Q4 2024 Z.1 and the Start of Deleveraging
Doug Nolan
The thesis holds that a multi-decade super cycle Credit Bubble - over recent years succumbing to “terminal phase excess” - has turned increasingly fragile.
Q4 2024 Z.1 data from the Federal Reserve corroborate the analysis.
Non-Financial Debt (NFD) expanded $3.467 TN during 2024, to a record $76.731 TN.
Debt growth was down slightly from 2023’s $3.594 TN – while still about 90% above the two-decade (2000-2019) annual average of $1.836 TN.
NFD inflated $21.583 TN, or 39%, over the past 20 quarters.
For comparison, NFD expanded $11.074 TN, or 25%, over the preceding 20 quarters (Q4 ’14 to Q4 ’19).
Since 2008, NFD has inflated $40.851 TN, or 114%.
As has been the case throughout this late-super cycle phase, government finance dominates the Credit system.
Treasury Securities increased (nominal) $589 billion during Q4, with one-year growth of $2.040 TN.
Over the past five years, Treasury Securities has inflated $12.316 TN, or 57.1%.
Since 2007, Treasuries have ballooned $25.837 TN, or 321%.
After ending 2007 at 55.5%, Treasury Securities as a percentage of GDP inflated to 96.4% to end 2024.
Agency Securities rose $111 billion to a record $12.249 TN, the strongest quarterly growth since the banking crisis Q1 2023.
Agency Securities inflated $2.906 TN, or 31.1%, over 21 quarters.
Why do the agencies continue such rapid expansion?
Treasury and Agency Securities combined to expand $2.186 TN over the past year to a record $40.389 TN – or 136% of GDP – with historic five-year growth of $14.576 TN, or 58%.
Total Debt Securities rose $493 billion during the quarter to a record $62.004 TN, with one-year growth of $2.910 TN.
Debt Securities ballooned $18.974 TN, or 44%, over 22 quarters.
Debt Securities closed 2024 at 209% of GDP (ended ‘08 at 201%).
Equities rose $1.124 TN during Q4 to a record $92.852 TN, with one-year growth of $15.317 TN, or 19.8%.
Equities inflated a historic $42.084 TN, or 83%, over 22 quarters.
Equities ended the year at 312% of GDP, up from previous cycle peaks 187% (Q3 2007) and 210% (Q1 2000).
Total (Debt and Equities) Securities surged $18.227 TN, or 13.3%, last year to a record $154.856 TN, with 22-quarter growth of $61.058 TN, or 65%.
Total Securities ended the quarter at 521% of GDP, dwarfing previous cycles peaks of 375% (Q3 ’07) and 357% (Q1 2000).
Historic debt and securities inflation directly inflated the household balance sheet and perceived household wealth.
Household Assets were up slightly ($101 million) to $190.151 TN during Q4.
With Household Liabilities down $63 billion to $20.790 TN, Household Net Worth rose $164 billion to a record $169.361 TN.
Household Real Estate holdings dipped $400 million to $52.138 TN.
Real Estate rose $3.054 TN, or 6.2%, over the past year, and $17.275 TN over 18 quarters, or 49.6%.
Household RE ended the year at 175% of GDP, somewhat below the 190% peak from Q3 2006.
Financial Assets increased $375 billion to a record $128.870 TN, with one-year growth of $10.806 TN, or 9.2%.
Household Financial Asset holdings ballooned $34.955 TN, or 36.7%, over 18 quarters – to 434% of GDP.
For perspective, Financial holdings posted a mortgage finance Bubble peak of $54.328 TN, or 356% of GDP, during Q3 2007.
Total (Equities and Mutual Funds) Equities ended 2024 at a record $50.061 TN, with a one-year gain of $7.740 TN, or 18.3% - and 18-quarter growth of $20.538 TN, or 69.6%.
Total Equities ended the year at 168% of GDP, greatly surpassing previous cycle peaks of 105% during Q2 2007 and 115% for Q1 2000.
Households continue their unprecedented “money” accumulation.
Total Household Deposits rose $303 billion (8.4% annualized) to a record $14.789 TN, while Money Fund holdings surged $275 billion (25.4% annualized) during Q4 to a record $4.600 TN.
Combined Deposits and Money Funds surged $578 billion for the quarter (12.3% annualized), $1.194 TN for the year (6.6%), and $4.018 TN, or 26.1%, over 18 quarters.
Combined Deposits, Money Funds, Treasuries and Agency Securities holdings ballooned a historic $6.294 TN, or 36.7%, over 18 quarters.
Bank (“Private Depository Institutions”) assets increased slightly ($26 million) to a record $27.812 TN.
Meanwhile, Total Loans expanded $190 billion (5.2% annualized), the strongest quarterly growth in two years. Non-mortgage/consumer loans (business loans “not elsewhere classified”) surged $247 billion, the largest gain since pandemic Q1 2020.
Led by declines in Agency/MBS ($103bn) and Corporate Bonds ($67bn), bank Debt Securities holdings fell $128 billion (first decline in 5 quarters) to $6.176 TN.
Curious Q4 happenings within the Broker/Dealers balance sheet.
Total Assets declined $239 billion during Q4 to $5.270 TN (‘24 growth of $384bn, or 8.1%).
The majority of this contraction is explained by the $142 billion drop in “repo” assets (to $1.690 TN).
Data away from the Z.1 pointed to significant year-end “repo” positioning adjustments (for reporting purposes).
For example, the Fed’s reverse repo liability (where institutions park cash balances) spiked $375 billion during the final 11 days of 2024, likely associated with a year-end pullback in Wall Street “repo”.
Meanwhile, Broker/Dealer Loans jumped $49 billion (28% annualized) to $753 billion, the largest increase since Q1 2021.
Loans expanded $102 billion during 2024, or 15.6%.
Debt Securities holdings added $26 billion to $627 billion (high since ’08) – with one-year growth of $179 billion, or 40.0%.
Treasury holdings jumped $73 billion to a record $408 billion, with 2024 growth of $139 billion, or 52%.
The money market fund complex remains at the epicenter of the critical intermediation of massive issuance of increasingly risky government debt into perceived safe and liquid “money” (enjoying insatiable demand).
Money funds are massive buyers of short-term Treasury and agency securities.
As major “repo” market operators, money funds are also a primary source of securities finance for leveraged speculators – in a process that essentially transforms longer-term Treasury bonds into “money” (money market shares backed by “repo” holdings).
And especially after the past few years of historic ballooning, it’s alarming that traditional concerns for money market fund stability have gone MIA.
Money Market Fund Assets (MMFA) surged $404 billion during Q4, or 23.6% annualized, to a record $7.243 TN.
For the year, MMFA expanded a record $1.100 TN, or 17.9%, surpassing 2023’s record $920 billion growth.
In one of history’s great monetary inflations, MMFA ballooned $3.241 TN, or 81%, over the past five years.
MMFA “repo” holdings declined $68 billion to $2.620 TN during Q4.
Meanwhile, Treasury holdings jumped $335 billion to a record $2.995 TN, with one-year growth of $725 billion, or 32%.
It’s worth noting that MMFA Treasury holdings were up $1.872 TN, or 167%, over five years.
Agency Securities holding rose $93 billion during Q4, or 47% annualized, to $886 billion (one-year growth $178 billion, or 25.2%).
Q4 Rest of World (ROW) data comes with some (end of cycle) intrigue.
Total holdings of U.S. financial assets increased only $656 billion, the slowest expansion in five quarters.
Debt Securities holdings contracted $337 billion, a sharp reversal from Q3’s $689 billion gain, and was the largest decline since Q3 2022 (British bond market crisis).
Treasury holdings fell $179 billion to $8.494 TN, following Q3’s $462 billion surge.
Corporate bond holdings contracted $128 billion to $4.354 TN, reversing much of Q3’s $161 billion rise – and the largest decline since Q3 2022.
ROW Repo assets contracted $80 billion to $1.383 TN, the largest decline since Q3 2018.
Repo assets jumped $523 billion, or 61%, over 17 quarters.
Repo liabilities dropped $143 billion during Q4 to $1.612 TN, a record quarterly decline.
ROW Total Equities holdings gained $593 billion to a record $17.983 TN, with one-year growth of $3.428 TN, or 23.5%.
Total Equities ballooned $7.876 TN, or 78%, over 17 quarters.
Let’s talk markets.
Acutely unstable markets saw de-risking this week intensify into fledgling Credit market deleveraging.
March 12 – Financial Times (Costas Mourselas and George Steer):
“Hedge funds have slashed their bets on equities and cut their borrowings from banks as they struggle to deal with surging market volatility triggered by US President Donald Trump’s global trade war.
A sharp stock market sell-off in recent weeks on concerns about Trump’s tariffs has hit the sector particularly hard.
Goldman Sachs’ Hedge Industry VIP index… has tumbled 12.5% since February 19…
The reduction in gross positions — the combination of bets on and bets against shares — by hedge funds on Friday and Monday was the largest in four years… and one of the largest in the past 15 years.
‘There is a lot of pain out there,’ said an executive at one large hedge fund.
‘The only way to defend yourself in the environment today is to cut your leverage’…
‘These policy changes have been massive and fast,’ said one executive.
‘It’s a different environment now.
We have never seen this.’”
Risk aversion and waning liquidity erupted (as it does) this week at the “periphery.”
High yield bond spreads surged 22 bps Thursday, the largest daily increase since global deleveraging day, August 5th, 2024.
Prior to Friday’s 14 bps narrowing, high yield spreads were 44 wider w-t-d at Thursday’s close.
This was the largest widening move since the 55 bps increase for the week of August 2nd (preceding August 5th instability).
At Thursday’s close, high yield spreads had widened 79 bps since February 18th – to the high since August 14th.
Investment grade spreads had widened 10 bps w-t-d by Thursday’s close (narrowed 4 Friday), which was the largest weekly spread widening since the week of August 2nd (12bps).
Spreads closed Thursday at 97 bps, up 20 bps since February 19th to the widest level since September 12th.
The levered short Treasury/long higher-yielding corporate debt “carry trade” – that has minted big returns over recent years – is suddenly under pressure.
Bank Credit default swap (CDS) prices surged this week.
Morgan Stanley CDS jumped seven to 60 bps, the largest increase since the week of August 2nd.
Bank of America CDS rose 5.5 to 59 bps, also the largest increase since August – to the highest level since August.
Goldman Sachs CDS rose six to 62 bps, near the high since August.
JPMorgan CDS gained five to 44 bps, the largest increase since August.
Leveraged loan new deal volume this week was the slowest of 2025.
According to Bloomberg, there have been six offerings “pulled from syndication in the last few weeks...”
It's worth noting that the stocks of leading public “private credit” firms have been under heavy selling pressure.
Apollo Global Management is down 18.4% y-t-d, Blackstone 17.6%, and KKR 23.3%.
“Subprime” Credit Bubbles have a tendency to erupt quickly, with wide ramifications.
To fulfill all the manic AI hype will require trillions of Credit - private and public.
The unfolding instability of private Credit is another major blow for the now deflating AI/tech Bubble.
Before Friday’s 2.8% rally, the Bloomberg Mag 7 Index was down 5.3% w-t-d as of Thursday’s close – trading to lows back to mid-September.
The Nasdaq100 rallied 2.5% in Friday trading, with the Semiconductors recovering 3.3%.
Next Friday is quarterly options expiration.
Recent market weakness and associated hedging ensure enormous quantities of put options mature next Friday.
Similar backdrops have seen intense short squeezes and the unwind of hedges into expiration.
Bear market rallies tend to be the most ferocious, and I feel increasingly confident that speculative deleveraging marks the beginning of a major bear market.
But a crash scenario is not a low probability event.
In the event of a squeeze and equities rally, it will be interesting to monitor bond market dynamics.
Ten-year Treasury yields closed the week at 4.31%, down about 50 bps from January highs.
Treasury performance has been notable in the face of surging global yields.
German bund yields spiked 47 bps in two weeks to 2.88%, the high back to October 23rd.
French yields rose 42 bps in two weeks, Italian yields 46 bps, Spanish 46 bps, and Greek yields 44 bps.
UK yields were up 18 bps in two weeks, Australia 13 bps, New Zealand 16 bps, and Canada 17 bps.
Japanese 10-year yields traded Monday (1.575%) to the high since 2008.
The market is pricing less than 1% probability of a Fed rate cut at next Wednesday’s FOMC meeting.
Markets will focus on quarterly revisions to the Statement of Economic Projections (“dot plot”) and, of course, Chair Powell’s press conference.
Details from the preliminary March University of Michigan consumer survey highlight the Fed’s dilemma.
Expectations sank 10 points to a 30-month low of 54.2, while one-year inflation expectations jumped six-tenths to a 28-month high of 4.9%.
Tariff and trade war uncertainties risk a further jump in prices and inflation expectations.
Meanwhile, shocks to consumer and business confidence pose major economic risk.
Tariff, inflation, and recession risks weigh on market confidence.
But I also believe there is escalating fear of four years of erratic and incoherent policymaking.
It’s worth repeating: This is no environment for aggressive leveraging.
And I don’t see history’s greatest speculative Bubble, which succumbed to manic “blow off” excess in 2024, surviving a major deleveraging dynamic.
At this point, the Trump “put” looks like a big, beautifully overhyped dud.
Hamstrung by elevated inflation and trade war risks, the Fed “put” is also suspect.
It likely comes lower and later than markets anticipate.
I doubt the Fed appreciates the amount of QE that will be required to stabilize a major deleveraging event.
And listening to the President’s speech this afternoon at the Justice Department only reinforced the darkness that is enveloping our nation.
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