A Squeeze, a Gambit, and a Z.1
Doug Nolan
A well-timed short squeeze significantly mitigated Q1 market declines.
The S&P500 rallied 2.9% during the quarter’s final trading session, reducing Q1 losses to 4.6%.
The Goldman Sachs Most Short Index surged 7.1% (ending the quarter up 6.4%).
From Monday’s lows to Tuesday’s quarter end, the Nasdaq100 rallied 4.0% to close Q1 down 6.0%.
The MAG7 index rallied 5.0% from Monday’s lows to end the quarter with a 12.0% loss.
The KBW Bank Index recovered 4.0% to end Q1 down 6.0%.
There was notable quarter-end hedge fund performance “window dressing.”
March 31 – Barron’s (Shaina Mishkin):
“Fannie Mae and Freddie Mac stock on Monday notched their largest one-day increases in over a decade after traders took investor Bill Ackman’s advice.
Ackman, founder of the hedge fund Pershing Square Capital Management, said… that ‘some of the highest quality businesses in the world are trading at extremely cheap prices.’
‘And Fannie and Freddie are stupidly cheap.
Asymmetry at its best’… ‘They could be a 10X and it could happen soon.’
The stocks took off on Monday: Fannie Mae closed 51% higher, logging its largest one-day gain since August 2009… Freddie Mac gained 47%, its largest gain since March 2013.”
April 2 – Bloomberg (Nishant Kumar, Bei Hu, and David Ramli):
“Some of the world’s biggest hedge funds known for delivering steady returns lost money in March as the war in the Middle East roiled markets across energy, bonds and equities and forced traders to unwind crowded positions.
Multistrategy hedge funds ranging from ExodusPoint Capital Management to Balyasny Asset Management, Citadel and Millennium Management posted declines, giving up all or part of their gains from the prior two months…
Earlier in March, JPMorgan… strategists said hedge funds experienced their biggest drawdown since the Liberation Day tariff turmoil…”
CDS prices reversed sharply lower Tuesday, with high yield CDS sinking 21 to 385 bps (ended week at 377 bps).
“Squeeze” dynamics…
April 1 – Bloomberg (Tasos Vossos and Caleb Mutua):
“Investors looking to protect themselves against corporate defaults are helping drive record trading volumes in credit derivatives…
Trading volumes for the most active derivatives that protect bundles of high-grade and junk-rated bonds in the US and Europe surged to almost $4.5 trillion in the first quarter of the year, according to DTCC data going back to 2013...
That’s 36% higher than the previous record set by credit default swap indexes when US President Donald Trump unleashed trade tariffs in April last year…
The sharp gyrations in the indexes underscore the extent of the volatility in trading.
‘Every market participant is forced to hedge against two mutually exclusive scenarios simultaneously: a full-scale war and a diplomatic breakthrough,’ said Elena Nefedova, head of the investment office at Astero Falcon.”
It's worth noting that it was Monday’s global bond market rally that set the stage for squeeze day.
Tuesday morning’s WSJ article, “Trump Tells Aides He’s Willing to End War Without Reopening Hormuz,” really juiced quarter-end trading.
Primed for more positive war news from the President’s Wednesday evening address to the nation, traders were instead blindsided by the prospect of major escalation.
April 1 – Axios (Dave Lawler and Marc Caputo):
“President Trump said in a prime time address that the U.S. was close to ending its war in Iran but would spend the next two to three weeks bombing the country ‘back to the stone ages.’
If a deal to end the war cannot be reached, he said, the U.S. would bomb all of Iran’s power plants and perhaps its oil fields.
That would have devastating consequences for Tehran’s civilian population and the future of the country, while likely inciting retaliation on America’s allies in the region…
‘The Iranian military leadership has lost so much but they’re not feeling the pain and there's a discussion about testing their pain tolerance,’ said one confidant…
The massive bombing campaign to come was an indication of the Trump administration’s plan to strike a ‘final blow’ to close out the bombing campaign that began Feb. 28.”
While equities posted solid gains for the week, oil (WTI up 11.9%!) markets were much more circumspect.
Circumspect was prescient.
Tuesday’s war optimism was by Friday troubling war escalation, with two downed U.S. aircraft and a missing crew member.
CNN: “US Intelligence Assesses Iran Maintains Significant Missile Launching Capability, Sources Say.”
NYT: “Iran Is Quickly Repairing Missile Bunkers, U.S. Intelligence Says.”
WP: “An Emboldened Iran is Driving a Hard Bargain.”
It seems almost at the point where a miracle would be required to end this war in Trump’s two-to-three-week timeframe.
The President’s high-risk “escalate-to-deescalate” gambit has global markets and economies hanging in the balance.
Let’s knock out analysis of the Fed’s Q4 2025 Z.1 “flow of funds” report.
Non-Financial Debt (NFD) expanded $3.987 TN during 2025, greater than all years excluding pandemic stimulus periods 2020 and 2021.
Prior to 2020’s $6.862 TN debt monstrosity, 2007 held the record for annual NFD growth at $2.527 TN.
Last year’s debt growth significantly exceeded 2024’s $3.501 TN.
For further perspective, annual NFD growth averaged $1.874 TN for the decade 2010 through 2019.
In the 15 years since the 2008 crisis, NFD has more than doubled (107%) to $80.719 TN, or 262% of GDP.
This compares to 233% in 2007 and 192% to end the nineties.
At $1.930 TN, the increase in Treasury Securities accounted for almost half of 2025’s NFD growth – surpassed only in 2023 ($2.382 TN) and 2020 ($4.317 TN).
Since the end of 2007, Treasury Securities have inflated an astonishing $25.576 TN, or 569%, to a record $36.054 TN.
In one of history’s greatest Credit inflations, Treasury Securities as a percentage of GDP surged from 31% to 98%.
Including the Agencies’ $12.843 TN, total Treasury/GSE debt has ballooned to a record 119% of GDP.
For Q4 2025, NFD expanded a seasonally adjusted and annualized rate (SAAR) of $3.915 TN, up significantly from Q4 2024’s $3.218 TN.
Combined with Q3’s blistering SAAR $6.875 TN, it was the strongest six months of NFD expansion since the pandemic.
Indicative of reckless Washington’s financial dominance, Federal Government debt expanded SAAR $2.682 TN during Q4.
This compares to Household debt’s SAAR $688 billion increase, Total Business’s $522 billion, and State & Local Governments’ SAAR $23 billion.
Curiously, Rest of World U.S. borrowings expanded SAAR $770 billion (second only to Q3 2021).
Bank Assets expanded nominal $379 billion during Q4, up from Q3’s $200 billion - and compared to Q4 2024’s $18 billion.
Loan assets surged $344 billion, up from Q3’s $165 billion and Q4 ‘24’s $192 billion – for the strongest loan growth since Q4 2022.
Mortgage Loans increased $63 billion (3.5% annualized), with Consumer Credit gaining $60 billion, the strongest quarter since Q4 ’22.
Business loans (“not elsewhere classified”) rose $220 billion – over the past four years second only to Q4 ’24.
Debt Securities holdings declined $33 billion to $6.413 TN, the first contraction in a year – led by the $42 billion fall in Corporate bonds (to a one-year low $906bn).
Treasury holdings increased $21 billion to a record $1.962 TN, with one-year growth of $239 billion, or 13.9%.
As the banking system lends aggressively, Wall Street ballooning is unrelenting.
Securities Broker/Dealer assets expanded another $147 billion, or 9.6% annualized, during Q4 – with one-year growth of $1.006 TN, or 19.1%.
This easily surpassed 2006’s previous record $839 billion expansion.
Broker/Dealer Loan assets surged $187 billion, or 25.5%, last year – second only to 2020’s $233 billion.
Debt Securities holdings jumped a record $270 billion in 2025 – having more than doubled (116%) in 13 quarters to $1.299 TN.
When it comes to Bubble Dynamics, few areas compare to Broker/Dealer “repo” activities (repurchase agreements/securities lending).
For 2025, Broker/Dealer “repo” assets expanded $300 billion, or 17.7%, to a record $1.990 TN - surpassing 2004’s previous record quarterly expansion ($279bn).
Broker/Dealer “repo” liabilities ballooned $492 billion, or 21.1%, to a record $2.828 TN – surpassing record 2023’s $484 billion and 2006’s $387 billion.
Over 13 quarters, “repo” liabilities ballooned $1.214 TN, or 75%.
In a separate Z.1 category, Other Financial Businesses (the old “Funding Corps”) – Wall Street “funding subsidiaries, custodial accounts for reinvested collateral of securities lending operations” – jumped $67 billion, or 19.4% annualized, during the quarter to a record $1.444 TN – with one-year growth of $259 billion, or 21.8% (second only to 2020’s $360 billion).
System (total) “repo” (“Federal Funds and Securities Repurchase Agreements”) assets expanded $1.064 TN, or 15%, last year to a record $8.168 TN – second only to 2021’s $1.354 TN rise. Repo assets gained $297 billion, or 15.1% annualized, during Q4.
Over 24 quarters, repo assets ballooned $3.355 TN, or 70%.
Money fund “repo” holdings jumped $222 billion, or 32% annualized, during the quarter, and $374 billion, 14.3%, y-o-y – to a record $2.994 TN (6-yr gain $1.752 TN, or 141%).
Interestingly, ROW “repo” holdings fell $130 billion during the quarter to $1.473 TN (up $136bn, or 10.2% in ’25).
Total Money Market Fund assets (MMFA) expanded $947 billion, or 13.1%, during 2025 to a record $8.190 TN (second to ‘23’s $1.134 TN).
For Q4, MMFA jumped $416 billion, or 21.4% annualized – with historic 12-quarter ballooning of $2.967 TN, or 56.8%. MMFA Treasury holdings surged $285 billion during the quarter to a record $2.454 TN.
Total Debt Securities inflated $3.250 TN in 2025 to a record $65.151 TN, while Equities Securities inflated $17.533 TN to a record $111.355 TN.
This pushed the inflation of Total Securities to an annual record $20.783 TN.
Total Securities ballooned an unprecedented $55.293 TN, or 46%, over three historic Bubble years.
For the quarter, Debt Securities increased another $628 billion and Total Equities $3.143 TN.
Total Equities ended 2025 at a record 362% of GDP, up from previous annual peaks 182% (’07) and 207% (’99).
At an unmatched 574%, Total Securities-to-GDP compares to previous cycle peaks 375% (’07) and 358% (’99).
ETFs inflated another $3.068 TN, or 29.8%, last year to a record $13.373 TN.
Domestic Equities jumped $1.724 TN, or 25%, to $8.611 TN, with Taxable Bond ETFs rising $433 billion, or 26.7%, to $2.053 TN.
The Household balance sheet remains a fundamental Bubble manifestation and analytical focal point.
Household Assets inflated $15.149 TN during 2025 to a record $205.613 TN.
And with Liabilities increasing $662 billion (to $21.508 TN), Household Net Worth surged another $14.486 TN to a record $184.106 TN.
Household Net Worth ended 2007 at a then record $68.272 TN.
At 598% of GDP, Net Worth-to-GDP ended the year at a record (excluding pandemic 2020/2021).
This compares to peak cycle years 2007 (483%) and 1999 (449%).
Explaining consumer spending resilience, Net Worth added another $2.173 TN during Q4.
Net Worth inflated an unprecedented $40.358 TN, or 28%, over three years.
For perspective, Net Worth expanded $24.0 TN over five mortgage finance Bubble years (2003 through 2007).
Household holdings of Financial Assets inflated $13.485 TN, or 10.3%, during 2025 to a record $143.866 TN – with three-year growth of $34.992 TN, or 32.1%.
Household Financial Asset holdings ended the year at a (non-pandemic period) record 458% of GDP, up from cycle peaks 372% (Q3 ’07) and 353% (Q1 2000).
Equities holdings rose another $8.131 TN last year to a record $47.186 TN, and Mutual Funds added $1.352 TN to a record $13.680 TN.
Equities/Mutual Funds ended the year at a record 194% of GDP, up from cycle peaks 105% (Q3 ’07) and 116% (Q1 2000).
Real Estate holdings added $1.052 TN for the year to $52.067 TN.
For 2025, Household Total Deposits expanded $705 billion to a record $15.144 TN, while Money Fund holdings rose $611 billion to a record $5.321 TN.
Treasury holdings gained $318 billion to a record $2.945 TN.
Over three historic years of monetary inflation, Treasury holdings inflated $1.286 TN (77.5%), Total Deposits $280 billion (2%), and Money Market Funds $2.224 TN (71.8%).
Also Bubble integral, Rest of World (ROW) holdings of U.S. financial assets inflated an annual record $8.388 TN (surpassing ‘24’s record $7.571 TN), or 14.7%, to an unprecedented $65.473 TN.
Over nine quarters, ROW holdings inflated $19.787 TN, or 43.3%.
Over this period, Total Equities surged $8.373 TN, or 69%, to $22.177 TN.
Total Equities ended 2019 at $9.178 TN.
In one of the more incredible data points, ROW U.S. holdings inflated $49.965 TN, or 322%, since 2008.
It’s worth noting that ROW “repo” liabilities jumped $324 billion, or 19.9%, last year to $1.953 TN – with nine quarter growth of $480 billion, or 33%.
In short, it was another quarter of Federal Reserve data that further corroborated the Bubble thesis.
I expect major deviations in Z.1 data over the coming quarters.
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