Party Like It's 1999, 1996 and 2007
Doug Nolan
We’ve gone and really done it this time.
Down somewhat from Wednesday’s high, the rates market still ended the week pricing 95% probability of a 25 bps Fed rate hike in the next 11 months (57% by year end).
If a rate cut – or even talk of higher rates - coincides with a problematic market downturn, disregard those who will be quick to blame for rate policy.
I’m reminded of the debate surrounding Federal Reserve rate policy leading up to the 1929 stock market crash.
Some argued that a misguided Fed, fixated on stock market speculation, had remained excessively tight despite mounting economic vulnerability.
More rigorous analysis would recognize that historic late-cycle Credit, speculative and economic “Roaring Twenties” excesses perpetuated precariously loose financial conditions.
Like nowadays, responsibility for the inevitable bubble bursting lies with protracted loose money accommodation throughout the boom.
May 27 – Financial Times (George Steer and Michael Acton):
“Semiconductor stocks have made their best start to a year since the dotcom bubble at the turn of the millennium…
A roughly 75% gain since the start of the year has left the Philadelphia Semiconductor Index, which tracks 30 of the world’s biggest US-listed chip manufacturers, on track for its largest annual return since 1999…
The index has gained more than $5tn in market value over the past two months — about 1.5 times the value of the UK’s flagship FTSE 100 index — on the back of increasingly optimistic bets on chip manufacturers’ future earnings.”
When the definitive history of this period is written, the impact of the Fed’s 175 bps of rate reduction, which commenced on September 18, 2024, cannot be overstated.
The Federal Reserve slashed rates despite excessively loose financial conditions and ongoing rapid system Credit growth.
The Fed moved to bolster monetary stimulus despite sticky inflation, which had remained above target for going on four years.
They significantly loosened monetary policy in the face of historic speculative leverage; rampant stock market speculation; booming high-risk lending markets (i.e., private Credit and leveraged lending); out of control federal deficit spending; and a rapidly intensifying AI mania/arms race.
Since that fateful September 18, 2024, the S&P500 has returned 37.7%, with the small cap Russell 2000 returning 35.4%.
But, of course, the semiconductor and technology sectors have been the epicenter of historic Bubble excess.
Since the Fed began cutting, the Nasdaq100 has returned 58.7% and the MAG7 Index 64.4%.
The Semiconductors (SOX Index) jumped another 5.1% this week, boosting y-t-d (5-months) gains to 81%.
It has been an unbelievable run, one that rally caught fire after the Fed began to slash rates.
Since September 18, 2024, the SOX has returned an incredible 168%.
Micron’s 27.4% gain this week boosted gains since 9/18/24 to over 1,000%.
A few other notable post-easing gains include Intel (452%), Lam Research (327%), AMD (248%), and Broadcom 181%.
Dell’s 42.6% gain this week inflated post-easing gains to 274%, as Palantir’s 13.9% advance boosted post-easing returns to 138%.
It’s worth noting that Ford’s remarkable 45% 12-day surge has inflated post-easing returns to 77% (Ford Energy!).
Carvana’s stock is up 126% since 9/18/24.
The Fed had company in loosening monetary policy into notably loose global financial conditions.
Since 9/18/24, South Korea’s benchmark KOSPI Index has inflated 240%, Taiwan’s TAIEX 113%, and Japan’s Nikkei 225 89%.
This week’s 8.0% KOSPI’s surge pushed y-t-d gains to 101%.
The major averages in Japan and Taiwan rose 4.7% and 5.8% this week, boosting 2026 gains to 31.8% and 54.5%.
More big advances this week inflated post-easing gains to 1,500% for Samsung Electronics, 1,300% for South Korea’s SK Hynix, and 150% for Taiwan Semiconductor.
It's worth noting that major equities indices were down this week in China, India, Indonesia, Malaysia, Philippines, Vietnam, Turkey, and Brazil.
Bitcoin dropped $2,000, or 2.7%, to 73,400.
Has the AI mania begun to suck oxygen out of the room?
May 24 – Bloomberg (Abhishek Vishnoi):
“The AI boom is giving momentum investors their best return in decades, as the world’s hottest stocks power ahead despite worries over potentially slower growth due to the Iran war.
MSCI Inc.’s global momentum gauge has beaten the MSCI All Country World Index by 17 percentage points since the end of March, on track for its strongest two-month outperformance on record, in data… back to 1991.”
May 27 – Reuters (Jihoon Lee, Yena Park and Heekyong Yang):
“SK Hynix topped $1 trillion in market value for the first time on Wednesday, joining its memory chip rivals Samsung Electronics and Micron Technology in reaching the milestone on an AI-driven rally.
Shares of SK Hynix closed the session up 9.3%... to take the South Korean chipmaker’s market value to a record 1,680 trillion won ($1.12 trillion) and propel the country’s benchmark KOSPI index to a record high.”
May 27 – Bloomberg (Jiyeun Lee):
“The breathtaking rally in South Korean stocks took gains for 2026 to 100%, eclipsing even the historic run-ups seen before the dotcom bubble burst and during the nation’s industrial boom in the late 1980s.
Supercharged by advances in memory makers SK Hynix Inc. and Samsung Electronics Co., the benchmark Kospi has shattered record after record — racing from 5,000 to 8,000 in a matter of months.
The gauge jumped as much as 5.1% on Wednesday.
Less than halfway through the year, the Kospi’s performance now rivals the Nasdaq 100 Index’s 102% surge in 1999 — right before the bubble burst.”
May 27 – Wall Street Journal (Jared Mitovich and Robbie Whelan):
“The frenzied rally in chip stocks passed a new milestone on Wednesday, with the PHLX Semiconductor Index posting its best start to a year on record. Even by the standards of the artificial-intelligence boom, the gains have been extraordinary.
Sandisk has soared 570% this year.
Intel has more than tripled.
Samsung, Micron and SK Hynix have all climbed into the ranks of $1 trillion companies.
And Advanced Micro Devices now has a higher valuation than JPMorgan...
The semiconductor index has climbed 82% so far in 2026, its best-ever performance over a year’s first 100 trading days.”
Understandably, comparisons of the current backdrop to 1999 have begun to proliferate.
The intensity of the AI mania has surpassed even the “dot.com” Bubble period.
Yet the bullish narrative scoffs at 1999 parallels, arguing that earnings and valuations are much more supportive these days.
May 27 – Bloomberg (Jonathan Ferro, Lisa Abramowicz and Annmarie Hordern):
“Veteran market strategist Ed Yardeni of Yardeni Research dismissed concerns that US stocks are in a bubble, arguing the rally is driven by ‘fabulous earnings momentum’ rather than speculation.
‘The big difference is earnings,’ Yardeni said…, adding that the forward price-to-earnings ratio for the S&P 500, at 20 to 22, looks reasonable if the economy avoids recession over the next few years.
He coined the term ‘FEMO’ — fabulous earnings momentum — to distinguish the current rally from ‘FOMO,’ or fear of missing out, which he said is based on hope and hype rather than fundamentals.”
“FEMO” notwithstanding, today’s “FOMO” exceeds even 1999 Bubble intensity.
There are today similarities to 1999, as well as important differences.
Arms race dynamics also dominated the late-nineties Bubble period, with massive industry spending driving industry earnings, along with what were perceived as “new paradigm” economy-wide productivity gains (that summarily dissolved with the bursting Bubble).
But today’s “hyperscaler” dynamics are unique.
Extraordinarily protracted innovation and monetary inflation boom cycles generated miraculous cash-flows and cash hoards.
The tech oligarchy can these days literally marshal their unprecedented cash positions and borrowing capacities to finance Trillions of expenditures, arms race spending that inflates industry and system earnings.
Today’s earnings are indeed “fabulous”; they are also symptomatic of historic late-cycle Bubble excess.
There are other important differences to 1999.
Having fully and exuberantly adopted online trading, options, and ETFs, retail investors are exposed to today’s mania like never before.
Also notable, the federal government actually ran a surplus of $123 billion in (fiscal) 1999 (following ‘98's $69bn surplus).
This year’s deficit could exceed $2.0 Trillion, up from last year’s $1.8 TN.
Massive federal spending has become integral to sustaining inflated system incomes and earnings.
Analysts should be cautious with valuation analysis and earnings growth extrapolation, unless they believe $2 TN annual deficits are the sustainable new normal.
I remember 1999 all too well.
The Q4 ’98 LTCM bailout resuscitated aggressive leveraged speculation, while GSE balance sheet ballooning provided markets a powerful liquidity spigot.
GSE assets inflated an unprecedented $305 billion during crisis-year 1998, only to return the following year with another $317 billion.
As a key system liquidity intermediator, money market fund assets ballooned $293 billion, or 27.7%, in 1998, and another $261 billion, or 19.3%, in 1999.
Today’s leveraged speculation so dwarfs late-nineties excess.
At $500 billion in 1999, hedge fund assets were about 10% of today’s level.
System “repo” assets expanded $122 billion in 1999 to $1.76 TN.
Last year, “repo” assets ballooned $1.064 TN (15%) to an unprecedented $8.168 TN.
Moreover, leveraged speculation hadn’t yet taken the world by storm by 1999.
Today, the amount of global leveraged speculation has surely inflated to many tens of Trillions.
This is a serious and increasingly pressing issue.
May 28 – Bloomberg (Alice Atkins):
“Hedge funds now control more than half of the electronically traded gilts market, Tradeweb data show, a shift that could be making UK government debt more vulnerable to bursts of volatility.
Their share of trading volumes grew by about a third between 2021 and 2025, reaching 63%, according to Tradeweb…
The proportion handled by traditional asset managers like pension funds and insurers has dropped to 26% from 45% in the period, it said.”
May 28 – Bloomberg (Greg Ritchie):
“Banks may be providing generous leverage to hedge funds trading gilts due to competitive pressures, a senior Bank of England official said, a sign regulators intend to impose greater restrictions on the market.
The bulk of gilt repurchase agreement transactions — which allow investors including hedge funds to borrow against gilts and lever up trades — are conducted at so-called zero haircuts, said Sarah Breeden, the British central bank’s deputy governor for financial stability…
The BOE, which is considering ways to make the UK bond market more resilient, has floated imposing minimum haircuts to avoid this but has received widespread industry pushback.”
May 27 – Bloomberg (Greg Ritchie):
“The European Central Bank warned that the growing role of highly-leveraged trades in the region’s bond markets poses a risk to financial stability.
Hedge funds seeking to exploit small price differences between similar assets, such as bonds and equivalent futures contracts, typically rely on leverage ratios of around 25, according to the central bank’s twice-yearly Financial Stability Review.
While such ‘basis trades’ can support liquidity, they risk exacerbating market swings in times of stress, officials said.
‘Their leveraged positions may have to be unwound quickly if bond prices react sharply to geopolitical or risk sentiment shocks, for instance,’ the ECB said…
That could ‘erode the stable funding base of European governments’ by amplifying price movements and increasing volatility.”
The Kevin Warsh chairmanship raises many questions.
How long until he pushes the FOMC in the direction of lower rates?
Is he serious about reform?
With all the talk of a smaller Fed balance sheet, does he attempt to at least build a consensus to halt the current expansion?
How much has his independence been compromised?
Kevin Warsh has been working with hedge fund legend Stanley Druckenmiller for 15 years.
Warsh is as well-versed in the issue of massive hedge fund leverage as Treasury Secretary Scott Bessent.
The Bank of England and the European Central Bank were out again this week with hedge fund leverage warnings.
The ECB devoted particular attention to this issue in its May semiannual Financial Stability Report (“hedge funds” get 14 mentions, see below).
How might Chair Warsh handle this critical issue?
I view Scott Bessent as the hedge fund and market “whisperer.”
For Warsh, will it be hear, speak and see no evil?
In a sign of the times, the top two U.S. financial officials were recent hedge fund players.
They now oversee the most enormous amount of speculative leverage in history.
Knowing what he knows, does Warsh elevate hedge fund leveraging to a major concern, following the lead of the ECB and BOE?
Or has he signed on to the administration’s gambit of pushing finance, economic growth, and excess to the (late-cycle) limit?
We’re at such a critical juncture for the markets, finance, and myriad Bubbles.
Returning to the 1999 comparison, why not today extrapolate the boom for years to come?
After all, policymakers have proven time and again – over decades - that they have the tools to resolve crises and resuscitate Bubbles.
And Bessent and Warsh, more than most, know where the bodies are buried and have a plan.
There are today major problems with extrapolation.
For one, Treasury debt has literally expanded 10-fold since 1999.
The Fed’s balance sheet has inflated almost 10-fold.
Government finance is at the end of the rope.
There is no next source of massive Credit creation waiting to reflate system Credit when crisis of confidence dynamics unfold in Treasury debt and central bank Credit.
Moreover, it is a “global government finance Bubble” in every meaning of the phase.
From my perspective, I see ominous Bubble parallels to 1999.
But there are also global elements of 1996 “Asian Tiger” Bubble excess that ended in disaster in 1997.
Worse yet are the unnerving similarities to 2007 Bubbles in high-risk lending and speculative leverage, which erupted into the “great financial crisis”.
The late-nineties Bubble was relatively contained within the technology arena.
The mortgage finance Bubble was much more systemic and global in nature.
Today’s global government finance Bubble is uniquely systemic – at home and abroad, throughout finance, markets and economies.
Global bond markets rallied this week in anticipation of the end of the war and the opening of the Strait of Hormuz.
We can only hope… I doubt bonds are out of the woods.
For Posterity: Excerpts from the ECB’s Financial Stability Review, May 2026
“…The growing presence of more price-sensitive investors like hedge funds in euro area sovereign bond markets could amplify any abrupt repricing of sovereign risk.
This could also raise the risk of spillovers to the funding costs of corporates and banks.
A repricing of euro area sovereign risk could also be triggered by spillovers from global sovereign bond markets.
US Treasuries have served as safe-haven assets since the outbreak of the war in the Middle East.
Nonetheless, market concerns about US fiscal credibility as a result of persistently high fiscal deficits, expectations of higher debt service costs and high borrowing needs could lead to changing risk perceptions and a repricing of sovereign risk globally.”
“Inadequate liquidity buffers in times of heightened volatility and liquidity mismatch in open-ended investment funds, especially in corporate bond and private credit funds, could exacerbate market volatility in times of stress through procyclical selling.
Pockets of elevated financial and synthetic leverage in some entities, notably global hedge funds, may exacerbate the risk of financial contagion and expose liquidity vulnerabilities through margin calls when market volatility spikes.
Although hedge funds remain a comparatively small subsector of euro area investment funds, it is a segment with a high concentration of potential leverage-related risks.
Additionally, global hedge funds are highly active in European sovereign bond markets and could amplify price swings in times of sudden and substantial bond price movements.”
“Changes in the investor base are shaping dynamics in sovereign markets, with global hedge funds increasing their presence in euro area sovereign bond markets.
While supporting liquidity, their more price-sensitive and, in some cases, leveraged strategies may make market pricing more sensitive to changes in sentiment.
At the same time, high sovereign financing needs related, among other things, to defence spending, the green transition and potential fiscal measures to cushion households and firms from rising energy prices, are likely to add to pressures over the medium term.”
“Leverage and strong interlinkages with the broader financial system are major financial stability risks posed by global hedge funds, which continue to lever up.
In particular, the largest hedge funds maintain leverage ratios that are significantly above average.
Relative value strategy funds tend to engage in highly leveraged basis trades, including in European sovereign bond markets, and have leverage ratios of around 25.
Their leveraged positions may have to be unwound quickly if bond prices react sharply to geopolitical or risk sentiment shocks, for instance.
In this way, hedge funds’ procyclical deleveraging could exacerbate ongoing price moves and, through increased volatility in bond markets, erode the stable funding base of European governments.
Hedge funds domiciled in the euro area have also increased their financial leverage in the past few years, albeit with a slight decrease in the very recent past, but the level of their leverage remains below that of US hedge funds.
Risks may be compounded by synthetic leverage in the form of derivatives, which can quickly translate into liquidity stress once market adjustments trigger margin or collateral calls.”
“A key issue is how best to address risks from complex leveraged strategies – this is a concern in the euro area given the growing presence of hedge funds in sovereign bond markets.”
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