The Question
Doug Nolan
The Nasdaq100 enjoyed one of those well-timed Friday afternoon rallies (1.9% off morning trading lows) to somewhat ease concerns.
Still, Nvidia sank 7.1% this week.
Meta Platforms and Microsoft fell 4.1%, and Tesla dropped 5.9%.
Microchip Technologies lost 9.8%, AMD 8.8%, Qualcomm 5.5%, and Broadcom 5.5%.
The Semiconductor Index (SOX) fell 3.9% (down 7.4% w-t-d at Friday lows).
Big tech selling had noteworthy company for much of the week: big financial, though a 2% Friday afternoon bank index rally erased the week’s losses.
Robin Hood sank 11.2% this week, Strategy 10.2%, Palantir 11.2%, and Block 13.8%.
Even after Friday afternoon’s 4.7% rally (sinking below $99,000 intraday), Bitcoin traded down $7,900, or 7.1%, for the week.
The Question:
Brad Gerstner (CEO Altimeter Capital Management), November 3, 2025:
“OpenAI’s revenues are still a reported $13 billion in 2025, and, Sam, on your live stream this week you talked about this massive commitment to compute - $1.4 trillion over the next four or five years.
With big commitments - $500 billion to Nvidia, $300 billion to AMD and Oracle, $250 billion to Azure.
So, I think the single biggest question I’ve heard all week – and hanging over the market – is how can a company with $13 billion in revenues make $1.4 TN of spending commitments?
And you’ve heard the criticism (cut off by Altman).”
OpenAI CEO Sam Altman:
“First of all, we’re doing well more revenues than that.
And, second of all, Brad, if you want to sell your shares, I’ll find you a buyer.
Enough. I think there’s a lot of people who would love to buy OpenAI shares.
I don’t think you want to sell Brad, including people who talk with a lot of like breathless concern about our compute stuff or whatever, that would be thrilled to buy shares.
So, we could sell your shares or anyone else’s to some of the people who are making the most noise on Twitter, wherever, very quickly.
We do plan for revenues to grow steeply.
Revenue is growing steeply.
We are taking a forward bet that it’s going to continue to grow, and that not only will ChatGPT keep growing, but we will be able to become one of the important AI clouds, that our consumer device business will be a significant and important thing.
AI that can automate science will create huge value.
So, there are not many times that I want to be a public company, but one of the rare times it’s appealing is when those people are writing these ridiculous ‘OpenAI is about to go out of business and whatever.’
I would love to tell them they could just short the stock and I would love to see them get burned on that.”
Perhaps a month ago, Sam Altman’s response could have been laughed off as childish Musk-like pomposity.
Not this week – not now.
Folks are beginning to have concerns and questions.
Manic AI enthusiasm has started to dim.
And while Altman is clearly fixated on OpenAI’s stock, everyone else is focused on the company’s $1.4 TN of industry commitments.
While the hype has been phenomenal, OpenAI is no Microsoft, Meta Platforms, Nvidia, Apple, or Oracle.
It has not enjoyed years of market dominance and the accumulation of a massive financial war chest.
It does not have a market monopoly position that continually generates tens of billions of free cash flow.
Sober analysis would be cautious in extrapolating OpenAI’s current competitive advantage much into the future.
My thoughts this week returned to peak late-eighties Japanese Bubble madness.
At the time, the grounds of Tokyo’s Imperial Palace were said to be worth more than all the real estate in California.
Some things turn so preposterous that you can pretty much assume the cycle is running on fumes.
November 4 – Financial Times (Antoine Gara):
“The financing package stitched together for Meta’s humongous Hyperion data centre campus in Louisiana made Alphaville curious about just how much energy the new AI infrastructure will consume if it all comes online.
After all, massive new projects are being announced almost every week, in what even KKR’s digital infrastructure lead called a ‘bragawatts’ phenomenon…
The latest example is OpenAI on Thursday revealing plans for a 1+ gigawatt data centre hub in Michigan.
Together with previously announced ‘Stargate’ projects this brings the total to over 8 gigawatts — close to the 10 target it floated earlier this year.
This will cost over $450bn over the next three years, according to the company that spends more on marketing and employee stock options than it makes in revenue.
So how many data centre projects have now been started or announced?
Which ones will actually happen and which ones are fantasy?
As Barclays noted last week, tracking ‘what is real vs. speculative is a full-time job’...
So what is the total so far?
With OpenAI’s Michigan project they now total 46 gigawatts of computing power.
Apologies for the virtual shouting, but this seems a bit mad.
These centres will cost $2.5tn to build, according to Barclays, to service an industry that still doesn’t turn a profit.
But the maddest bit arguably is how much energy they will require once completed.
Using Barclays’ 1.2 ‘Power Use Effectiveness’ ratio, all these data centrers… would need 55.2 gigawatts of electricity to function at full capacity.
If we also use Barclays’ rule of thumb that 1 gigawatt can power over 800,000 American homes, it means that these data centres will consume as much energy as 44.2mn households — almost three times California’s entire housing stock.”
November 3 – Bloomberg (Spencer Soper):
“Amazon.com Inc. alleges that a Berkshire Hathaway Inc.-owned utility in Oregon is failing to provide sufficient power for four new data center facilities, highlighting the strain rapid expansion of technology facilities is putting on the electric grid.
Amazon lodged a complaint last week with the Public Utility Commission of Oregon alleging that… PacifiCorp breached obligations that date back to 2021 to provide sufficient power for the projects.
Amazon said the company provided insufficient power for one data campus, no power for a second campus and ‘has refused to even complete its own standard contracting process for the third and fourth Data Center Campuses.’”
Arms race.
MAD – mutually assured destruction.
How far will all this go?
Where on earth is all the necessary electricity supposed to come from?
At what price; at what disruption; and how long will all this take?
How many Trillions will be spent before reality sinks in?
For sure, Sam Altman had better change his mindset and demeanor (time is of the essence).
Key issues have little to do with OpenAI stock (that doesn’t even trade publicly), and he clearly relishes the relative insulation from scrutiny afforded private companies.
As such a key industry executive, he fails to project the presence of someone who recognizes the many challenges that await.
His company needs to borrow enormous sums – likely from banks, “private Credit,” and public markets.
When markets begin to question the viability of such a massive financing challenge, concerns and skepticism will surround OpenAI’s $1.4 TN of commitments.
Importantly, the viability of financing the AI arms race will be determined by a confluence of factors.
Market sentiment could certainly turn against such grandiose – and astonishingly expensive – industry spending plans.
There are also mounting general Credit system issues, with repercussions of the First Brands fiasco coupled with rising consumer delinquencies signaling a turn in the Credit cycle.
Might OpenAI be the next Microsoft, Apple, or Amazon?
I well remember when Mosaic was the go-to web browser.
Netscape’s much improved Navigator browser dominated until it was crushed by all-powerful Microsoft and its Internet Explorer.
Today, Google Chrome has about 70% market share, followed by Apple’s Safari.
And let’s not forget how AOL.com completely dominated the Internet, until its virtual lock on dial-up was briskly made obsolete by cable broadband.
Blackberry…
In today’s late-cycle backdrop, there is a phenomenally financially powerful tech oligarchy spending previously unimaginable amounts to ensure they are not left behind in the AI arms race.
OpenAI today enjoys first mover advantage in a momentously important field of technological development.
But in terms of the major AI players, OpenAI is financially vulnerable – the weaker, marginal operator.
Especially when AI finance tightens, they will be vulnerable and an obvious takeover target.
But who would be comfortable with their $1.4 TN of commitments?
There were curiously timed comments Wednesday from OpenAI CFO Sarah Friar (which she soon backed away from):
“We’re looking for an ecosystem of banks, private equity, maybe even governmental, the ways governments can come to bear.
The backstop, the guarantee that allows the financing to happen.
That can really drop the cost of the financing but also increase the loan-to-value, so the amount of debt you can take on top of an equity portion.”
Of course, OpenAI – and those on the other side of their commitments – yearn for a Trump backstop/guarantee.
The company’s financial position is so tenuous.
And there reaches a point when the quiet part is said out loud – critical issues are broached, serious discussion and debate take hold, and the process of reality sinking in gathers momentum.
November 6 – CNBC (Ashley Capoot):
“Venture capitalist David Sacks, who is serving as President Donald Trump’s artificial intelligence and crypto czar, said… there will be ‘no federal bailout for AI.’
‘The U.S. has at least 5 major frontier model companies.
If one fails, others will take its place,’ Sacks wrote...
Sacks’ comments came after OpenAI CFO Sarah Friar said… the startup wants to establish an ecosystem… and a federal ‘backstop’ or ‘guarantee’ that could help the company finance its infrastructure investments.
She softened her stance later… and said OpenAI is not seeking a government backstop for its infrastructure commitments.
She said her use of the word ‘backstop’ clouded her point.”
“If one fails, others will take its place.”
And there will no doubt be failures – and big ones.
We can assume scores of uncompleted data center and energy infrastructure projects.
Enormous losses will reverberate throughout the financial system and economy.
A collapsing Bubble will reveal sickening resource misallocation and severe economic maladjustment.
And anyone downplaying financial and economic risks associated with this historic multi-Trillion arms race has their head in the sand.
It is these days most important to appreciate that booms don’t end because of lack of enthusiasm or perceived investment opportunities.
Their termination is the product of self-destructive late-cycle finance.
Credit becomes deranged.
Wildly inflated securities (asset) prices turn increasingly untenable - “money” hopelessly corrupted.
Ben Bernanke and others have argued that the Great Depression would have been avoided had a competent Fed only printed money and recapitalized the banking system.
No.
The protracted Bubble had wrecked finance and economic structure.
Similarly, conventional thinking holds that the Great Financial Crisis was the consequence of the Fed not bailing out Lehman Brothers.
No.
The Bubble had impaired the soundness of Trillions of financial claims, while leaving deep economic scars.
The ongoing AI arms race Bubble has added Trillions to already tens of Trillions of problematic financial claims.
November 6 – Bloomberg (James Crombie):
“Fixed-income investors should tread carefully when it comes to funding the artificial intelligence boom, according to DoubleLine Capital’s Robert Cohen.
‘You have to be not only cautious about the tech sector, but the tangential, related sectors that are providing support for these new projects,’ the investment firm’s director of global developed credit, said…
‘Who knows what the spillover will be if the music stops?’…
Cohen pointed to novel structures, like off-balance sheet funding, and the fact that no one knows whether these huge capital projects will make money.
He warned of overcapacity driving losses and flagged potential trouble for related companies in sectors including power and chemicals.
‘At some point, it’s going to have to be proven that these projects are profitable,’ said Cohen…
‘If we find that most of them are not, then there’s going to be a severe reaction’.
Morgan Stanley forecasts the big cloud computing companies known as hyperscalers will spend about $3 trillion on infrastructure projects such as data centers between now and 2028.”
AI arms race financing demands are on a collision course with an increasingly fragile Credit system.
November 4 – Financial Times (Arjun Neil Alim):
“Insurers shopping for better ratings on their private credit assets are creating a ‘looming systemic risk’ to global finance, the chair of UBS has warned…
Colm Kelleher said the insurance industry, especially in the US, was engaging in ‘ratings arbitrage’ akin to what banks and other institutions did with subprime loans before the 2008 financial crisis.
Kelleher joins a growing chorus of voices pointing to risks in the multitrillion-dollar insurance industry, including its holdings of illiquid private credit loans and opaque disclosures.
‘What you’re seeing now is a massive growth in small rating agencies ticking the box for compliance of investment,’ said Kelleher, who stressed that regulators were failing to get a handle on the industry even as they were pushing for faster economic growth.
‘If you look at the insurance business there is a looming systemic risk coming through because of lack of effective regulation,’ he said.”
“Democrats sweep key races in 2025 elections in early referendum on Trump.”
“Election Shocks Underscore Power Bills as New Political Risk.”
“Cruz: Tuesday elections ‘disaster’ for Republicans.”
“Donald Trump and Republicans react to ‘shocking’ election results.”
“The affordability crisis, once Biden’s, is now Trump’s.”
“Top Trump political adviser says president will focus on affordability going forward.”
One year until mid-terms.
Tuesday’s election was a wake-up call for an administration already hyper-focused on next year’s elections and furthering its agenda.
President Trump cast a lot of blame and made one unrealistic promise after another.
Forget CPI data.
People are seeing and feeling problematic inflation – health insurance and care, home and auto insurance, electricity, services, goods, food…
That so much of the population is outraged with the stock market so inflated is a warning to all.
So much at stake, and there’s a case to be made that much of the Trump administration’s agenda hangs in the balance.
We surely haven’t heard the last of the administration’s assault on Federal Reserve independence.
Their urgency to gain control of the monetary levers must have intensified.
So, we can ponder the various mechanisms Team Trump will employ as crisis dynamics gain momentum.
I watched in utter amazement as the GSEs evolved into powerful market liquidity backstops in 1994, 1998, 1999, and again during 2000-2003 with the bursting of the “tech” Bubble.
It will be “fascinating” to observe what Team Trump and Bill Pulte devise now that they enjoy almost complete control.
November 7 – Bloomberg (Patrick Clark and Katy O'Donnell):
“Bill Pulte, the director of the Federal Housing Finance Agency, said that Fannie Mae and Freddie Mac are looking at ways to take equity stakes in technology companies.
‘We have some of the biggest technology and public companies offering equity to Fannie and Freddie in exchange for Fannie and Freddie partnering with them in our business,’ Pulte said Friday…
‘We’re looking at taking equity stakes in companies that are willing to give it to us because of how much power Fannie and Freddie have over the whole ecosystem.’”
Extracted from my October 30th Tactical Short Q3 presentation:
“Loose Conditions, Excess and Fed Accommodation.”
My interest in bubbles dates back to my experience as a Treasury analyst at Toyota’s U.S. headquarters in 1986/87.
At the time, top Toyota management were concerned that a problematic bubble had taken hold in Japan.
Loose monetary policies and an investment-led economic boom were fueling extraordinary asset inflation - most conspicuously in stock market and real estate bubbles.
At the time, it appeared that the 1987 stock market crash had abruptly brought bubble inflation to a conclusion.
While not as dramatic as the 22.6% one-day drop in the Dow, Japan’s Nikkei 225 Index was down 23% from highs to end 1987 at 20,500.
But something extraordinary unfolded that I still find absolutely fascinating.
The Nikkei almost doubled in two years to end 1989 at 38,957, while already inflated real estate prices also roughly doubled.
That was my first experience with what I would later label “terminal phase excess” – somewhat along the lines of the great Austrian economist Ludwig von Mises’ “crack up boom.”
The compact explanation: years of gratifying excess lay the foundation for exuberance, risk-taking, and manic behavior to go off the rails - to doom long cycles.
The 1989 year-end high in Japan’s Nikkei would not be surpassed for over 34 years – a period where deep post-bubble financial and economic structural maladjustment would see Japanese policymakers resort to decades of reckless ultra-loose monetary and fiscal policies.
And you know, inflationism’s upshot is a Japan today in a direr predicament than in 1989.
After the 1987 stock market crash, there were fears of another U.S. economic depression.
Instead, Fed accommodation and loose conditions fueled our own late eighties “terminal phase”.
The bursting of the late-80’s bubble would reveal massive fraud and recklessness at the savings & loans; Michael Milken, Drexel Burnham, and “junk” bond market crimes and shenanigans; Ivan Boesky, LBO madness and pervasive insider trading; awful loan underwriting, fraud and deflating real estate bubbles along both coasts.
The 18th largest U.S. bank, Bank of New England, imploded in 1991.
There were serious concerns for Citicorp and other major financial institutions.
Having witnessed in the U.S. and Japan parallel cycles of bubble excess, market dislocation, monetary accommodation, late-cycle bubble excess, and subsequent painful bubble collapses, it was clear that there were extremely consequential bubble dynamics that I had to understand.
Fascination with bubble analysis drove my long and deep dive into understanding America’s preeminent bubble experience, the first world war inflation that evolved into historic “Roaring Twenties” excess, the 1929 market and financial crash, and the Great Depression.
I’ve previously discussed in some detail alarming parallels between that experience and today’s multi-decade bubble.
In short, one cannot overstate the consequences of the interplay of phenomenal technological advancement and financial innovation – along with evolutionary changes in monetary management.
Today, I will offer context for current “terminal phase excess,” and the general disregard for risk in the face of mounting fragilities.
Years ago, I read all the contemporaneous accounts of the late-twenties period I could find.
And the more I studied, the more confounding and fascinating it all became.
How could everyone have been blindsided - caught so exposed and unprepared in 1929?
At some point, I stumbled upon writings from a journalist who had interviewed a group of Wall Street traders after the crash.
He wanted to understand how they could have failed to recognize the dangers associated with speculative excess - all the margin debt; the leveraged trusts; Wall Street chicanery; deteriorating economic prospects, and such.
I was struck by the commonality of their responses.
It was not that they were unaware.
Most had recognized the gravity of market excess.
Concerns had intensified, especially during 1927 market and economic instability.
But these Wall Street traders conveyed something quite profound – and especially pertinent for bubble “terminal phase” analysis.
They admitted that you can only worry about such things for so long – explaining that surging stock prices eventually compelled all those operating in the markets to disregard risk.
“Terminal phase excess” is a period of intoxicating wealth accumulation – and I’m talking late-night whiskey shots rather than evening wine glass tipsiness.
Just look these days at how hefty market returns continue to inflate investment accounts across the population.
Just ponder the incredible amounts of money Wall Street firms made during Q3 – and over the past year – earnings that feed huge compensation for traders, investment bankers, asset managers, structured finance specialists, corporate managers, and executives.
There are also the energized commercial bankers and loan officers, along with those working in booming fin-tech and crypto.
Those engaged in “private credit” and “private equity.”
There are tens of thousands employed across investment management that have never had it so good.
The investment arms of insurance companies are “printing money”.
And let us not miss booming professions supporting this great asset inflation, including attorneys, accountants, consultants, and real estate and insurance agents.
Millions have watched their net worth inflate tremendously – especially recently.
Generations ago, economists referred to this inflationary phenomenon as “money illusion.”
“Terminal phases” are dominated by loose conditions and liquidity overabundance.
Importantly, liquidity will always chase inflating prices, with finance habitually flooding into booming markets.
And when everyone is making so damn much money, they’ll simply ignore risk until some development smacks them in the face.
I’m reminded again of bubble insight from the great American economist Charles Kindleberger.
I’ll paraphrase: Nothing causes more angst than watching your neighbor get rich.
My hope is to help bridge the divide between what many of us recognize as extraordinary risk and unmistakable evidence of systemic fragility - versus the bullish consensus view that downplays or dismisses things we know are so important.
It is not that we don’t learn from history, but especially when it comes to bubbles and inflating market and asset prices, the learning process is of the short horizon variety.
In such a confounding and uncertain world, it has never been as important to adopt a historical perspective.
The seeds for today’s spectacular “terminal phase” were planted when the Greenspan Federal Reserve responded to late-eighties bubble collapse with a then dramatic loosening of monetary policy - “easy money” that stoked fledgling bubbles in securitizations, the GSEs, derivatives, “repo,” money market funds, hedge funds, and Wall Street securities finance.
It was the genesis of the so-called “shadow banking” apparatus that continues its runaway expansion despite being at the epicenter of the Great Financial Crisis.
Just a couple weeks ago, the IMF warned of mounting bank exposure to hedge funds, “private credit,” and other non-bank financial institutions.
The Greenspan Fed’s extraordinary market intervention sowed the seeds for 1994 bond market and derivatives mayhem; the so-called Tequila crisis and Mexican bailout; and later in 1998, with the collapse of the egregiously levered Long-Term Capital Management run by its genius Nobel laureates.
The Fed-orchestrated LTCM bailout triggered 1999’s almost doubling of Nasdaq.
“Tech” bubble “terminal phase excess” ended with spectacular bubble implosion, including collapses in technology stocks and the likes of WorldCom, Global Crossing, McLeod, and other highly levered telecommunications operators and scores of Dot.com darlings.
Loose money and Wall Street finance propagated one of the biggest U.S. corporate swindles.
The Enron fraud unraveled in 2001.
Throw in Superior Bank and Conseco, along with accounting heavyweight Arthur Anderson.
Subsequent post-tech bubble monetary easing made Alan Greenspan’s early-nineties cuts to 3% look timid.
Rates were held at 1% until June 2004 – despite double-digit annual mortgage credit growth in 2001, 2002, and 2003.
Moreover, rates were slashed 325 bps in eight months after the 2007 subprime eruption, a dramatic loosening that prolonged bubble “terminal phase excess.”
The 2008 bursting revealed an absolute fiasco of reckless lending, leveraged speculation, derivatives abuse, and seemingly systemic financial fraud and misconduct.
Major collapses included Bear Stearns, Washington Mutual, insurer AIG and, of course, Lehman Brothers with its $640 billion of assets.
I first warned of the unfolding “global government finance bubble” in April 2009 – with outstanding Treasury debt at $6.2 TN and a then plump $2.1 TN Fed balance sheet.
The Federal Reserve had just unleashed an unprecedented $1 TN of liquidity.
It was clear that Washington’s desperate policies to reflate the markets and economy had crossed the Rubicon.
Having scrutinized dynamics during the nineties and again following the burst tech bubble, all the makings were in place for a super bubble to inflate at the very heart of finance – central bank credit and government debt.
And with this perceived safe “money” and credit enjoying insatiable demand, this bubble had unique potential to run longer and to greater excess than all previous bubbles.
Today, Treasury debt is approaching $29 TN, with the Fed at about $6.6 TN.
It recently took just 71 days for federal debt to grow by an additional $1 TN, the fastest pace ever.
Previously unimaginable monetary inflation and resulting disorder unleashed myriad forces now completely out of control.
Epic crazy has become deeply entrenched.
Stock prices inflate to ever higher highs, fueled by a steady flow of trillions into stocks, mutual funds, and ETFs.
Equities have come to be recognized as a no-lose proposition.
Millions have discovered that you trade options to really juice returns.
High-risk lending has boomed like never before, exemplified by trillions of leveraged loans and “private credit.”
To be sure, speculative excess has entered uncharted waters – notably tech stock, AI, and crypto manias.
In the dark shadows, leveraged speculation has reached unprecedented heights, with tens of trillions of “basis trades,” “carry trades,” and levered strategies propagating across virtually all markets - everywhere.
Excess long ago passed the point of no return.
It is when and not if myriad bubbles burst.
Again, my love affair with macro analysis took hold in 1987, mesmerized by the Telerate machine on Toyota’s U.S. trading desk.
I will never forget summer of 1987 market instability that culminated with that October’s “Black Monday” crash.
Curiously, Citadel’s Ken Griffin a couple weeks ago reminded an audience that the ’87 crash was without a clear catalyst.
There was similarly no catalyst for “Black Monday”, October 28, 1929.
Parallels between the two “Roaring Twenties” are as striking as they are frightening.
Both were culminations of protracted cycles characterized by epic technological advancement and innovation - intricately connected to equally phenomenal financial development.
Momentous credit expansions characterized both periods.
In both, the Federal Reserve was fundamental to such energized and prolonged cycles.
The Fed began its operations in 1914, at the onset of a major World War-related inflationary cycle.
The perception of a central bank committed to actively backstopping system stability was essential to confidence that crystallized on Wall Street and throughout the economy.
Bubble excess got out of hand, in a world experiencing monumental change, instability, and disorientation.
In 1927, New York Fed President Benjamin Strong’s infamous “coup de whiskey” injected liquidity into an already dangerously speculative marketplace - triggering a fateful two-year speculative blowoff.
Caution was thrown to the wind.
Faith in the Fed backstop spurred a fateful mania that saw bullish perceptions completely detach from deteriorating fundamental prospects and escalating systemic risk.
In the “Roaring 20’s” finale, finance became deranged – precarious speculative excess, too much on leverage, that was financing a manic upsurge of new paradigm investment spending and resource misallocation.
The 1929 stock market crash and financial crisis revealed epic fraud, financial chicanery, and malinvestment.
As is said, history may not repeat, but it sure rhymes.
Today’s backdrop shares too many unnerving parallels to 1929.
Having watched this historic bubble inflate to ever-greater extremes for more than three decades, it’s astounding how closely developments have followed the “Roaring 20’s” playbook.
A powerful new central bank was paramount to the twenties bubble era, while the new ultra-powerful QE reflationary tool has been fundamental to this era.
The $5 TN Covid-period monetary stimulus coupled with egregious fiscal stimulus – now that’s a whiskey double shot with beer chasers.
Fundamental to bubble analysis is the maxim that given sufficient time and monetary accommodation – a cycle of credit growth, loose conditions, speculation, and risky lending will invariably run completely amuck.
The third quarter was replete with notable financial excess that I’ll share in some detail.
Investment-grade corporate bond issuance jumped to $208 billion in September alone, a September record – and the second largest month excluding Covid.
Investment grade bonds traded at the narrowest spreads to Treasuries since 1998, reflective of incredibly depressed risk premiums throughout the markets.
The strongest weekly issuance in five years powered high yield “junk” September issuance to $58 billion – one of the busiest months ever.
Q3 volume of $118 billion was the strongest since 2021.
The quarter saw almost $400 billion of leveraged-loan launches, an all-time high.
At $161 billion, year-to-date collateralized loan obligations – CLO – issuance was 10% ahead of a booming 2024.
“Private credit” CLOs were sold at record pace.
Fueled by loose conditions and booming debt markets, M&A activity has been on fire.
Global deals surpassed $1 TN during Q3 for only the second time.
At $3 TN, year-to-date activity is up 27% from last year - to the strongest pace since 2021.
More than $255 billion was raised in the equities market during the first nine months of the year, also the most since Covid.
The $55 billion buyout of Electronic Arts greatly exceeded the previous record set, while debt markets were “still dancing” in 2007 – the $32 billion buyout of utility TXU.
It would not be surprising if Q3 Wall Street earnings represented a high-water mark for years to come.
Goldman net revenues were up 20% y-o-y to $15.2 billion, with earnings-per-share up a staggering 46%.
Investment Banking fees surged 42% to $2.7 billion.
Assets under management surged $159 billion to $3.34 TN.
JPMorgan’s revenue was up 9% to $47 billion, with $14.4 billion of Net Income.
Market trading was 25% higher to a record $9 billion.
Client Assets inflated 20% y-o-y to $6.8 TN.
At Bank of America, revenues were up 11% y-o-y to $28 billion.
Investment Banking fees surged 43%.
Charles Schwab Q3 revenues were 27% higher y-o-y to a record $6.1 billion.
Net new assets were 48% higher at $134 billion, as daily average notional trading volume surged 30% to $7.42 TN.
Blackrock revenues were up 25% to $6.5 billion.
The company saw $205 billion of net inflows during the quarter, as assets under management reached a record $13.5 TN.
The Fed’s Q3 Z.1 report won’t be available until December, but Q2 data illuminate the scope of ongoing historic financial excess.
The financial sector has been firing on all cylinders – the most powerful growth dynamic since peak mortgage finance bubble.
Banking system loan growth surged to $316 billion during Q2, or 8.4% annualized – the quickest pace since 2022.
Loans – chiefly to business - expanded 16.4% annualized, with one-year growth of 10.4%.
Meanwhile, Wall Street left notably strong bank lending in the dust.
Broker/Dealer Assets expanded $259 billion, or 18% annualized, during Q2 to a record $6.0 TN.
Over one year, assets surged $849 billion, or 16.4%.
In 11 quarters, assets ballooned $1.6 TN, or 36%.
Broker/Dealer Debt Securities holdings surged $106 billion for the quarter, or 36% annualized.
These holdings were up $316 billion, or 33%, in a year, and $677 billion, or more than doubling over 11 quarters.
Wall Street has been leaning on the “repo” market to finance ballooning balance sheets.
“Repo” Liabilities ended Q2 at $2.71 TN – the high since Q3 2008.
Over one year, “repo” liabilities inflated $333 billion, or 14%, with 11-quarter ballooning of $1.1 TN, or 68%.
Total system “repo” assets jumped $291 billion, or 15% annualized, during Q2, to a record $8.1 TN.
Repo assets inflated $1.1 TN, or 16% y-o-y, and $3.3 TN, or 68%, over 22 quarters.
Rapid financial sector expansion feeds asset inflation and inflating household perceived wealth, in the process boosting spending and economic activity.
While robust corporate earnings are viewed as confirmation of the bullish thesis, they are a direct consequence of financial excess.
Household Net Worth - Assets less Liabilities - jumped $7.1 TN, or 17% annualized, during Q2 to a record $176 TN.
Illuminating historic late-cycle bubble inflation, Net Worth was up a staggering $10 TN over one year; $30 TN over three years; and $65 TN, or 59%, over 21 quarters.
Household Net Worth rose to a non-Covid record of 581% of GDP - compared to previous cycle peaks of 487% in Q1 2007 and 443% for Q1 2000.
American households have never enjoyed such a stock market bonanza.
Household Equities holdings surged $3.7 TN during Q2 to a record $42 TN - with three-year growth of $15 TN, or 56%.
Total equities and mutual fund holdings expanded to a record 180% of GDP - compared to previous cycle peaks 105% (Q3 2007) and 116% (Q1 2000).
I wish there were some deep analytical flaws here.
But there is consistent and irrefutable thesis confirmation – unrelenting Washington debt growth, booming high-risk lending, conspicuous market excess, egregious amounts of levered speculation, the manic AI arms race, the crypto mania, and so on.
It would be somewhat less concerning if markets demonstrated the capacity for orderly adjustment.
But the opposite is true – markets become only more dismissive of risk and detached from the reality of extreme uncertainty, underlying fragility, and waning prospects.
The world’s preeminent banker, JPMorgan’s Jamie Dimon, recently offered a warning:
“I probably shouldn’t say this, but when you see one cockroach, there are probably more.
Everyone should be forewarned on this one.”
He also said, “My antenna goes up when things like that happen.”
Dimon was referring to the swift collapse of First Brands.
The First Brands fiasco is a big deal.
I have compared it to the June 2007 collapse of two Bear Stearns credit funds that had invested in subprime mortgage derivatives.
That event basically terminated subprime mortgage excesses – marking an inflection point for the mortgage finance bubble.
The Bear Stearns subprime eruption proved so consequential because it revealed the scope of egregious excess – especially the revelation of the critical role Wall Street structured finance had played in the intermediation of risky mortgages – what I refer to as the “Wall Street alchemy” transforming high-risk loans into mostly perceived safe money-like instruments.
This apparatus works miraculously – until increasingly precarious schemes collapse under their own weight – until the associated finance becomes too malignant.
In the case of the Bear Stearns funds, it was subprime CLOs.
The blow up of these two funds shattered perceptions and effectively ended what had become the critical source of finance to the marginal home buyer.
The cycle reversed when marginal borrowers lost access to mortgages.
Inventory piled up, prices declined, buyers backed away, terrible underwriting and widespread fraud were revealed and, much belatedly, the regulatory environment shifted.
The bubble was doomed.
While not huge, First Brands is a microcosm of key facets of this cycle’s excess.
It encompasses banks, Wall Street firms, hedge funds, flimsy structured finance, “private credit,” “business development companies”, leverage, so-called “fin-tech” and invoice and supply-chain finance, insurance companies, credit insurance, CPA firms, rating agencies, and a complacent investor community.
The collapse revealed that across the spectrum of players, a boom-time ethos prioritized money-making above analysis and sound business practices.
Loan underwriting was woefully deficient, as was the accounting and due diligence across the intermediation process.
First Brands was willing to pay high borrowing rates for billions of liabilities, affording profit opportunities for layers of enterprising operators.
It worked miraculously – until the scheme collapsed.
Remember that it was 15 months between the subprime eruption and the October 2008 financial crisis.
Credit tightening at the “periphery” takes time to gravitate to the “core” – especially during periods of loose conditions and central bank accommodation.
Indeed, aggressive Fed rate cuts sustained bubble excess in 2007’s second half, with declining AAA-rated MBS yields sustaining risky lending for prime mortgages.
System credit growth remained highly elevated into 2008, with stock prices reaching record highs in October 2007 – months after the fateful subprime collapse.
We’re witnessing similar dynamics now.
The drift higher in global bond yields ended abruptly a few weeks back, with the First Brands news.
Ten-year Treasury yields recently dropped to a one-year low of 3.94%, despite a 3.9% Atlanta Fed GDPNow forecast and ongoing inflation risks.
Markets now assume a more aggressive rate-cutting cycle, and the Fed just announced the end to its balance sheet drawdown.
More than a year ago – in September 2024 – the Fed began cutting rates despite loose conditions and conspicuous market excess.
And over the past 13 months, we’ve witnessed historic bubble inflation go into high gear, notably in AI, leveraged lending, and “private credit.”
Nvidia’s stock inflated almost 80%. For Oracle, it was 65%.
The Semiconductor Index has returned almost 50% since the Fed’s first cut, boosting three-year gains to over 200%.
It’s important to note that Money Market Fund Assets (MMFA) inflated $1.09 TN, or 17%, since that first cut – expanding another $30 billion last week to a record $7.4 TN.
Just over the past eight weeks, money funds inflated $191 billion, further extending one of history’s great monetary inflations – one I link directly to the expansion of leveraged speculation and “repo” market borrowings.
Especially over the past year, this now international phenomenon has stoked global liquidity overabundance.
That the Fed and global central bank community are slashing rates despite historic leveraged speculation is a perilous bubble dynamic.
I have previously highlighted the trillion-plus hedge fund “basis trade” – where extremely levered Treasury positions are financed in the “repo” market.
Interestingly, Federal Reserve researchers recently released a report in which they estimate that hedge fund holdings of Treasuries domiciled in the Cayman Islands ended 2024 at $1.85 trillion – fully $1.4 TN more than tabulated in Treasury data.
This position had doubled in two years.
Amazingly, this places the Cayman Islands as the largest foreign owner of US government securities, ranking ahead of China, Japan, and the UK.
From this revelation, I’ll offer a few inferences.
For one, estimates that hedge funds held a massive $3.4 TN Treasuries position in 2024 likely grossly understate actual holdings.
Second, Fed analysis further confirms that “basis trade” and other Treasury leveraged speculation ballooned starting in 2022 – coinciding with the historic inflation of money market fund assets.
Third, leveraged speculation has become critical to financing massive fiscal deficits, and is also a primary culprit behind over-liquefied speculative market bubbles.
This is such a precarious market structure.
I’ll try to tie these various analytical threads together.
In its semi-annual global financial stability report, the International Monetary Fund issued strong warnings.
The IMF believes it is time for forceful oversight of Non-Depository Financial Institutions – or NDFI - the so-called “shadow banking” universe, which includes hedge funds, private credit, private equity, credit funds, insurance companies, and others.
Quoting from the IMF:
“Beneath the calm surface, the ground is shifting in several parts of the financial system, giving rise to vulnerabilities…
Banks are increasingly lending to private credit funds because these loans often deliver higher returns on equity than traditional commercial and industrial lending…”
From IMF data, reported by the Financial Times:
“Banks in the US and Europe have $4.5 TN of exposures to hedge funds, private credit groups and other non-bank financial institutions...”
The IMF report was released three weeks after the First Brands’ bankruptcy.
A week following the IMF, Bank of England Governor Andrew Bailey issued similar, but notably more urgent warnings – stressing that alarm bells were ringing:
“We certainly are beginning to see, for instance, what used to be called slicing and dicing and tranching of loan structures going on, and if you were involved before the financial crisis then alarm bells start going off at that point.’”
“Wall Street’s practice of packaging subprime mortgages into asset-backed bonds fueled the 2008 financial crisis, with years of loose lending standards leading to a crash in the value of these assets when US house prices fell.
In the run-up to the crisis, bankers and investors had regarded many such complicated financial products as virtually riskless.
The perception encouraged large institutions to borrow heavily against their holdings…”
“If you go back to before the financial crisis when we were having a debate about subprime mortgages in the US, people were telling us it was too small to be systemic.
That was the wrong call.”
BOE deputy governor for financial stability, Sarah Breeden, added her own warning:
“We can see the vulnerabilities here, the opacity, the leverage, the weak underwriting standards, the interconnections.
We can see parallels with the global financial crisis.
What we don’t know is how macro-significant those issues are.”
First Brands revelations have altered cycle dynamics.
The quiet part is now being said out loud – and it’s being spoken at an elevated volume by top central bankers, financial regulators and even Wall Street professionals.
Providing additional perspective, the Financial Times last week highlighted analysis from JPMorgan, noting that the First Brands and Tricolor collapses had raised bank funding costs.
“High-profile collapses… have highlighted the complex and often opaque financial arrangements between banks and ‘non-depository financial institutions’.”
The article underscored a key development:
“Regulators have become increasingly concerned about the interconnectedness of banks and NDFI.”
I believe a consequential tightening of high-risk lending is afoot, though ongoing market exuberance is currently masking it.
Banks will tighten loan underwriting, with the leveraged lending crowd forced to adopt a more cautious approach.
Importantly, the opacity and leverage that provided a boom-time advantage for “private credit” will increasingly prove a hinderance.
And a tightening of subprime finance will become problematic for scores of levered and negative cash-flow borrowers whose existence depends on readily available new finance.
And, over time, I expect revelations of widespread imprudent loan underwriting, along with historic quantities of fraud and financial shenanigans.
The credit cycle has not been repealed.
The old Austrian economists warned that the pain associated with the bust is proportional to the excesses of the preceding boom.
And this is what really worries me.
Trillions of “basis trades” and speculative leverage have created seemingly unlimited liquidity – liquidity that has helped finance a historic AI arms race.
Looking ahead, the AI and energy infrastructure buildout will require many trillions of additional borrowings.
So far, much of the required AI finance has been from - or associated with - the cash-rich tech oligarchy.
Going forward, much of the trillions required will have to come from the credit market and financial institutions.
Future AI arms race profits are highly uncertain, if not dubious.
Trillions of borrowings will be of a high-risk nature.
Especially when the AI mania breaks, I doubt markets and the financial system will be willing and able to take on such colossal amounts of risky debt.
Meanwhile, there is this perilous issue of bond market and credit system leverage.
A bout of de-risking/deleveraging will expose vulnerabilities to marketplace illiquidity and dislocation.
We saw elements of this dynamic start to unfold during April market instability.
And April tumult illuminated the tight correlation between deleveraging fears and aggressive selling of tech and AI-related stocks.
Importantly, the AI arms race buildout depends on ongoing market exuberance and liquidity abundance.
So long as “terminal phase excess” continues, the AI arms race appears miraculously feasible.
Meanwhile, this bubble is uniquely vulnerable to a shift in market perceptions.
A surprise market de-risking/deleveraging would immediately expose the fragile high-risk nature of AI finance – history’s greatest subprime lending bubble.
I’ll wrap this up with a concise summary.
AI and tech are history’s greatest mania – and throw in crypto for good measure.
The leveraged lending and “private credit” booms are the greatest high-risk lending bubble ever.
U.S. and global sovereign debt is history’s most spectacular credit bubble.
And “basis trades,” “carry trades,” and myriad levered credit market strategies comprise the most colossal levered speculative bubble.
I often say I hope I’m wrong.
I’m not wrong on this.
Timing remains unknown, but this will end very badly.
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