Disrupted
Doug Nolan
“Bubbles are mechanisms of wealth redistribution and destruction – with detrimental consequences for social and geopolitical stability.
Boom periods engender perceptions of an expanding global pie.
Cooperation, integration, and alliances are viewed as mutually beneficial.
But perceptions shift late in the cycle.
Many see the pie stagnant or shrinking.
A zero-sum game mentality dominates.
Insecurity, animosity, disintegration, fraught alliances, and conflict take hold.”
A whirlwind first month for the “Disruptor in Chief,” such a monumental late-cycle figure and phenomenon.
Campaign promises kept.
Red meat for the MAGA and “nation saved” half.
Affirmation for the “nation doomed” half.
Unprecedented executive orders of overwhelming scope and consequence.
Radical federal spending cuts and downsizing (enter photo of sunglass-donned Elon wielding his chainsaw at CPAC).
The post-WWII global trade architecture in a jumble.
WTO – along with traditional trade conventions and practices - on life support.
Relations with allies in disarray.
The future of key international institutions, including the UN, WHO, NATO, is murky at best.
A month in, the existing world order is increasingly in tatters.
The world now waits anxiously to see if two autocratic strongmen can fashion a plan acceptable to Zelenskyy, Ukraine, and Europe – or whether Putin refocuses his attention on Kiev and beyond.
Insecurity, animosity, disintegration, fraught alliances, and conflict.
Disruption at the brink of chaos.
Fortunately, he spends most of his time these days on school work and music instead of gaming.
But I was reminded this week of that ill feeling in my gut when I would see the vitriol and toxicity my son experienced playing video games.
How these kids communicate with each other can be shocking.
Anathema to traditional sportsmanship.
Bereft of even a modicum of civility and decency, the impulse is often to goad hostility and malice.
A microcosm of the degradation plaguing society and, increasingly, our international relations.
Words matter.
Civility and respect matter.
It sounds goofy and hopelessly out of touch, but I miss those “Choose Kindness” signs that used to be a fixture in our community.
And if (politically incorrect) kindness has become far too much to ask, it seems like we could at least strive for respectful.
Kind of civil, as the new ideal?
Clearly, it won’t be coming from the top.
This week’s posterity content:
“I think I have the power to end this war, and I think it’s going very well.
But today I heard, ‘Oh, well, we weren’t invited.’
Well, you’ve been there for three years.
You should have never started it.
You could have made a deal.”
- President Trump, February 18, 2025
“We’ve seen this disinformation, we understand it comes from Russia.
Unfortunately, President Trump — and we have great respect for him as a leader of people we also respect very much — he lives in this disinformation space.”
- Ukraine President Volodymyr Zelenskyy, February 19, 2025
“Think of it, a modestly successful comedian, Volodymyr Zelenskyy, talked the United States of America into spending $350 Billion Dollars, to go into a War that couldn’t be won, that never had to start, but a War that he, without the U.S. and ‘TRUMP,’ will never be able to settle.
The United States has spent $200 Billion Dollars more than Europe, and Europe’s money is guaranteed, while the United States will get nothing back.
Why didn’t Sleepy Joe Biden demand Equalization, in that this War is far more important to Europe than it is to us — We have a big, beautiful Ocean as separation.
On top of this, Zelenskyy admits that half of the money we sent him is ‘MISSING.’
He refuses to have Elections, is very low in Ukrainian Polls, and the only thing he was good at was playing Biden ‘like a fiddle.’
A Dictator without Elections, Zelenskyy better move fast or he is not going to have a Country left.
In the meantime, we are successfully negotiating an end to the War with Russia, something all admit only ‘TRUMP,’ and the Trump Administration, can do.
Biden never tried, Europe has failed to bring Peace, and Zelenskyy probably wants to keep the ‘gravy train’ going.
I love Ukraine, but Zelenskyy has done a terrible job, his Country is shattered, and MILLIONS have unnecessarily died – And so it continues…”
- President Trump, Truth Social, February 19, 2025.
“The idea that Zelenskyy is going to change the president’s mind by badmouthing him in public media… everyone who knows the President will tell you that is an atrocious way to deal with this administration.”
- vice president Vance, February 19, 2025
February 21 – Guardian (Miranda Bryant):
“Elon Musk has become embroiled in a heated row with a Danish astronaut who criticised the tech billionaire’s claim that the former US president Joe Biden abandoned two American astronauts at the International Space Station on purpose.
Andreas ‘Andy’ Mogensen accused Musk of lying when he claimed in a Fox News interview alongside Donald Trump that NASA’s Butch Wilmore and Suni Williams were left stranded for ‘political reasons’ by Biden.
‘What a lie.
And from someone who complains about lack of honesty from the mainstream media,’ the 48-year-old European Space Agency astronaut, who has flown to the ISS twice, wrote on X. In response, Musk called Mogensen ‘fully retarded’.”
Unleashed a decade ago with “fat”, “pig” and “degenerate” Rosie O’Donnell, and later evolving into vile attacks on all political adversaries, made an alarming escalation this week, with President Zelenskyy being targeted as a “dictator” that has bilked the U.S. after starting the war.
The “world order” was significantly disrupted this week.
By now, we Americans are all used to the antics, theatrics, and shameless threats.
I didn’t expect the emboldened “TRUMP” shtick to play well internationally – but never imagined how quickly it would go off the rails.
Governor Trudeau and our 51st state. Panama’s President Jose Raul Mulino protesting the U.S. spread of “lies and falsehoods.”
Gaza.
A Wednesday essay from the Carnegie Endowment for International Peace: “The Death of the World America Made.”
To be sure, the international view of U.S. global leadership has taken a dreadful turn for the worse.
February 19 – Politico (Nicholas Vinocur and Victor Goury-Laffont):
“Forget NATO.
Forget the EU.
A new coalition of nations is emerging to deal with the greatest security crisis to hit Europe in decades, as President Donald Trump on Wednesday squarely aligned U.S. interests with the Kremlin's by unleashing excoriating tirades against Ukrainian President Volodymyr Zelenskyy, whom he branded a ‘dictator.’
The new grouping is made up of all the countries that once saw themselves as indefectible allies of the United States, but are now questioning the very foundations of that relationship as Washington embraces Russia and ramps up its attacks against NATO allies.
On Wednesday, French President Emmanuel Macron held a meeting with the leaders of the group… about how to respond to the new Trump world order.
The group started taking shape this week in the wake of the Munich Security Conference…
By Wednesday, that initial group — composed of the leaders of France, the United Kingdom, Poland, Germany, Italy, Spain, the Netherlands and Denmark, plus the heads of NATO, the European Commission and Council — had more than doubled, widening to 19 nations including Canada.
Non-EU countries such as Norway and Iceland attended as well.”
For much of the world, certainly including our allies, the contrast of how President Trump has chosen to interface with the two war adversaries (Zelenskyy and Putin) has been too much to bear.
It raises questions.
The Telegraph’s Ambrose Evans-Pritchard:
“But nobody expected it to end this badly and this suddenly.
To watch an ally of 80 years turn on us with ferocity and blithely team up with our declared enemy really is the end of days.”
Ukraine War negotiations are not unfolding in a vacuum.
The administration’s combative trade policies seem to be coalescing around April 2nd.
The President announced major tariffs will be forthcoming on automobiles, semiconductors, and pharmaceuticals: “It’ll be 25% and higher, and it’ll go very substantially higher over a course of a year.”
Agency reports on the reciprocal tariff regime are due by April 1st.
It appears a less than hospitable backdrop for negotiating trade deals.
Tariffs have become integral to various negotiations, with Wall Street too complacent about the critical role they’ll play in budget talks and the passage of “one, big, beautiful bill.”
February 20 – Bloomberg (Maria Luiza Rabello):
“President Trump says ‘let’s give it a shot’ at balancing the budget.
‘Lots of money coming in from tariffs,’ he says in a post on Truth Social.
Lutnick Says Trump’s Goal Is to Abolish IRS, Let Outsiders Pay.”
Question from Thursday’s daily White House press briefing:
“So, Mr. Hassett, you were speaking about tariff revenue, and you also addressed a question about the IRS.
President Trump has spoken about replacing income tax with tariff revenue, especially with all this waste, fraud, and abuse that we're seeing cut.
Is that a possibility?"
Director of National Economic Council Kevin Hassett:
“Absolutely.
And in fact, if you think about the China tariff revenue that we’re estimating is coming in from the 10% that we just added, plus the de minimis thing, that it’s between $500 billion and $1 trillion over 10 years, is our estimate.
And that’s something that is outside of the reductions that markets are seeing through the negotiations up on the Hill.
And, so, we expect that the tariff revenue is actually going to make it much easier for Republicans to pass a bill, and that was the President’s plan all along.”
I was ready to try to explain why financial markets had remained so calm in the face of unfolding disruption.
Coincidence, perhaps, but the S&P500 dropped 2% in the two sessions following “dictator.”
Friday Bloomberg headlines:
“Stocks Finally Cave In to Fading Economic Fundamentals.”
“Hard-to-Shock Markets Show Tolerance for Trouble Isn’t Limitless.”
AP:
“US Stocks Tumble as Companies and Consumers Worry About Tariffs and Washington.”
News and analysis predictably follow market direction.
A crazy notion, indeed, but reality may even start to sink in. Tariffs are a problem.
The current global backdrop does not support cooperation and compromise, albeit the Ukraine war or trade disputes.
Speculative markets face myriad uncertainties.
Domestically, the tumble in University of Michigan Consumer Confidence to a 15-month low 65.2 (9 point 2-month drop) suggests Washington disruption could have near-term economic impact.
Five-to-10 year inflation expectations rose to a 30-year high of 3.5%.
February 21 – Bloomberg (Devika Krishna Kumar):
“US growth is likely to slow in the second half of the year as tariffs, tighter immigration laws and government cost-cutting efforts led by Elon Musk weigh on the economy, billionaire Steve Cohen said.
The Point72 Asset Management founder… struck a bearish tone when asked about his outlook.
He pointed to sticky inflation, slowing growth and the possibility of tit-for-tat tariffs as drags on the US economy.
‘I’m actually pretty negative for the first time in a while,’ Cohen said.
‘It may only last a year or so, but it’s definitely a period where I think the best gains have been had and wouldn’t surprise me to see a significant correction.’”
Steve Cohen:
“Tariffs cannot be positive, okay?
I mean, it’s a tax.
On top of that, we have slowing immigration, which means the labor force will not grow as rapidly as… the last five years and so.”
One of the big hedge fund operators uttering the quiet part out loud.
According to last August’s 13F filing, Point72 Asset Management had $172 billion of assets under management.
One of the major levered fund groups, Cohen’s funds have not traditionally been “basis trade” players.
But a “pretty negative” view implies a de-risking/deleveraging bias, in an environment that seems ripe for risk aversion and contagion.
The hedge funds tend to move in crowds, creating vulnerability to abrupt positioning shifts and market instability.
The S&P500 closed Wednesday’s session at a record high.
Resilience in the face of serious unfolding and festering issues has been extraordinary.
Then again, speculative Bubbles are notorious for disregarding deteriorating fundamentals.
And for a multi-decade Bubble blow-off top, max disregard is par for the course.
Economic and corporate earnings growth have been solid, and there’s always the specter of a magical life of AI, humanoid robots and such that can keep the bullish imagination humming.
But the real story is, as it always is in historic booms, in Credit.
Most importantly, Credit has been extraordinarily resilient.
This resilience can be explained by perceived “moneyness.”
Non-financial debt (NFD from Fed’s Z.1 report) expanded at a seasonally adjusted and annualized rate (SAAR) of $3.642 TN during Q3.
This compares to 2007’s $2.534 TN - an annual record that held until pandemic 2020.
Treasury debt expanded SAAR $2.261 TN during Q3, accounting for an extraordinary 62% of Q3’s growth in NFD (7.7% of Q3 GDP).
Despite historic over issuance, perceived safe and liquid money-like Treasury debt still enjoys insatiable demand.
The unprecedented – and uninterrupted - expansion of federal IOUs has inflated system incomes and corporate earnings - bolstering growth, asset prices, and general debt performance.
Years of strong economic activity and debt returns have been instrumental in the spectacular Bubble inflations throughout “private Credit” and “subprime” leveraged lending more generally.
A Friday Bloomberg headline:
“Private Credit Mints Billionaires in Reshaping of Global Rich.”
This historic Credit and speculative Bubble has been fundamental to late-cycle “blow-off” excess.
Importantly, the consequences of the crucial interplay of two momentous Bubbles – “private Credit” and the highly levered Treasury “basis trade” – cannot be overstated.
In short, the constancy of massive money-like debt issuance has validated a historic high-risk lending boom.
Certain the Fed will (again) use open-ended QE to maintain liquid/stable Treasury and “repo” markets, a group of powerful hedge fund players have levered “basis trades” 40 to 75 times.
Financed in the perceived risk free “repo” market, levered Treasury, agency and MBS speculation have generated Trillions of marketplace liquidity.
Liquidity overabundance has been fundamental to booming stocks, “private Credit,” leveraged lending, crypto, and the like.
When contemplating the consequences of booms financed by historic expansions of speculative Credit, think 2008 and 1929.
Such booms are unstable and unsustainable.
At some point, risk aversion spurs problematic deleveraging.
Throughout both the “Roaring Twenties” and mortgage finance Bubble periods, there were scares, mini-crises, and policy-induced recoveries that fatefully extended “terminal phase excess.”
The parabolic growth in speculative leverage dooms the cycle.
Daily, I monitored the late nineties “tech Bubble,” the mortgage finance Bubble, and the ongoing global government finance Bubble.
I’ve witnessed historic excess and fretted historic systemic fragility.
Yet a new degree of excess was unleashed over recent years, resulting in fragility that today goes far beyond anything I’ve ever seen or studied.
The fearless leveraged speculating community operates confidently that the Fed and administration have their backs.
But all bets are off when they get spooked.
An unexpected bout of de-risking/deleveraging has the potential to bring this party to a rapid conclusion.
So much disruption and potential catalysts aplenty.
February 20 – Wall Street Journal (Aaron Zitner):
“Elon Musk on Thursday offered hints about the work to come, including auditing the Federal Reserve, as his Department of Government Efficiency bulldozes through federal agencies in its effort to identify and implement budget and staffing cuts under authority from President Trump.
Asked if he plans to audit the Federal Reserve, Musk said yes without offering elaboration.”
Federal Reserve oversight is the purview of Congress, not Elon’s DOGE.
Recall Musk’s “The Fed is absurdly overstaffed” tweet following Powell’s December 18th “It’s a new phase and we’re going to be cautious about further cuts” press conference.
Especially when markets begin to buckle, the administration will come down hard on Chair Powell.
“See my chainsaw.
I assume you’d rather not face amputation of half of your economists and staff.”
At the top of Bloomberg Intelligence’s “most read” research this week:
“Can Trump Fire Powell?”
February 21 – Reuters (Sam McKeith):
“Australia accused China on Saturday of failing to give satisfactory reasons for what it called inadequate notice of a live-fire drill in waters between Australia and New Zealand that forced airlines to divert flights.
Defence Minister Richard Marles said the government did not yet have ‘a satisfactory answer from China as to the question of the notice’ of the drills, which he has said was ‘disconcerting’ for commercial aviation.’”
February 21 – The Hill (Elizabeth Crisp):
“Sen. Chris Coons said… a number of longtime U.S. allies in Europe are worried Russian President Vladimir Putin could be emboldened and look to ‘keep going’ into other countries if he’s seen as getting a free pass on Ukraine.
Coons… said he’d had a number of discussions at a security conference this week in Germany where officials had relayed their fears.
‘All of them are alarmed — concerned — that giving Putin a free pass to roll over the rest of Ukraine will send a signal that President Trump no longer respects our commitment to NATO and that Putin will just keep going.’”
February 22 – Wall Street Journal (Nancy A. Youssef):
“The Trump administration fired the military’s highest-ranking officer, the admiral leading the Navy, and several other senior Pentagon leaders in a massive shake-up of the top ranks of the armed forces.
The firings began with an announcement by President Trump on Friday that he had removed the chairman of the Joint Chiefs of Staff, Air Force Gen. CQ Brown Jr….
Defense Secretary Pete Hegseth said he was ousting Adm. Lisa Franchetti, the first woman to lead the Navy and to be on the Joint Chiefs of Staff, and Gen. James Slife, the vice chief of staff for the Air Force.
Hegseth also said he was planning to replace the top uniformed lawyers for the Army, Navy and Air Force.
The firings were an unprecedented move to replace top uniformed officers in several branches of the armed services…”
February 21 – Wall Street Journal (Austin Ramzy):
“The militaries of China and Russia, America’s top two global adversaries, are working together as never before in their long partnership, probing the defenses of the U.S. and its allies.
The message to America from the growing partnership is that, if drawn into a military conflict, U.S. forces could find themselves confronting both countries.
Chinese-Russian joint patrols and military exercises have become more frequent and increasingly assertive…”
February 21 – Politico (Chris Lunday):
“Friedrich Merz, the front-runner to become Germany's next chancellor, issued a stark warning on Friday that Europe must be prepared to defend itself without the U.S.
‘We must prepare for the possibility that Donald Trump will no longer uphold NATO’s mutual defense commitment unconditionally,’ Merz said…
‘That is why, in my view, it is crucial that Europeans make the greatest possible efforts to ensure that we are at least capable of defending the European continent on our own.’”
Impactful German elections Sunday.
Suddenly, European governments will prepare for bond issuance necessary to fund a hike in defense spending and additional Ukrainian support.
Stakes are high and rising for highly levered European bond markets.
At home or abroad, a disrupted world is problematic for historically speculative and levered financial markets.
There’s some irony in the hedge funds having so embraced the great disruptor.
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