Worse than the Worst-Case
Doug Nolan
“Worse than the worst-case scenario.”
“Liberation day,” a day that will live in infamy.
Financial Times Editorial Board: “America’s Astonishing Act of Self-Harm.”
The catalyst for bursting history’s greatest Bubble was delivered Wednesday on the White House lawn – pomp and circumstance, celebratory propaganda, placards, and disinformation aplenty.
The historic, multi-decade, global Bubble was always going to end badly.
The circumstances I see today are worse than what I had previously contemplated as the worst case.
It’s difficult to envisage the U.S. more unprepared for what will now unfold - an atrocious backdrop for heading into crisis.
Society is angry and so deeply divided – with stocks only somewhat off record highs and unemployment at 4.2%.
Washington is at the brink of complete dysfunction.
The existing world order is collapsing.
Extraordinary fragmentation and hostility risk great peril.
The unfolding global trade war backdrop is uncharted waters.
Scenario analysis should now include the possibility of things spiraling out of control over time - prolonged financial crisis, severe economic recession/depression, and even war of the non-trade variety.
Financial markets will now factor in myriad extraordinary risks.
At the minimum, the unfolding crisis will lack the concerted global response that has been instrumental in calming previous panics.
“S&P 500 Plunges 6% In Worst Rout Since March 2020.”
“S&P 500 Ends Week Down 9.1% in Biggest Decline Since March 2020.”
“Worst Stock Meltdown Since Covid Deepens as Recession Odds Soar.”
“VIX Closes at Highest Since 2020 as Stock Slide Accelerates.”
“Wall Street’s Fear Gauge Spikes to Highest Level Since 2020 Covid Crash.”
“Junk Bonds Suffer Worst Rout Since 2020 With US Hit Hardest.”
“JPMorgan to Goldman Swoon in Worst Two-Day Rout Since Pandemic”
“Hedge Funds Hit With Steepest Margin Calls Since 2020 Covid Crisis.”
April 4 – Washington Post (Natalie Allison, Jeff Stein, Cat Zakrzewski and Michael Birnbaum):
“Inside and outside the White House, advisers say Trump is unbowed even as the world reels from the biggest increase in trade hostilities in a century.
They say Trump is unperturbed by negative headlines or criticism from foreign leaders.
He is determined to listen to a single voice — his own — to secure what he views as his political legacy.
Trump has long characterized import duties as necessary to revive the U.S. economy, at one point calling tariffs ‘the most beautiful word in the dictionary.’
‘He’s at the peak of just not giving a f--- anymore,’ said a White House official with knowledge of Trump’s thinking.
‘Bad news stories?
Doesn’t give a f---.
He’s going to do what he’s going to do.
He’s going to do what he promised to do on the campaign trail.’”
April 4 – Bloomberg (Catarina Saraiva and Jonnelle Marte):
“Federal Reserve Chair Jerome Powell made clear the US central bank won’t rush to react to sweeping Trump administration tariffs, or to the financial market turmoil that has ensued amid fears of a global economic downturn.
Tariffs are likely to have a significant effect on the US economy, including slower growth and higher inflation, Powell said Friday at a conference in Virginia.
But, he added, Fed officials will wait to gain more clarity on those policies before lowering interest rates.
He also emphasized that, with inflation still elevated, the central bank had an obligation to make sure a temporary price boost from tariffs doesn’t turn into something more persistent.”
This is a national crisis.
Our unhinged President, too eager to brandish unchecked power, has moved forward with deeply misguided policies that risk sparking that type of financial mayhem that could induce global economic depression.
It’s essentially evolving into financial, economic, political, societal, constitutional, and geopolitical crises all melded into one historic quagmire.
Markets have so far reacted similarly to the initial Covid pandemic panic.
It took three separate announcements of progressively more massive QE to reverse the unwind of “basis trade” and other speculative leverage.
Back in March of 2020, the prospect of imminent economic collapse unleashed unprecedented monetary and fiscal stimulus.
Markets quickly reacted to massive QE, with financial collapse and economic depression thwarted.
April 4 – Financial Times (Costas Mourselas, Harriet Agnew and Joshua Franklin):
“Hedge funds have been hit with the biggest margin calls since Covid shut down huge parts of the global economy in 2020…
Wall Street banks have asked their hedge fund clients to stump up more money as security for their loans because the value of their holdings had tumbled, according to three people familiar…
Several big banks have issued the largest margin calls to their clients since the beginning of the pandemic in early 2020.
The margin calls underscore the intense turbulence in global markets on Thursday and Friday as Trump’s tariffs announcement was followed by retaliatory duties by China, and other countries readied their own responses.”
There are key aspects of the current environment that point to more formidable risks compared to March 2020.
For one, while highly elevated going into the pandemic, speculative leverage has ballooned precariously since 2020.
The highly levered “basis trade” is reported to have at least doubled (exceeding $1TN), with growth in “carry trade” and other speculative leverage likely of similar scope.
Marketplace liquidity is poised to be a major issue.
Historic stock market and AI manias fueled record flows of $1.1 TN into ETFs last year, followed by a quarterly record of $248 billion in Q1 2025.
Prolonged manic excess throughout “private Credit” and leveraged lending ensure unprecedented Credit and market vulnerability.
Importantly, inflation is today unanchored and elevated compared to 2020, even before Trump’s historic tariffs.
Powell’s Friday comments support the thesis that the Fed will be slower to react to market instability, increasing the likelihood that deleveraging gains problematic momentum before the Fed is forced to provide support.
The more deeply deleveraging takes hold, the greater the amount of QE required to thwart financial collapse.
April 4 – Bloomberg (Anna Wong, Estelle Ou, and Nick Hallmark):
“In his first public remarks since the March FOMC meeting, Fed Chair Jerome Powell hinted at a more hawkish outlook on inflation and rates – saying the Trump administration’s new tariffs are ‘significantly larger than expected,’ and their inflation impact ‘could be more persistent.'
Notably, Powell never mentioned the recent stock-market plunge or offered any assurance that the Fed is monitoring the sell off.”
We’ll assume President Trump is not hankering to reverse course, while the Fed is clearly not contemplating anything on the scale of a 2020 policy response.
It’s also worth noting that it was 15 months between the initial subprime eruption and acute financial crisis in September 2008.
The Fed over time escalated its response to weakening growth fundamentals and intensifying market fragility.
“Liberation Day” has unleashed crisis dynamics, with unemployment at 4.2%.
Until recently, financial conditions were exceptionally loose, cheap Credit easily available, speculative Bubbles manic, and economic fundamentals seemingly robust.
“American exceptionalism” was accepted as an indisputable fact.
The “Fed put” is today unusually ambiguous.
Unless the Fed is focused specifically on the potential for highly destabilizing speculative deleveraging, there is little that would point to imminent aggressive rate cuts, let alone a massive QE response.
I could be proven wrong on this.
What most believe are robust financial and economic structures, I view as fragile.
And how this debate plays out will be of monumental importance.
My analytical framework is unequivocal: Nothing short of historic Credit and speculative Bubbles, along with a “Bubble economy.”
I have argued that the “Roaring Twenties” period offers the closest parallels.
Today’s market structure, with hundreds of trillions of derivatives, dynamic hedging strategies that risk self-amplifying “flash crash” selling, $11 TN of ETFs, record household stock exposure, unprecedented indebtedness, and Bubbles in stocks, Credit and crypto – create unprecedented fragility.
Meanwhile, economic structure has been made fragile by decades of boom-time resource misallocation, malinvestment, unending fiscal and trade deficits, and the proliferation of uneconomic enterprises dependent on loose conditions and inflating asset markets.
The risk of major deleveraging unleashing disorderly financial and economic crises is elevated, an assertion corroborated in the markets Thursday and Friday.
Deleveraging was a global dynamic, with the U.S. the irrefutable epicenter.
U.S. High yield CDS (Credit default swap) prices surged 51 Thursday and Friday to 339 bps, the largest two-day gain since the March 2023 banking crisis (10th and 13th). CDS spiked 67 bps for the biggest weekly jump since June 2020.
High yield CDS spiked 124 bps over the past month.
In a market move the must cause shudders across Wall Street, high yield spreads to Treasuries.
Posted a two-session widening of 93 bps, the largest since March 2020 (20th and 23rd).
This week’s spread widening (87bps) was the most since the week of March 20, 2020.
Spreads widened 135 bps over the past month.
Spreads blowing out is indicative of the panicked unwind of levered “carry trades.”
April 4 – Bloomberg (Aaron Weinman):
“It was one of the darkest weeks for US leveraged loans this decade, with prices slumping in both the primary and secondary markets and potential borrowers standing on the sidelines, as global markets were roiled by President Donald Trump’s tariff plan.”
Leveraged loans prices sank 114 bps Thursday and Friday (to 95.01), the largest two-day drop back to March 2020 (23rd and 24th) – to the lowest level since November 2023.
For good reason, the stocks of major “private Credit” players were under intense pressure, including two-day drops of 23.3% at KKR, 23.2% at Apollo Global Management, 23.6% at Ares Management 23.6%, and 15.3% at Blackstone.
Unless extreme policy, financial and economic uncertainties swiftly abate, “subprime” Bubble deflation will be irreversible.
Manic “private Credit” and leveraged lending booms will succumb, as risky lending always does, to the downside of the Credit cycle.
A most protracted and extreme cycle portends deep financial and economic consequences.
An abrupt tightening of financial conditions will have profoundly negative effects on the tech/AI Bubble.
Losses this week included Micron 26.8%, Microchip Technology 25.6%, Dell 22.4%, Marvell Technology 20.3%, ARM Holdings 18.6%, Lam Research 18.6%, and Analog Devices 18.3%.
Nvidia dropped 14.0%, Apple 13.6%, Meta Platforms 12.5%, Amazon 11.3%, Tesla 9.2%, Alphabet 5.7%, and Microsoft 5.0%.
Bloomberg’s MAG7 Index dropped 10.1% this week, increasing one-month losses to 15.8%.
Acute Credit stress and collapsing technology stocks portend serious systemic issues.
The KBW Bank Index fell 13.8% this week, and the Broker/Dealers lost 12.1%.
Citigroup sank 17.4% and Bank America dropped 16.6%.
Goldman Sachs CDS surged 20 bps this week (to 86bps), the largest weekly gain since March 2020.
It was a slaughter for global bank stocks.
Japan’s TOPIX Bank Index sank 20.2%, and Europe’s STOXX 600 Banks Index fell 13.9%.
An index of Italian bank stocks dropped 15.9%.
In general, global de-risking/deleveraging attained powerful momentum Thursday and Friday.
Over two sessions, the S&P500 sank 10.5%, and the Nasdaq100 dropped 11.2%.
For the week, Japan’s Nikkei 225 Index was pummeled 9.0%.
Major indices were down 10.5% in Italy, 10.1% in Sweden, 9.3% in Switzerland, 8.1% in France and Germany, and 7.0% in the UK.
Asian losses included Vietnam 8.1%, Taiwan and Thailand 4.3%, South Korea 3.6%, India 2.9%, and China (CSI 300) 1.8%.
Market drops in Latin America included Argentina 12.6%, Peru 6.5%, Brazil 3.5%, Chile 2.5%, and Mexico 3.2%.
Commodity markets were slammed, as deleveraging, an abrupt tightening of financial conditions, and the likelihood of an unfolding global growth shock sparked panic liquidations.
In two sessions, crude sank 13.6%, copper and silver 12.7%, platinum 7.4%, and gold 3.1%.
The “commodity currencies” were under notable selling pressure.
Over two sessions, the Australian dollar sank 4.1%, the Norwegian krone 3.3%, the Brazilian real 3.1%, the New Zealand dollar 2.6%, the South African rand 1.3%, and the Mexican peso 1.2%.
Meantime, safe haven currencies outperformed, as the Swiss franc gained 2.3%, the Japanese yen 1.6%, and the euro 1.0%.
In EM, the Brazilian real dropped 3.1%, the Colombian peso 2.8%, Chilean peso 2.4%, the Mexican peso 1.2%, and the Polish zloty 1.2%.
Losses were larger versus the yen, an issue for levered “carry trades.”
EM bonds underperformed.
In two sessions, two-year Treasury yields sank 21 bps to 3.86%.
Market pricing for the June 18th Fed funds rate dropped 17 bps to 3.98% (35bps of rate reduction expected) - and the December 10th rate sank 25 bps to 3.31% (102bps of rate reduction).
Government yields sank 25 bps in Japan, 22 bps in New Zealand, 21 bps in Australia, 19 bps in the UK, and 14 bps in Germany.
“Let Donald Trump run the global economy.
He knows what he’s doing.
He’s been talking about it for 35 years.
You got to trust Donald Trump in the White House.
That’s why they put him there.
Let him fix it, okay.
It’s broken.
Let him fix it.
Our $36 trillion deficit is going to ruin our children’s lives and our grandchildren’s lives.
Let Donald Trump fix the American economy.”
“Let the dealmaker make his deals, when and only if these countries can change everything about themselves - which I doubt they will...
Negotiate is talking.
No talking.
Doing.
These countries have abused us and exploited us, as [the President] said yesterday.
They need to change their ways.
Let’s see them change their ways.
It’s going to be a long time.
Let’s see what they do.
Not talking.
Talking is nonsense.”
Commerce Secretary Howard Lutnick (Pamela Brown interview, CNN, April 3, 2025)
It's unAmerican to have such incredible power left unchecked in a single individual.
Truth be told, few are willing to trust President Trump to “run the global economy.”
This is a reckless gamble.
The President has pushed our great nation to the edge – approaching the precipice.
Our disrespected longtime friend and ally Canada won’t be talking us off the ledge.
Ditto for “PATHETIC” Europe.
Xi Jinping simply can’t believe his miraculous good fortune.
His archenemy has stupidly gone off and left itself incredibly vulnerable – exposed and defenseless.
China certainly won’t be coming to draw Trump away from the ledge.
More likely, it’s a nudge.
April 4 – Bloomberg (Josh Xiao and James Mayger):
“China retaliated against Donald Trump’s latest tariffs with commensurate levies on all American goods and export controls on rare earths, dealing a fresh blow to global markets…
President Xi Jinping’s government will impose a 34% tariff on all imports from the US starting April 10…
Authorities in Beijing also announced other measures including: Immediately restrict exports of seven types of rare earths.
Launch anti-dumping probe into medical CT X-ray tubes from the US and India.
Halt imports of poultry products from two American companies.
Add 11 American defense companies to an unreliable entity list.
Impose export controls on 16 US firms.
Halt imports of sorghum from a US company.
Investigate DuPont China for suspected antitrust violations.”
Truth Social: “CHINA PLAYED IT WRONG, THEY PANICKED - THE ONE THING THEY CANNOT AFFORD TO DO!”
Especially after Hegseth’s “warrior ethos” Asian trip last week, China is more than ready to play hardball.
President Trump is behaving like a poker player looking at his big pile of chips and thinks he can mindlessly place big bets and force the other players to throw in their cards – while failing to recognize that his stack is made up of $10 chips and not $100s.
It became rather conspicuous this week that a fragile U.S. has a tremendous amount to lose.
This is understood by China and others.
Unfortunately, we need to prepare for the President to double-down with more bad bets.
Truth Social: “This would be a PERFECT time for Fed Chairman Jerome Powell to cut Interest Rates.
He is always “late,” but he could now change his image, and quickly.
Energy prices are down, Interest Rates are down, Inflation is down, even Eggs are down 69%, and Jobs are UP, all within two months - A BIG WIN for America.
CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS!”
It's difficult to envisage a more troublesome backdrop for the bursting of history’s greatest Bubble.
Worse than the worst-case.
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