Don't Say You Weren't Warned
Doug Nolan
This followed on the heels of Wednesday’s spike in Japanese 30-yr JGB yields to a record high (3.19%) for an instrument first issued in 1999.
UK 30-year gilt yield surged to a peak of 5.61% in Wednesday trading, the high since just before the LTCM blowup in 1998.
At 4.13%, French yields traded Wednesday within two bps of the high back to 2010.
One would expect unfolding crisis of confidence dynamics to be most discernible in longer-term debt instruments.
That the debt of high deficit nations is suffering outsized losses provides further evidence of today’s evolving debt market dynamics.
The “vigilantes” have gained focus, along with expanding power.
While on the subject of crises of confidence, the dollar index dropped 2% this week, the largest weekly decline since the tumultuous week ended April 11th.
The Bloomberg dollar index ended the week at the lowest close since December 2023.
Gold surged $154, or 4.8%, the largest gain since the week of April 11th.
May 22 – Bloomberg (Michael Mackenzie, Liz Capo McCormick and Ye Xie):
“In the world’s biggest bond market, investors are pushing back against President Donald Trump’s tax-cut plan…
The concern is that the tax bill would add trillions of dollars in coming years to already bulging budget deficits at a time when investor appetite is waning for US assets across the globe.
‘Make no mistake, the bond market will have its own vote on the terms of the budget bill,’ said George Catrambone, head of fixed income and trading at DWS Americas.
‘It doesn’t seem this president or this Congress is actually going to meaningfully reduce the deficit.’”
May 21 – Committee for a Responsible Federal Budget:
“The Congressional Budget Office (CBO) released its first comprehensive estimate of the House’s Fiscal Year (FY) 2025 reconciliation bill – the One Big Beautiful Bill Act – finding that before accounting for interactions, the bill would add $2.3 trillion to deficits over the next decade.
Incorporating our estimates of interactions and the adjustments announced by House leadership Monday, we estimate the bill would add $3.1 trillion to the debt as written.”
Meanwhile…
May 19 – Bloomberg (Alexandra Semenova):
“Retail traders went on a record dip buying spree Monday, reversing a 1% decline in the S&P 500 Index triggered by the US credit downgrade…
Individual investors purchased a net $4.1 billion in US stocks through 12:30 p.m… the largest level ever for that time of day — and broke the $4 billion threshold by noon for the first time ever, according to… JPMorgan… quantitative and derivative strategist Emma Wu…
‘Retail has learned the hard way, getting left behind during previous stocks recoveries supported by policy puts,’ said Frank Monkam, head of macro trading at Buffalo Bayou Commodities.
‘There is almost an unwavering commitment from retail to never make that mistake again.’”
Recent weeks were likely one of the most powerful “buy the dip” episodes ever – following last year’s (and Q1’s) unprecedented ETF inflows.
That retail has “learned” so well is evidence of late-cycle dynamics.
Similarly, there have been recent articles highlighting the push for retail investors by the major private Credit and private equity firms.
When discussing risks associated with prolonging “terminal phase excesses” (certainly including speculative risk markets detached from deteriorating prospects), I’ll note the general transfer of risk from the sophisticated to the unsuspecting.
Markets are experiencing a major redistribution from the sophisticated players to a household sector absolutely convinced that stocks always recover to ever higher highs.
The public – historically exposed to stocks and risk markets more generally - will be left holding the bag.
It’s time to heed a flurry of warnings from some of the more astute financial market operators.
“We are entering a new phase of globalization — one less defined by cooperation, and more by strategic self-interest.
Long-held assumptions are being challenged, not just by tariff announcements but by a deeper confidence shock.
The near-term impact is already being felt, and the long-term trajectory is being rewritten in real time.
If you’re looking to markets for clarity, you might be a tad disappointed.
But if you’re looking for signals, they’re everywhere.
Treasury yields rose even as equity markets wobbled.
The U.S. dollar, typically a safe haven, has weakened at moments when it used to rally.
That tells us something deeper is going on — investors aren’t just pricing near-term risks; they’re reevaluating the credibility of long-held certainties.
It’s showing up in how capital moves.
Pensions and asset managers are tilting more towards Japan, India and parts of Europe.
Hedge funds are being selective and didn’t chase the April equity bounce.
Sovereign wealth funds are diversifying more aggressively.
Hedging against the dollar is now at levels we haven’t seen in years.” Citigroup CEO Jane Fraser, May 16, 2025
“You should know that credit ratings understate credit risks because they only rate the risk of the government not paying its debt.
They don’t include the greater risk that the countries in debt will print money to pay their debts, thus causing holders of the bonds to suffer losses from the decreased value of the money they’re getting (rather than from the decreased quantity of money they’re getting).
Said differently, for those who care about the value of their money, the risks for U.S. government debt are greater than the rating agencies are conveying.” Ray Dalio, May 19, 2025 (from CNBC’s Spencer Kimball)
“I think we should be afraid of the bond market.
It’s like… I’m a doctor, and I’m looking at the patient, and I’ve said, you’re having this accumulation, and I can tell you that this is very, very serious, and I can’t tell you the exact time.
I would say that if we’re really looking over the next three years to give or take a year or two, that we’re in that type of a critical, critical situation…
We will have a deficit of about 6.5% of GDP — that that is more than the market can bear…
I’m not optimistic.
I have to be realistic.” Ray Dalio, May 22, 2025 (from CNBC’s Yun Li)
Below I’ve extracted from insightful Jamie Dimon JPMorgan Investor Day Q&A comments:
“We have huge deficits.
We have, what I consider complacent central banks – almost [so] complacent that central banks think they’re omnipotent.
And you all think they can manage through all this.
I don’t think they manage all that.
They set short-term rates, right…
They don’t set the 10-year rate.
Who sets the 10-year rate?
You do.
Foreigners own $35 trillion of U.S. public securities as debt, corporate credit, money market funds and U.S. debt.
They’re there to help set that rate.
And I look at all the things… including trade, trade in general – not just tariffs.
It’s creating a lot of risk out there, and you should be prepared for it.”
“My own view is people feel pretty good because you haven’t seen an effect of tariffs.
The market came down 10%.
It’s back up 10%.
I think that’s an extraordinary amount of complacency.
That’s my own view - that when I’ve seen all these things adding up that are on the fringes of extreme kinds of things, I don’t think we can predict the outcome, and I think there is a chance of inflation going up and stagflation a little bit higher than other people think.
There are too many things out there.”
“I’m not going to talk about geopolitical risk.
I would not take it off the table.
I think there’s an operating assumption inside the room that it’s not a big deal; it’s not going to cause a problem.
I don’t know.
I think the geopolitical risk is very, very, very high.
How it plays out over the next several years, we don’t know.
But it will clearly, if it does play out worse than what we have today, it’d clearly affect all the scenarios.
So, we do look at the range of potential outcomes.
I think the worst one for the bank and for most companies is stagflation which is basically a recession with inflation.
I think the odds of that are probably two times what the market thinks…
What happens in that is credit losses go up.
They will not be like the global financial crisis.
I think there have been 15 years of pretty happy-go-lucky credit - a lot of new credit players, different covenants, different leverage ratios, there’s leverage on top of leverage in some of these things.
I would expect that credit would be worse than people think when you have a recession…”
“We have the largest peacetime deficit we’ve ever had, almost 7% of GDP.
If you go around the world, the other major countries, around 3.5% of GDP.
Our debt to GDP is 100%.
With Paul Volcker… it was 35% and inflation was 3.5%.
The last time we put in 10% tariffs was 1971.
Nixon was President.
Things were booming.
He was winning a landslide in 1972… And he resigned.
And 18 months later, inflation had ticked up to 3.5%.
They put in price controls.
It didn’t work.
They got rid of gold convertibility.
The market went from 1,000 to 540, down 40% plus in an 18-month period.
Things happen out there.”
“I never believed we were as exceptional as people were saying.
I never believed that Europe was as bad as people were saying.
I think those got blown out of proportion. Part of our exceptionalism… is that we borrowed [since 2020] and spent $10 trillion, and that’s a lot of money…
If we borrowed another $1 trillion and gave it to you… we gave it to states, cities, we game it to unions, $10 trillion, and that fuels inflation but it fuels growth.
Had Europe borrowed and spent another $1 trillion, they would probably have another $1 trillion of GDP too."
“We haven’t seen the other side of that mountain yet.
And we have to remember it also drives corporate profits.
That trillion ends up in the pockets of restaurateurs, corporations, and healthcare companies, and it drives a lot of things that maybe we don’t understand – and it inflates asset prices.
So, America’s asset prices, I still think they are kind of high.
I’d put that in the risk category too.
And credit spreads are kind of low.
I’d put that in the risk category too.
I think both of those things may change and that will change your psyche a little bit and so.”
“I am not a buyer of credit today.
I think credit today is a bad risk.
I think that people who haven’t been through major downturns are missing the point about what can happen in credit.”
This week, warnings had a better shot at resonating: Long-term Treasury yields surging, the dollar sinking, and stock market instability returning.
That Treasuries failed to rally as stocks slumped is bad news for myriad levered strategies.
May 22 – Bloomberg (Edward Bolingbroke):
“Bond Vigilantes Threaten Popular Hedge-Fund Bet on Swap Spreads: A surge in long-term bond yields is once again threatening to upend a crowded hedge-fund bet that Treasuries will perform better than interest-rate swaps.
The trade is at risk of falling apart as borrowing costs for the world’s biggest economies soar, diminishing the returns in US government debt against the swaps.
That’s a problem for hedge funds and other traders who piled into the bet in recent weeks, as well as the chorus of Wall Street strategists who’ve been recommending it.
Trouble for the trade has come as concern mounts about the ability of governments — including in the US — to cover massive budget deficits, pushing long-term yields higher.”
The derivatives “swaps” market was at the epicenter of April’s acute market instability (i.e., deleveraging).
Along with the dollar and Treasury yields, the tepid recovery in swap spreads suggests deep-seated market vulnerability.
This week’s move in 30-year swaps was notable, with spreads widening the most since April.
Importantly, Treasury market instability (yields, curve steepening, “swaps” volatility) indicates pressure on a highly levered market – corroboration of the thesis of enormous speculative leverage overhanging the marketplace.
I have argued that myriad risks and extreme uncertainty are scourges for an extraordinarily levered Treasury market.
The sophisticated players recognize they must de-risk and deleverage, but the massive leverage coupled with marketplace liquidity challenges ensures an arduous deleveraging process.
Stocks and long-term Treasuries have diverged notably.
Equities rallied to near record highs, fueled by a big short squeeze, unwind of hedges, and “buy the dip” and FOMO buying.
Surging stocks solidified market confidence that President Trump had found religion.
The 90-day tariff pause and China surrender were proof that the President would bow to the markets – that the “Trump put” lives. Sure looks overly optimistic.
May 23 – Bloomberg (Jennifer A. Dlouhy, Skylar Woodhouse and Alberto Nardelli):
“President Donald Trump dug in on his threat to impose a 50% tariff on the European Union and said a potential 25% charge on smartphones would apply to all foreign-made devices, in the latest escalation of a trade war that is rattling markets and confusing businesses.
Trump on Friday reiterated his complaints about the EU, accusing the bloc of slow-walking negotiations and unfairly targeting US companies with lawsuits and regulations.
The president downplayed the ability of the EU to broker a lower tariff rate, which he said would hit June 1.
‘We’ve set the deal.
It’s at 50%,’ he said.
‘They don’t go about it right,’ Trump told reporters…
‘I just said, it’s time that we play the game the way I know how to play the game.’”
Instead of the “Trump put,” the focus might be better directed at the “Trump call.”
After all, market rallies essentially grant the President the right to (cut the crap and) reactivate hardball tactics/antics.
And Trump’s hardball instincts these days pose serious market risks.
The President loves wielding his incredible power to threaten and intimidate.
His MAGA base is even more in love with it all.
Meanwhile, the world has major issues with the President’s tactics – and it’s the world that is today questioning the merits of remaining so overweight the dollar, Treasuries, and U.S. securities more generally.
Markets largely dismiss Trump’s tariff threats.
The President, post China cave in, likely reckons he must demonstrate his manhood to the world.
May 21 – Axios (Dave Lawler):
“Trump on Friday threatened to put a 25% tariff on Apple products if the company failed to move more of its manufacturing back to the U.S., just weeks after publicly scolding Apple CEO Tim Cook over his firm’s reliance on Indian manufacturing.
This marks a sharp contrast from the more cordial relationship that Cook managed to maintain with Trump in his first term, when he scored a key tariff exemption.
‘It puts Apple with their back against the wall a little because India was going to be the go-to to navigate the China tariffs,’ Wedbush Securities analyst Dan Ives said, adding, ‘This is putting Apple in an almost impossible spot.’”
That the President would turn on Tim Cook and one of the greatest companies in American history, must be disturbing to both global CEOs and CIOs (chief investment officers).
Americans love their iPhones.
They care greatly about the phone’s affordability - and hardly at all where its one thousand components are manufactured.
Picking a fight today with Apple not only doesn’t instill confidence, but it’s the kind of nonsense that kindles crisis of confidence dynamics.
No serious analyst believes it’s realistic to develop and operate colossal (and massively complex) Foxconn complexes here in the U.S.
Is there one private sector executive – tech or finance – that gains confidence from the President attempting to dictate Apple manufacturing decisions?
May 21 – Axios (Dave Lawler):
“South African President Cyril Ramaphosa got the Zelensky treatment while meeting President Trump…, with added special effects.
Visiting the White House is no longer just a coveted opportunity to earn goodwill with the president and credibility back home.
Under Trump 2.0, it carries the risk of a presidential ambush.
The visit immediately evoked the disastrous Feb. 28 meeting in which Trump and Vice President Vance berated Ukrainian President Volodymyr Zelensky, shocking the world and setting a precedent.
Even leaders who avoid a public flogging face prolonged and unpredictable on-camera spectacles, with Trump taking questions from a mix of mainstream and MAGA media and holding the floor for up to an hour.
Trump’s premeditated humiliation of Ramaphosa is likely to be on the minds of other leaders before they make plans to visit Washington.”
I doubt the Ramaphosa ambush was much of a factor in this week’s dollar drubbing.
But it sure brought back memories of the dollar’s 3.5% plunge the week following President Zelensky’s Oval Office humiliation.
This is an especially sensitive time for the so-called “global south.”
With new U.S. tariffs, trade wars, and Xi Jinping’s global charm offensive, President Trump’s aggressive approach with President Ramaphosa was ill-advised – if not irrational.
A wary world watches.
And confidence was chipped away for another week.
Similar to Apple, Harvard is such an iconic American brand.
Families all over the world dream of their children studying at Harvard or other world-leading U.S. universities.
I’ll assume that President Trump’s unprecedented attack is part of a high-profile strategy to ensure that all U.S. colleges and universities fall in line.
It’s certainly a grim assault, worthy of a listing of factors conducive to waning confidence.
May 23 – Bloomberg:
“Former US Treasury Secretary Lawrence Summers blasted the Trump administration’s decision to block Harvard University from enrolling international students, calling on the institution to fight back.
‘This is vicious, it is illegal, it is unwise, and it is very damaging,’ Summers, who is president emeritus of Harvard University, told Bloomberg TV.
‘Why does it make any sense at all to stop 6,000 enormously talented young people who want to come to the United States to study from having that opportunity?’
‘Harvard must start by resisting,’ he said.
‘This is the stuff of tyranny.’”
When Xi Jinping a few years back began cracking down on journalists, academics, and commentators, Bloomberg News stopped including journalists’ names with articles focusing on Chinese developments.
That China’s authoritarian turn made such a change necessary was disheartening.
After Russia invaded Ukraine, journalist credits disappeared for Bloomberg’s Russia-related news stories.
I haven’t communicated with anyone at Bloomberg, and perhaps there’s a reasonable explanation.
But I admit to an uncomfortable chill when the above “Summers Slams Trump’s Move Against Harvard as ‘Stuff of Tyranny” went authorless.
Some hours later, “Trump Attack on Harvard Students Reverberates Across World” also ran without a byline.
So many things that have made America great for so long are now slipping away.
Secretary Bessent is doing his best to hold market confidence together.
But it will all be for not unless the President somehow changes his approach.
I titled the March 7th CBB “Train Wreck.”
Approaching three months later, things only get worse.
A market crisis of confidence is closer.
Contemplate the important insights from Frasier, Dalio and Dimon – and don’t say you weren’t warned.
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