Volatile and Fragile
Doug Nolan
“Nvidia’s Upbeat Forecast Soothes Concerns of AI Market Bubble.”
After closing Wednesday at 185.52, Nvidia spiked to a post-earnings report high of 198.49 in early-Thursday trading.
The stock then reversed 12% lower to a two-month low of 174.43 - closing Thursday’s session at 180.64.
The stock traded back up to 184.56 in Friday trading, before closing the week down 5.9% at 178.88.
From Monday’s intraday high to Tuesday’s low, the Semiconductors Index sank 5.9%.
The index had rallied 6.2% at (Nvidia earnings) early Thursday’s highs.
The index then sank 10.5% to early-Friday lows, only to rally 5.6% intraday to cut the week’s losses to 5.9%.
The MAG7 Index dropped 4%, rallied 5.3%, sank 5.6%, and then rose 3% - to close the week 1.9% lower.
Wild volatility was not limited to tech/AI stocks.
The small cap Russell 2000 dropped 2.8%, rallied 3.4%, sank 4.1% and rallied 3.0% - outperforming to end the week down only 0.8%.
De-risking/deleveraging gained momentum this week – at home and abroad.
Major equities indices were down 3.9% this week in South Korea, 3.9% in China, 5.1% in Hong Kong, and 3.5% in Taiwan.
Over the past six sessions, stocks were down 7.6% in South Korea, 5.3% in Taiwan, and 6.8% in Hong Kong.
Japan’s Nikkei 225 Index sank 5.2% in six sessions, with Australian stocks down 3.8%.
In six sessions, Germany’s DAX Index dropped 4.0%, Italy’s MIB 4.7%, Spain’s IBEX35 4.6%, and France’s CAC40 3.0%.
From November 13th record highs, Europe’s STOXX 600 Bank Index dropped 5.6% in six sessions.
Italy’s bank index sank 6.2%. Financial stocks globally have come under notable pressure.
Hong Kong’s China H-Financials Index fell 5.7%, and the MSCI Asia Banks Index dropped 5.4% in six sessions.
And after trading to record highs on November 13th, the MSCI World Banks Index reversed 3.7% lower.
Over the past seven sessions, the NYSE Broker/Dealer Index dropped 8.1%.
Over this period, Goldman Sachs sank 7.7% and Morgan Stanley dropped 6.9%.
Robinhood sank 19.3%, Interactive Brokers 16.0%, XP Inc. 9.6%, LPL Financial 8.7%, Raymond James 7.8%, Charles Schwab 7.4%, BGC 7.0%, StoneX Group 7.0%, and Stifel Financial 6.4%.
As for the major banks, JPMorgan dropped 7.0% in seven sessions, State Street 5.6%, Bank of New York Mellon 5.5%, Bank of America 4.7%, and Citigroup 4.1%.
Capital One fell 6.4%, and Klarna sank 22.8%.
Markets, especially the major financial stocks globally, have begun to respond to dramatically altered liquidity prospects.
Marketplace liquidity is mercurial, especially late in the cycle.
Market blowoffs fueled by speculative leverage guarantee acute liquidity instability.
On the upside, self-reinforcing speculation and leveraging propagate liquidity overabundance and the perception of endless liquidity.
But speculative melt-ups set the stage for sharp reversals, de-risking, and deleveraging.
The liquidity backdrop (and perceptions of prospective liquidity) turns increasingly prone to abrupt shifts.
Liquidity over-abundance can quickly transition to waning liquidity.
And once market perceptions begin to adjust to a deteriorating liquidity backdrop, the marketplace turns acutely vulnerable to the forces of heightened risk aversion, deleveraging, illiquidity, and market dislocation.
This process has begun.
From their September 12th highs (15.99 and 14.99), the stocks of Fannie Mae and Freddie Mac have both dropped 47%.
From its October 6th high to Friday’s intraday low (80,554), bitcoin has collapsed 36%.
Bitcoin slumped 10.4% this week.
November 21 – Bloomberg (David Pan):
“Bitcoin is crashing into dangerous territory — and options-fueled selling is adding to the volatility.
The largest cryptocurrency dropped as much as 7.6% on Friday to $80,553, deepening a selloff that’s erased nearly 25% of its value this month.
November is now shaping up to be Bitcoin’s worst month since the 2022 collapse of Terra and FTX — a stretch that triggered a cascade of corporate failures across the industry.”
November 21 – Bloomberg (By Jim Silver):
“Bill Ackman says ‘forced liquidations and margin calls in crypto’ are leading to selling of Fannie Mae and Freddie Mac shares.
‘I underestimated how much exposure Fannie and Freddie (‘F2’) have to crypto, not on balance sheet, but in their shareholder bases,’ Ackman says…
‘We don’t own bitcoin, but clearly in the short term, we own a stock market proxy for bitcoin’.”
The hedge fund community is the dominant player in a crowded market for Fannie and Freddie shares.
I’ll take Ackman’s comment as confirmation that hedge funds have accumulated significant exposures to bitcoin and crypto currencies.
De-risking/deleveraging gained important momentum this week.
Mounting crypto losses are spurring liquidations from Fannie and Freddie shares to technology and AI stocks to risk assets more generally – and globally.
There is, however, more to this story than simply hedge funds selling Fannie and Freddie shares after suffering crypto losses.
Ackman’s Pershing Square Capital reportedly holds a combined 215 million Fannie and Freddie shares.
Ackman and others believed they were poised to make billions from the administration’s privatization of these two GSEs, which have been in federal receivership since the Great Financial Crisis.
A big score on Fannie and Freddie shares would work wonders for Ackman’s 2026 Pershing Square IPO plans.
November 18 – Bloomberg (Katherine Burton):
“Billionaire Bill Ackman said now isn’t the right time for the Treasury to sell its shares of the government-sponsored mortgage giants known as Fannie Mae and Freddie Mac.
The Pershing Square Capital Management founder held a presentation on X Tuesday that said it ‘will take significant time’ for the government to ‘deliberately execute’ an initial public offering of its shares of Federal National Mortgage Association and Federal Home Loan Mortgage Corp…
Ackman said there are a few steps that should be taken before the government sells its shares because it will take some time to get buy-in from market participants…”
Like AI and crypto Bubbles, a backdrop of market exuberance and liquidity abundance had Fannie and Freddie bonanza imaginations running wild.
The administration is keen to inflate the market values of these institutions, while rewarding the President’s hedge fund supporters.
Now, a lot of hopes and dreams have begun to fade.
Instead of hedge funds capitalizing on privatization, the leveraged speculating community will now look to the GSE’s for crucial market liquidity support.
The good news for the hedge funds is that in receivership, the explicit Treasury guarantee ensures critical crisis-period GSE debt market access.
When the administration beckons, the GSEs will surely aggressively expand their balance sheets (purchase MBS and provide other financing mechanisms) to accommodate hedge fund deleveraging.
The bad news is that as this scenario plays out, the odds of these institutions morphing into “private” enterprises collapse.
It’s unclear why Fannie and Freddie equities securities would hold significant value.
How much trouble the hedge funds are in at this point is an open issue.
We know the quant fund community was on their heels even before recent market weakness.
Crypto is a significant issue for many funds (Bloomberg: “Wild Ride on Wall Street as the Crypto Crash Spooks Risk Complex”).
With funds now scurrying, crowded (long vs. short) “pairs trades” have become a minefield (Friday: small caps up 2.8% vs. Semis up only 0.9%).
If the acutely vulnerable tech/AI trade falters here, a major deleveraging would be under way.
And a major deleveraging will place all sorts of (highly levered) trades in Harm’s Way, most notably the massive Treasury “basis trade” and “carry trades” globally.
The bottom line: Bubbles are faltering.
The financial world is changing, and the value of tens of Trillions of securities is overdue for reassessment and adjustment.
This will not go smoothly.
Oracle’s stock dropped another 10.8% this week, boosting losses from September 10th highs to over 40%.
The company’s CDS rose another 16 to 118 bps – up from 45 bps on September 10th.
Oracle’s stock is down 24% so far this month. In my “periphery to core” analytical framework, I place Oracle at the critical “periphery of the core”.
More at the “periphery,” CoreWeave’s 7.4% loss pushed November’s collapse to 46%.
CoreWeave’s 9% coupon 2031 bond, which traded at a yield of 7.97% on October 3rd, closed the week at a record 11.23%.
Contagion from the “periphery” is now rapidly gravitating to the “core.”
In April, fledgling deleveraging was reversed by a simple “pause” post on Truth Social.
After six months of crazy excess, markets became only more speculative, levered, and vulnerable.
The administration’s path for sustaining Bubble excess has turned much more challenging.
I’ll assume the ongoing crypto collapse has the inner circle on DEFCON1.
November 21 – Bloomberg (Mackenzie Hawkins and Jenny Leonard):
“US officials are having early discussions on whether to let Nvidia Corp. sell its H200 artificial intelligence chips to China, according to people familiar…, a contentious potential move that would mark a major win for the world’s most valuable company.
President Donald Trump’s team has held internal talks about H200 chip shipments to the Asian country in recent days, said the people, who requested anonymity to discuss a highly sensitive matter.
No final decision has been made…”
TACO has been everywhere on the menu of late.
And, of course, there remains a formidable “Trump put.”
But it’s borderline shocking how significantly the Credit backdrop has deteriorated since April.
And it is this extraordinary divergence between six months of wild speculative excess and a rapidly deteriorating Credit backdrop that calls “Trump put” efficacy into question.
So important has been another half-year parabolic rise in systemic risk.
So much has changed in six months, including the President.
And if it comes down to Trump v. Credit Cycle, my bet’s with Credit.
“Wall Street finance” now faces an unfolding crisis of confidence – so-called “private markets” in particular.
Characteristics that were so advantageous in stoking “terminal phase excess” are turning disadvantageous.
November 14 – Financial Times (Toby Nangle):
“Private markets have been attracting increasing regulatory scrutiny, and for good reason.
It’s not just that the level of disclosures is less than what is required in public markets.
Or even that valuations of private market assets are more based on models rather than public pricing, robbing regulators of market signals that could inform their work.
It’s because private markets have become so big.
By value, global private assets under management came to just over $13tn in 2023, having more than doubled in size over the previous five years, according to… Preqin.
It estimated that this figure is on track to almost double again by 2030.”
November 17 – Bloomberg (Denitsa Tsekova, Tracy Alloway and Joe Weisenthal):
“In markets awash in ‘garbage lending’ and unhealthy valuations, Jeffrey Gundlach is keeping his strategy simple: load up on cash and stay away from private credit…
‘The health of the equity market in the United States, it’s among the least healthy in my entire career,” Gundlach said.
‘The market is incredibly speculative and speculative markets always go to insanely high levels.
It happens every time.
'The veteran debt investor is concerned the $1.7 trillion private credit market is engaging in ‘garbage lending’ that could tip global markets into their next meltdown…
‘The next big crisis in the financial markets is going to be private credit,’ he said.
‘It has the same trappings as subprime mortgage repackaging had back in 2006.’
That warning sets the stage for Gundlach’s broader critique of market excess, which stretches from risky loans to frothy tech stocks.
He sees the clearest signs of speculative behavior in bets on AI and data centers…
Gundlach drew parallels to the ‘inflated’ AAA ratings of subprime mortgages in the run-up to the financial crisis and warned that private managers may have an unrealistic assessment of the value of their loans.
‘There’s only two prices for private credit — 100 or zero… It looks like it’s safe because you could sell it any day, but it’s not safe because the price at which you sell will be gapping lower day after day after day’.”
November 19 – Financial Times (Antoine Gara):
“Blue Owl has called off a merger between two of its private credit funds after a Financial Times article outlined how the move risked inflicting steep losses on investors in one of the vehicles.
The planned merger came against a backdrop of rising scrutiny of the risks that retail investors have taken in pouring hundreds of billions of dollars into private debt funds carrying limited liquidity rights.
The private credit group with almost $300bn in assets told investors… it was abandoning a merger between its Blue Owl Capital Corporation II fund, one of the earliest private credit funds for individual investors, and its far larger publicly traded credit fund OBDC.
The announcement comes days after the FT reported how investors in Blue Owl Capital Corporation II were being asked to exchange their investments for holdings in OBDC at the stated net asset value of both funds.
However, OBDC trades at a 20% discount to its NAV on public markets…”
November 16 – Wall Street Journal (Matt Wirz and Peter Rudegeair):
“Not long ago, Blue Owl Capital was an upstart investment firm that lent money to midsize U.S. companies such as Sara Lee Frozen Bakery.
These days, the firm is financing massive data centers costing tens of billions of dollars for the likes of Meta and Oracle—a sign of just how quickly Wall Street has become the enabler of America’s artificial-intelligence boom.
Fund managers such as Blue Owl amassed trillions of dollars of investing firepower and have been hunting for big deals where they can put that money to work.
They found slim pickings for years until a perfect match appeared in AI, which has provided a bigger target than anything in history due to the vast sums tech companies need to ramp up computing power.
‘We’re talking about numbers that are so large, even in the low cases,’ said Blue Owl co-founder Marc Lipschultz.
‘Does it even matter if you keep counting after you get to $1 trillion of capital expenditure in the next couple of years?’”
November 19 – Bloomberg (Rachel Graf and Aaron Weinman):
“A portfolio of private credit loans managed by BlackRock Inc. has performed so poorly that the money manager has waived some management fees – a rarity in the credit world.
The asset manager funded the loans by selling bonds known as collateralized loan obligations, which means the portfolio has to perform well enough to regularly pass a series of tests.
Failing to clear those hurdles can spur BlackRock to take steps to right the ship, through, for example, automatically diverting interest income away from riskier tranches and toward safer securities.
In October, the portfolio value declined enough to breach an over-collateralization test, which means the value of the vehicle’s loans was too low compared to the highest-rated bonds.”
November 19 – Financial Times (Toby Nangle):
“Close to 37% of North American life insurance investments are allocated to private credit.
But private credit encompasses a world of different types of lending — from private placements and commercial real estate lending to asset-based finance and fund finance — in which they have long-standing expertise.
Sure, insurers have been upping their exposures for reasons.
But has this impeded their liquidity?
Getting a sense of how liquidity of the stack is evolving is hard.
But Manoj Jethani, Alexander Naumann and team at Moody’s thinks they have some answers.
Tl;dr: not brilliantly.
The vast majority of the North American US life insurers’ $3.8tn fixed income portfolio carry ratings and are classified as either Level 1 or Level 2 assets — meaning you can either look up their prices on Bloomberg, or work them out pretty easily using a bunch of observable prices.
But Level 3 assets?
Their valuations are based on unobservable inputs.
And around a fifth of US life insurer fixed-income assets are valued on this basis.”
November 20 – Bloomberg (Alexandre Rajbhandari):
“No one worries about the insurance industry quite like Tom Gober.
From his home office outside of Pittsburgh, the forensic accountant has been tracking, documenting and highlighting the weaknesses of the $9.3 trillion sector responsible for the financial well-being of millions of Americans.
‘I’ve been seeing warning signs for years, and I’ve been very vocal about it,’ Gober, 66, said…
More recently, he’s been paying attention to what he says is the most troubling development yet: The influx of private equity’s billions.
The industry waves off its critics as needlessly alarmist, always predicting a disaster that never comes.
But that mid-October afternoon, Gober’s phone began to light up.
Josh Wander, the co-founder of 777 Partners, a private equity firm on Gober’s radar, had been charged with cheating investors and lenders out of almost $500 million — an alleged fraud enabled in part by its opaque and intricate ties with some US insurance companies.
For Gober, the possible misbehavior at a small shop is just a symptom.”
This week’s Federal Reserve Bank of Cleveland Financial Stability Conference (“Financial Stability in a Time of Rapid Economic and Technological Change”) was a timely affair.
From Cleveland Fed President Beth Hammack:
“The Fed has a strong interest in financial stability, and not only because promoting it is one of our core functions.
Financial stability supports our other objectives: fostering a safe and sound banking system, an efficient payments system, community development, and our monetary policy objectives of maximum employment and stable prices.”
“It’s typically at the end of a credit cycle that the riskiest lending is revealed.
And as it’s been a long time since we’ve had a full credit cycle, we need to be mindful not to be complacent.
Lack of transparency is another issue.
Private credit and loans to private firms usually offer less in the way of public financial information compared with bank loans, bond markets, and broadly syndicated loans.
Furthermore, private credit loans often include features like payment in kind that can enable riskier lending to less profitable companies.”
Extracts from Governor Lisa Cook’s notably astute presentation, “A Policymaker’s View of Financial Stability.”
“Let’s begin by putting financial-system vulnerabilities into context.
The Federal Reserve promotes financial stability in order to support the achievement of its dual mandate of promoting maximum employment and price stability.
That is, achieving maximum employment and price stability depends on a stable financial system.
We know from history, whether from the distant past—the Great Depression—or from the recent past—the Great Financial Crisis or the Great Recession—that financial crises typically lead to large job losses and high unemployment.”
“Currently, my impression is that there is an increased likelihood of outsized asset price declines…
Another potential vulnerability worth watching is the growth of private credit.
Fed staff estimate that, over the past five years, private credit has roughly doubled.
Whenever we observe such rapid growth in credit over such a short period of time, it draws our attention.”
“We have also seen more complex intermediation chains involving more leveraged players, such as banks and insurance companies, emerge in recent years.
Some private firms may also have multiple sources of funding.
The increased complexity and the interconnections with leveraged financial entities create more channels through which unexpected losses in private credit could spread to the broader financial system.”
“Another vulnerability I am following carefully is the footprint of hedge funds in the U.S. Treasury market.
This footprint has grown substantially over the past few years and recently just exceeded its previous, pre-pandemic peak.
My focus relates to the potential for transmitting stress to the U.S. Treasury market, which is critical to the functioning of our financial system…
Hedge funds’ holdings of Treasury cash securities—that is, Treasury bills, notes, and bonds—have increased from representing about 4.6% of total Treasury securities outstanding in the first quarter of 2021 to representing 10.3% in the first quarter of this year, just above its pre-pandemic peak of 9.4%.”
“All of these features of relative value strategies can make Treasury market liquidity conditions—and, in the extreme, market functioning—more vulnerable to stress.”
Bloomberg Television’s Jonathan Ferro (Nov. 21, 2025)
“Forgive me for coming out with the hawkish hits, but we’ve got another one in the past 24 hours, and it came from (Cleveland Fed President) Beth Hammack: ‘Lowering interest rates to support the labor market risks prolonging this period of elevated inflation and it could also encourage risk-taking in financial markets.'
Can we finish on that last point: ‘Risk taking in financial markets.
How excessive is it and should it be on the radar of the FOMC?”
Fed governor Stephen Miran:
“First of all, as I said before, the excessive inflation is a quirk of the statistical process, and it is a mistake to ask people to lose their jobs as a result of a quirk of a statistical process.
On financial markets, I think lots of things affect financial markets.
Tax policy does, regulation does, technology like artificial intelligence does.
It’s a mistake to conflate the status of financial market with the status of monetary policy, right.
Even when you look at a financial market as deeply connected to monetary policy like interest rates, we’ve lived through periods of conundrums, right, where passing through of the Fed funds rate to longer-term interest rates was confusing to people.
So, it’s just a mistake to do a one-for-one mapping of these things.
I think when you look at financial conditions, the financial condition that matters most for the real economy has been and remains housing, right.
And this is an area where financial conditions are not loose.
This is an area where financial conditions are still quite tight.
Going out getting a mortgage is not a financial condition that I would consider to be excessively easy.
And, so, I think it’s a mistake.
I think it’s also a mistake, as I said before, to ask people to experience job losses because you think the stock market is too high.
I don’t know what the right level for the stock market is.
And I think that it’s a very challenging question to be able to answer credibly, and to say that we need to create job losses in order to sort of restore the stock market to some level we think is more reflective of fair value is just not a policy view that I hold.”
Bloomberg’s Lisa Abramowicz:
“A lot of people have come on this show and said that right now the Fed is stuck between the conundrum of the k-shaped economy, where you have people at the upper-end doing just fine and supporting consumption, and the people on the lower end who are experiencing a lack of wage gains – and they are experiencing those job losses more significantly.
How concerned are you of your dual roles of how to prop up and prevent some of those job losses from really escalating, while at the same time potentially cutting rates would exacerbate that k-shape and only exacerbate what you’re seeing with respect to the wealth divide?”
Miran:
“So, Congress didn’t task us with addressing all social problems in the world, with inequality one of them.
They tasked us with tackling aggregate maximum employment and stable prices.
And, so, therefore, the right policy to take is to stabilize employment and prices.
That’s the policy I support.”
If you’re a Fed official these days, you either believe safeguarding financial stability is an overarching responsibility (supporting the dual mandate), or you don’t.
Stephen Miran clearly doesn’t.
He’s an analytical lightweight and disingenuous.
Mortgage Credit, that’s fighting the last war.
Beth Hammack and Lisa Cook have it right.
In his financial stability presentation, Fed vice chair Philip Jefferson was also spot on:
“A stable and resilient financial system is, of course, critical to achieve that dual mandate.”
Most unfortunately, the Fed for way too long created and accommodated excessively loose financial conditions.
Central bankers here and abroad have never appreciated that there is no cure for bubbles, other than to not allow them to inflate.
A policy focus on serial Bubble reflation has courted disaster.
In so many ways, decades of inflationism are coming home to roost.
November 21 – Wall Street Journal (Rachel Louise Ensign and Rachel Wolfe):
“America’s middle class is weary.
After nearly five years of high prices, many middle-class earners thought life would be more affordable by now.
Costs for goods and services are 25% above where they were in 2020.
Even though the inflation rate is below its recent 2022 high, certain essentials like coffee, ground beef and car repairs are up markedly this year.
‘Life felt more doable a year and a half ago,’ said Holly Frew, a college communications director… ‘I need to know where the light is at the end of the tunnel’.”
“The Middle Class Is Buckling Under Almost Five Years of Persistent Inflation” is the headline for the above article.
The “upper class” is exposed to inflation and bursting Bubbles, though the wealthy generally have the resources to weather the storm.
The “lower class,” for the most part, doesn’t have much in the way of assets to lose.
This leaves the vast “middle class”, the bedrock of social cohesion and stability, perilously exposed to market losses and deflating asset prices.
And to witness society’s dissatisfaction, angst and insecurity at record stock prices and peak Bubble excess portends one destabilizing down-cycle.
An astounding U-turn on “the files.”
“Quiet, quiet piggy.”
“You’re a terrible person and a terrible reporter.”
“Marjorie Traitor Greene.”
Elon now MTG.
In impatient President, unwilling to maximize pressure on Putin, forcing a 28-point capitulation plan upon a tormented Ukraine.
“SEDITIOUS BEHAVIOR, punishable by DEATH!”
“I met with a man who’s a very rational person.
I met with a man who… really wants to see New York be great again.
I’ll really be cheering for him.”
Enough to have your head spinning.
Leaves one pondering the greater source of volatility, the markets or our President.
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