Two Questions
Doug Nolan
Ominous week.
October 10 – Financial Times (Ryan McMorrow and Demetri Sevastopulo):
“China has unveiled sweeping export controls on rare earths and related technologies, as it boosts its leverage over critical minerals ahead of an expected meeting this month between Presidents Donald Trump and Xi Jinping.
Under the new commerce ministry rules, foreign companies will need Beijing’s approval to export magnets that contain even trace amounts of China-sourced rare earth materials, or that were produced using the country’s extraction methods, refining or magnet-making technology.
The restrictions will for the first time create a Chinese version of the US foreign direct product rule, a measure Washington has used to block semiconductor-related exports to China from third countries.
A White House official said… Beijing’s move appeared to be an ‘effort to exert control over the entire world’s technology supply chains’.”
“Some very strange things are happening in China!
They are becoming very hostile, and sending letters to Countries throughout the World, that they want to impose Export Controls on each and every element of production having to do with Rare Earths, and virtually anything else they can think of, even if it’s not manufactured in China.
Nobody has ever seen anything like this but, essentially, it would ‘clog’ the Markets, and make life difficult for virtually every Country in the World, especially for China.
We have been contacted by other Countries who are extremely angry at this great Trade hostility, which came out of nowhere.
Our relationship with China over the past six months has been a very good one, thereby making this move on Trade an even more surprising one.
I have always felt that they’ve been lying in wait, and now, as usual, I have been proven right!
There is no way that China should be allowed to hold the World ‘captive,’ but that seems to have been their plan for quite some time, starting with the ‘Magnets’ and, other Elements that they have quietly amassed into somewhat of a Monopoly position, a rather sinister and hostile move, to say the least.
But the U.S. has Monopoly positions also, much stronger and more far reaching than China’s.
I have just not chosen to use them, there was never a reason for me to do so — UNTIL NOW!
The letter they sent is many pages long, and details, with great specificity, each and every Element that they want to withhold from other Nations.
Things that were routine are no longer routine at all.
I have not spoken to President Xi because there was no reason to do so.
This was a real surprise, not only to me, but to all the Leaders of the Free World.
I was to meet President Xi in two weeks, at APEC, in South Korea, but now there seems to be no reason to do so.
The Chinese letters were especially inappropriate in that this was the Day that, after three thousand years of bedlam and fighting, there is PEACE IN THE MIDDLE EAST.
I wonder if that timing was coincidental?
Dependent on what China says about the hostile ‘order’ that they have just put out, I will be forced, as President of the United States of America, to financially counter their move.
For every Element that they have been able to monopolize, we have two. I never thought it would come to this but perhaps, as with all things, the time has come.
Ultimately, though potentially painful, it will be a very good thing, in the end, for the U.S.A.
One of the Policies that we are calculating at this moment is a massive increase of Tariffs on Chinese products coming into the United States of America.
There are many other countermeasures that are, likewise, under serious consideration.
Thank you for your attention to this matter!”
- President Trump, Truth Social, October 10, 2025
What are we to make of that?
More of the same, numbing Trump bluster that predictably ends with a delightful TACO market feast?
The President announced additional 100% tariffs on Chinese goods, along with tighter export controls, after Friday’s market close.
Will the President’s measures force Beijing into a hasty retreat?
I argued earlier this year - during U.S./China trade war hostilities - that the Chinese would not bow to administration pressure.
Perhaps the Chinese are playing their own game of hardball, again using their near monopoly positions rare earths and magnets to extract U.S. trade concessions.
This latest game of chicken seems more perilous.
The two sides have had six months to sort things out.
On its face, it appears Beijing has concluded that consummating an acceptable trade deal is unlikely.
They are now moving forward with their carefully calculated maximum pressure strategy.
To extract concessions ahead of the Trump/Xi meeting, or might Beijing’s gambit be more strategic?
It has been a consequential six months since “liberation day” U.S.-China tensions.
The Ukraine/Russia war has only intensified.
After the February Zelensky Oval Office berating, it appeared the end of U.S. support would force Ukrainian concessions to end Russian aggression.
But there was no weakening in Ukraine’s incredible resolve, as Europe stepped up.
The failure of the Trump/Putin Alaska summit signaled unrelenting war and related complexities, including U.S. reengagement with sophisticated longer-range U.S. missiles, intelligence sharing, and likely trade sanctions.
Europe’s hybrid war with Russia dangerously escalated.
I posited earlier in the year that a strategic Beijing might consider exploiting the vulnerabilities of its global rival.
China has taken full advantage of the void created by the administration's global bully tactics over the past six months.
Regrettably, it’s difficult not to view China and Russia’s New World Order ambitions as so far ominously successful.
China’s aggressive nurturing of global trade relationships has been rewarded with record trade surpluses despite slowing U.S. purchases.
Confidence must be overflowing behind those Forbidden City walls.
If China has been hard at work bolstering its position, it’s a stretch to claim something similar here at home.
From my perspective, the key dynamic has been a six-month extension of “Terminal Phase Excess:” More late-cycle risky debt, more manic speculation, and more destabilizing speculative leverage.
The AI mania and arms race went completely off the rails.
The “basis trade” and market leverage more generally went to further perilous extremes.
High risk borrowers took on only more debt, fraudsters did more of their dirty work, and, importantly, cracks began to emerge in the midst of the boom.
Such extreme market exuberance and excess can turn problematic in an instant.
Moreover, it has been six months of alarming political dysfunction and societal tension, epitomized by the government shutdown and myriad highly divisive activities (i.e., military deployments to blue cities).
Beijing has surely been paying close attention.
Has President Trump indeed “been proven right” – “they’ve been lying in wait”?
To that end, when was the U.S. as systematically vulnerable – markets, financially, economically, socially, geopolitically?
KKR was down another 7.7% this week, with Apollo falling 6.1%, Blackstone 8.7%, and Areas Management 7.6%.
This boosted respective one-month losses to 15.4%, 11.5%, 13.2%, 20.8%.
There have of late been two contrasting points of view: The consensus perspective remains one of incredibly robust markets and economic resilience, with loose conditions, a Fed easing cycle, intense FOMO, and the miracle of AI ensuring any tangential Credit snafus will swiftly dissipate.
The system is fundamentally sound.
I espouse divergent analysis, suggesting that serious Credit issues at the “periphery” likely mark an important cycle juncture.
Revelations of improprieties and deficient Credit analysis, notably at First Brands and Tricolor, mark a turning point.
This will spur contagious lender caution at Credit’s fringe, which will gravitate toward the “core.”
Trouble at the “periphery” - now increasing the likelihood of de-risking/deleveraging - lifts latent fragilities closer to the surface.
Historic late-cycle excess ensures myriad acute fragilities and vulnerabilities.
It's reasonable to assume the administration views markets and the U.S. economy as robust.
The markets’ reaction to President Trump’s China post was illuminating.
Trading to $792 pre-announcement, Goldman Sachs’ stock was down 3.4% to $765 minutes after the post.
The Broker/Dealer Index opened solidly higher, only to reverse 3.7% lower.
The Bank (KBW) Index reversed 4.0%, with the Regional Banks reversing 5.5%.
The “private Credit” stocks were notably sensitive to the news.
KKR was higher in early trading, only to then sink 5.5%.
Apollo reversed 4.2% lower, Blackstone 5.0%, and Ares Management 5.2%.
“First Brands Blindsides Wall Street in ‘Black Box’ Loan Fiasco.”
“First Brands Creditor Says Up to $2.3 Billion “Simply Vanished.”
“First Brands Debacle Leaves Creditors, Suppliers Hanging.”
“Federal Prosecutors Are Looking Into First Brands Collapse.”
“Jefferies Fund Has $715 Million in First Brands’ Trade Debt.”
“Regulators Are Investigating MassMutual’s Accounting Practices.”
“Blackrock Seeks Cash From Jefferies Fund Exposed to First Brands.”
“Morgan Stanley Asks to Pull Cash From Jefferies’ Point Bonita.”
“First Brands Group Lenders Provide Lifeline to ‘A Black Box.’”
“First Brands Collapse Drags Nochu Into Another Debt Mess.”
“Insurers Prepare for Wave of First Brands Claims.”
First Brands is messy, messy.
And this mess has a notably broad reach.
A missing $2.3 billion.
A “lifeline to a black box.”
Creditors and suppliers “hanging.”
Insurance companies on the hook.
Jefferies Financial Group’s stock is down 25% in three weeks, as concerns grow for reputational and financial losses.
October 8 – Financial Times (Robert Smith, Ortenca Aliaj and Eric Platt):
“Jefferies has said that one of its credit funds has about $715mn of exposure linked to First Brands Group, making it one of the largest-known creditors to the bankrupt auto parts company… Jefferies… said that a specialist invoice-finance fund it manages, Point Bonita Capital, has approximately $715mn invested in ‘receivables’ — customer invoices — from retailers that bought First Brands products.
Point Bonita held a total of about $3bn in ‘trade-finance assets’, Jefferies said.
While the fund’s investments are not held on Jefferies’ balance sheet, the bank does have some exposure to First Brands’ debt… Point Bonita fund documents… show that… it carried a ‘leverage ratio’ of more than 160%, having borrowed against its assets to boost returns for investors…
Jefferies also warned that another of its investment vehicles had been drawn into the First Brands debacle.
The company said that Apex Credit Partners, a structured finance joint venture with insurance and investment group MassMutual, held $48mn worth of loans to First Brands…
While those CLOs are ultimately held primarily by other investors, Apex itself invested in the riskiest portion of the structured investment vehicles.
These riskier slices of debt would bear the brunt of any losses if loans held by the CLOs defaulted.”
October 8 – Bloomberg (Irene Garcia Perez and Dorothy Ma):
“US regional lender Western Alliance Bancorp faces exposure to the collapse of auto-parts supplier First Brands Group through a leveraged facility with a fund linked to Jefferies Financial Group Inc.
Point Bonita Capital, a division of Jefferies’ Leucadia Asset Management that manages trade-finance assets on behalf of third-party institutional investors and others, has about $715 million invested in receivables owed to First Brands…
That’s nearly a quarter of its $3 billion trade-finance portfolio.
The fund has part of that exposure pledged into a leveraged facility with Phoenix-based Western Alliance, meaning Western Alliance would be on the hook if those assets went bad.”
Some of everything.
Jefferies has exposure to First Brands through their Point Bonita fund, which operates at 160% leverage (financing provided by Western Alliance Bancorp) for its portfolio holdings of high yielding First Brands and other companies’ invoice receivables.
Jefferies also has a joint venture with insurer MassMutual, which reportedly held the high-risk Collateralized Loan Obligations (CLO) tranches – that hold First Brands liabilities.
“Allianz, Coface and AIG are among the groups to have written policies shielding trading partners or investors from losses… (FT)”
It’s all reminiscent of the subprime mortgage boom and bust.
A boom-time carefree market for high yielding “equity” CLO tranches, operating as a key risk transferring/masking structure integral to the Wall Street alchemy transforming (seemingly endless) risky subprime mortgages into mostly perceive low risk securities.
The blowup of subprime CLOs and derivatives proved a decisive blow for high-risk mortgages and a critical inflection point for housing and mortgage finance Bubbles.
“Billions of Dollars ‘Vanished’: Low-Profile Bankruptcy Rings Alarms on Wall Street.”
“Tricolor’s Busted Money Machine Has Wall Street Rethinking Risks.”
“Auto Stocks in a Spin as First Brands, Tricolor Worry Investors.”
“Leveraged Loans Are Sending Signals of Credit Stress.”
Leveraged Loan (Morningstar Index) prices dropped 20 cents in Friday trading to 96.53, the largest single-session loss since April 9th (39 cents) – the day President Trump’s 104% China tariffs took effect, along with China’s retaliatory 84% tariffs (Trump’s “pause” came later in the day).
This week’s 44 cent leveraged loan decline was the largest since the “liberation day” first week of April.
Prices ended the week at a five-month low.
High yield spreads to Treasuries widened a notable 36 bps this week (widest since June 12th), the biggest jump since “liberation day” (87bps).
The 25 bps surge in high yield CDS prices was the largest since the first week of April (62bps) – with the highest close since June 18th.
The iShares High Yield Corporate Bond ETF’s (HYG) 1.1% weekly loss was the steepest since the first week of April.
The week’s six bps jump in investment-grade spreads was the largest since “liberation day” (16bps).
Friday’s four bps rise in investment-grade CDS prices was the largest since September 22nd.
The S&P500 suffered its worst one-day drop since April 10th.
The VIX index ended the week at 21.66, the highest close since June 19th.
Ominously reminiscent of early-April, the big tech stocks appeared hypersensitive to escalating Credit fears.
The MAG7 Index was slammed 3.8% in Friday trading (down 2.7% for the week), the largest decline since April 16th.
Tesla was hit 5.1%, Amazon.com 5.0%, Nvidia 4.9%, Meta 3.9%, Apple 3.5%, Microsoft 2.2%, and Alphabet 2.1%.
Nvidia’s loss was the largest since April 16th.
Advanced Micro Devices’ 30.5% surge masked intense pain in the semiconductor space.
The week’s losses included KLA 10.8%, NXP Semiconductors 10.3%, Lam Research 9.9%, ASML 9.3%, Qualcomm 9.2%, and Microchip Technology 9.2%.
October 7 – Bloomberg (Caleb Mutua):
“The amount of debt tied to artificial intelligence has ballooned to $1.2 trillion, making it the largest segment in the investment-grade market, according to JPMorgan...
AI companies now make up 14% of the high-grade market from 11.5% in 2020, surpassing US banks, the largest sector on the JPMorgan US Liquid Index (JULI) index at 11.7%, JPMorgan analysts including Nathaniel Rosenbaum and Erica Spear wrote…
The analysts identified 75 companies across tech, utilities and capital goods sectors that are closely tied to AI, including Oracle Corp., Apple Inc. and Duke Energy Corp.
Many of these firms are prolific debt issuers and in the case of tech, they are cash rich with very low net debt.
The cohort trades at 74 bps, 10 bps tighter than the broader JULI index, they said.”
October 7 – Bloomberg (Victor Swezey):
“Issuance boomed across credit markets last month, while a key fear gauge in the investment-grade market closed at its lowest level the year on Monday.
But beneath the surface, UBS Group AG strategists see cracks forming.
A number of factors, including a frothy investment-grade market, strained consumers, and a hot loan market, risk a reversal in the future, strategists led by Matthew Mish warned.
‘Credit fundamentals at both macro and sector levels are displaying classic late-cycle trends, with increasing vulnerabilities observed in investment-grade corporates and private credit markets,’ Mish wrote…”
Markets are increasingly vulnerable to de-risking/deleveraging.
The historic AI Bubble will be fixed to Credit and market liquidity developments.
The system was at the cusp of a very destabilizing deleveraging back in April.
It is more acutely vulnerable after an additional six months of crazy.
“Treasuries Soar After Trump Threatens China With Bigger Tariffs.”
The 11 bps drop in 10-year yields (to 4.03%) was the largest decline since August 1st (weak July Non-Farm Payrolls).
The pop in risk premiums was anything but confined to the U.S.
Emerging Market (EM) CDS surged 10 bps Friday (to 158bps), the biggest daily increase since April 10th (22bps).
Friday’s 14 bps (to 157bps) and the week’s 22 bps jumps in Brazil sovereign CDS were the largest back to December 2024.
Mexico’s daily (8bps) and weekly (9bps) rises were the biggest back to “liberation day.”
Interestingly, Bitcoin’s Friday $6,834 drubbing was the largest since March 3rd ($8,983).
For Friday and the week, the precious metals continue to distinguish themselves.
Gold added $41, or 1.0%, in Friday trading to a $4,018 – boosting a record week’s gain to 3.4% and 2025’s surge to 53.1%.
Silver’s 1.8% Friday advance to $50.15 put week and y-t-d advances at 4.5% and 73.5%.
In this crazy environment, the precious metals could get caught up in hedge fund liquidations and deleveraging dynamics.
But a week where Gold surpassed $4,000 and Silver attained $50 deserves at least brief comments.
There is a long list of precious metals’ attributes that have fueled this year’s power moves.
Global markets turned only more over-liquefied, fueled by unprecedented liquidity-creating leveraged speculation.
Way too much liquidity is sloshing around.
From the U.S. to China to Europe, Asia and EM – reckless debt growth is systemic and unrelenting.
As already historic Bubbles have inflated further (especially over the past six months), the view that central bankers are trapped has crystallized.
Another round of massive QE is a matter of when and not if a problematic deleveraging takes hold.
Furthermore, the Trump administration’s attack on U.S. norms, including Fed independence and the Constitution, does not inspire confidence in the dollar as a reliable store of value.
The so-called “debasement trade” is all the talk of late on Wall Street.
I have no issue with this narrative.
I do, however, see is another momentous risk supportive of precious metals discussed only behind closed doors: The risk of global markets “seizing up” is not remote.
The potential for financial meltdown should not be dismissed.
This historic global Bubble will not work in reverse.
At this point, a major unwind of speculative leverage would trigger illiquidity, dislocation, and panic.
That speculative excess and leverage took root across global markets creates unprecedented systemic risk.
Sitting here at my desk late into Friday evening, two questions are top of mind.
First, is the system robust as most, including the administration, believe – or might it instead be as fragile as I suspect?
Second, were China’s aggressive moves on rare earths, magnets and related technologies meant to boost leverage ahead of the Trump/Xi meeting – as most assume, or a more calculated strategic decision to escalate a “new world order” confrontation with what they view as a weakened adversary?
So much depends on how answers to these Two Questions play out.
October 10 – Bloomberg (Jeannine Amodeo and Aaron Weinman):
“The US leveraged loan market is coming under further pressure with its second pulled deal in a week and a slew of investor-friendly changes made on other transactions to help get them over the line.
The latest casualty is drugmaker Mallinckrodt, which shelved a $1.49 billion offering on Friday…
It follows a pulled deal from specialty chemicals producer Nouryon earlier this week, marking the eighth deal to be yanked from the market since August…”
October 9 – Bloomberg (Amedeo Goria):
“Bloomberg’s European leveraged loan index has fallen almost half a point in the past week, the steepest drop since President Donald Trump’s tariff announcements upended global markets in April.”
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