to a high of over $25 per share early this year. That is a threefold increase in just a couple of years.

More recently, the stock has struggled and is currently trading at $14 — or down almost 50%.

While the company has continued to report strong results, the stock market is signaling that there may be trouble ahead.

So what’s my view?

While I have a great track record of analyzing company fundamentals and the economy, I have an even better track record of listening to stock prices.

My view is that Blue Owl may indeed be the best canary in the coal mine for this market environment.

If the stock recovers and stabilizes in the coming months, we can see smooth sailing ahead for stocks.

However, if it continues to struggle, it may be time to evacuate stocks.

I will be monitoring it closely and will keep you informed.