Critical Market Juncture
Doug Nolan
A disconcerting environment turned notably more so this week, with market instability becoming more serious.
If risk aversion gathers momentum from here, it’s a short step to crisis dynamics.
It’s not hyperbole to argue that an outburst of speculative deleveraging could at this critical juncture prove the death knell to a multi-decade super cycle and historic Credit and speculative Bubbles.
The market narrative views market weakness as reflecting tariff angst and nervousness ahead of “liberation day.”
The unappreciated, yet overarching, issue is one of a looming day of reckoning.
The longer the Trump administration ignores mounting market distress, the clearer it becomes that moving full speed ahead with agenda priorities takes precedence.
In short, shock and consternation have begun to set in that the mighty stock market somehow might not be at the epicenter of the White House’s grandiose ambitions.
The Nasdaq100 (NDX) declined 2.4% this week, closing at 19,281, only 56 points, or 0.3%, above the March 13th close.
From March 13th lows to this week’s (Tuesday) high, the NDX rallied about 6%, a so far notably unimpressive rally from the previous steep one-month decline (from the 22,223 February 19th high).
The Bloomberg MAG7 Index closed the week only slightly above March 11th intraday lows, with the S&P500 ending the week 1.4% off March 13th trading lows.
At this critical market juncture, further weakness risks acute instability.
Thursday and Friday’s combined 35 bps spike to 377 bps was the largest since August 1st and 2nd.
High yield CDS jumped 28 bps this week – to the highest close since August 7th (382bps).
This was the largest weekly gain since the bout of global deleveraging during the week of August 2nd.
High yield spreads widened 18 bps Friday (23bps wider on the week) to 3.40 percentage points, the largest single-session widening since August 5th - to the high back to August 13th.
Investment grade CDS rose two bps this week to 62 bps, the high since December 7, 2023.
Bank CDS (JPMorgan, BofA, Goldman, Citi and Morgan Stanley) all closed the week at highs (at least) back to August.
Ten-year Treasury yields were down a notable 11 bps in intense Friday safe haven buying, as the implied rate for the December Fed funds rate dropped 10 bps to 3.60% (implying 73 bps of rate reduction).
March 27 – Financial Times (Kaye Wiggins):
“Private credit is ‘not a bubble’, Apollo Global Management president Jim Zelter has said, adding that he did not think adverse economic conditions would trigger ‘massive losses’ in a sector that has witnessed rapid growth in recent years.
Speaking at HSBC’s investment conference in Hong Kong…, Zelter was asked how private credit would perform in an economic downturn.
‘The biggest question I get from everybody around the globe is, is private credit a bubble?’ said Zelter.
‘And I would say it’s not a bubble, but it’s certainly been long in the tooth in the cycle.’
‘Bubble means there’s very much irrational actions, and while I think there are folks that are probably taking [a] more aggressive portfolio construction than I would take, I don’t think it’s a bubble where you’re going to find the massive losses that you saw in other bubbles since I’ve been around,’ he added.”
Over the years, I’ve viewed “can’t be a Bubble because of the lack of irrationality” – “very much irrational actions” – as Bubble analysis quackery.
I’ve instead argued that Bubbles turn so pernicious specifically because of the perceived rationality of participating.
Not joining in – not buying a tech stock in 1999, owning a home in 2006, and “investing” in AI, stocks and crypto in 2024 – seemed at the height of irrationality.
Credit is inherently prone to Bubble dynamics.
Credit growth is self-reinforcing – with Credit excess begetting Credit excess.
Loose conditions, readily available Credit and strong debt growth all promote economic activity, robust corporate earnings and income growth, and strong business and consumer spending.
High risk (“subprime”) Credit is especially prone to excess begetting precarious excess.
After all, few businesses offer greater initial “profit” opportunities than lending to a captive audience of risky borrowers amenable to paying exorbitant interest rates.
And the more protracted the “subprime” lending boom, the more entrenched Ponzi Dynamics become.
So long as conditions remain loose and loans readily available, hopelessly insolvent borrowers stay afloat borrowing from the next greater fool betting on ongoing boom times.
But it’s the musical chairs predicament.
Years of lending transgressions are waiting to erupt the moment the stupefying music stops and conditions tighten.
Recent years have witnessed history’s greatest subprime lending boom, dwarfing what was quite consequential high risk mortgage finance Bubble excess.
“Private Credit” has been right in the thick of it.
And whether the industry is beginning to appreciate it or not, that Bubble now has a big bullseye on its back.
Importantly, booms in “Private Credit” and leveraged lending, more generally, have been a prominent beneficiary of the liquidity overabundance originating from “basis trade” and “carry trade” leveraged speculation.
Think of a hedge fund borrowing at 50 times leverage in the “repo” market to purchase Treasury bonds, with the sellers then directing sales proceeds into leveraged loans and related ETFs or insurance company annuity products (funding “Private Credit” high yielding consumer and business loans).
The overheated high-risk lending boom is today acutely vulnerable to a destabilizing bout of deleveraging, a faltering Bubble Economy, and general instability and uncertainty.
March 28 – Bloomberg (Aaron Weinman and Gowri Gurumurthy):
“Chuck E. Cheese owner CEC Entertainment is struggling to drum up enough demand for a $660 million high-yield bond sale to refinance debt it has due next year, according to people familiar…
JPMorgan... and Goldman Sachs…, the banks leading the deal, had not obtained sufficient orders from investors…
One of the people attributed the difficulties to a broader market rout stemming from concerns about the Trump administration’s tariff policies as well as the US economy…
Other transactions in the leveraged finance market that are vulnerable to a dip in consumer spending, including casino operator Mohegan Tribal Gaming Authority, have faced investor pushback lately partly because of concerns about the US economy.”
March 21 – Los Angeles Times (Sandra MacDonald):
“Several Southern California cities have the most credit card debt per household in the U.S., a new WalletHub study found.
Santa Clarita ranked first out of 181 U.S. cities, with a household average of about $22,753 in credit card debt, and a total of about $1.7 billion in debt for its 228,000 residents, according to data taken from the U.S. Census Bureau and TransUnion…
Chula Vista was second, with an average of $20,567 in credit card debt per household, and a total of $1.8 billion among its 275,000 residents.”
Assuming a decent percentage of households choose to carry no expensive Credit card debt, we can infer that many in these areas have accumulated debts in excess of $25,000 to $30,000.
In a sign of the times, alarming data were somehow viewed positively: “But being high on the list doesn’t mean that debt is overwhelming the population, [according to] Chip Lupo, a WalletHub writer…
In areas like Santa Clarita, the fast-growing suburban community in northern Los Angeles County, where the median household income is $118,489… it’s actually a sign of good credit management, he said.
‘It reflects a greater financial flexibility rather than any type of financial distress,’ Lupo said.
‘As long as interest rates are lower, borrowing costs are managed and as long as you’re paying back the debt.’”
Such high Credit card debt in wealthier communities suggests households have opted to use cash balances to play stocks and crypto, rather than pay down balances.
A drop in risk asset prices concurrent with a tightening of Credit conditions will hit hard – borrower and lender.
We can assume sinking stocks and stricter Credit limits will trigger a surge in non-performing loans.
The U.S. Bubble Economy is today extraordinarily vulnerable to a pullback in spending by higher income households, which would quickly reverberate throughout an economy already susceptible to a tightening of Credit availability for small businesses and over-levered corporations more generally.
Tariffs, trade wars, and inflation all significantly heighten systemic risk.
March 27 – Bloomberg (Alexandra Harris):
“The Federal Reserve should consider setting up an emergency program that would close out highly leveraged hedge-fund trades in the event of a crisis in the $29 trillion US Treasuries market, according to a panel of financial experts.
Any vicious unwinding of a swath of the estimated $1 trillion in hedge fund arbitrage bets would not only hamper the Treasuries market, but others as well — requiring Fed intervention to assure financial stability.
When the US central bank did that in March 2020…, it engaged in massive outright purchases of Treasury securities, to the tune of about $1.6 trillion over several weeks…
If hedge funds need to unwind their positions quickly, the danger is that bond dealers may not be able to handle the enormous sudden volume of transactions.
When the Fed had to intervene in 2020, the basis trade was roughly $500 billion in total — just half today’s figure.”
Speculative leverage quickly became a pressing systemic issue during the March 2020 deleveraging episode.
We can assume that speculative leverage has at least doubled in five years.
University of Michigan March (final) consumer one-year inflation expectations were reported at 5%, more than double the 2.2% level from March 2000.
Core CPI (y-o-y) registered at 3.1% last month, versus a near Fed target of 2.1% in March 2000.
CPI averaged 1.9% annually for the decade preceding March 2000.
It has averaged 4.5% over the past four years.
Tariffs and trade wars ensure that inflation prospects are highly uncertain and certainly elevated.
With deleveraging risk arguably at the highest level ever, Fed “put” ambiguity is today a critical issue.
Nothing suggests the Fed is prepared for another massive balance sheet expansion.
They will, of course, come to the market’s defense.
But will QE come more slowly and in more limited scope than would be required by a disorderly unwind of “basis trade” and other speculative leverage?
Moreover, today’s bond market is in a different state than in 2008 and 2020.
Inflation is higher, foreign (including central bank) demand is uncertain, the amount of debt outstanding is much greater, and yields and market apprehension are notably higher (Treasury yields started March 2020 at 1.15%).
I began this CBB with the assertion of “shock and consternation” with the realization that the stock market is not a top Trump priority.
How must the levered players feel these days?
After all, they assumed they were even ahead of the equities market in the administration’s pecking order.
They got their man at the helm of the Department of Treasury, along with billionaires aplenty in cabinet positions and as trusted advisors.
With a pro-speculation President, pro-growth tax cuts and deregulation, a faithful Trump “put,” and a Fed with no alternative than to backstop vulnerable Bubble markets, of course you remain highly levered.
They’ve been making so much money, effortlessly.
Playing loosely with the house’s money and caught up (along with everyone else) in post-election euphoria, the levered players pressed their big bets.
These increasingly look like bad bets.
They misjudged Donald Trump.
They heard low taxes and pro-growth, while dismissing much of the administration’s radical far right agenda and penchant for breaking things.
I can imagine the chuckles: “Ha. Can’t take him literally.” Time to.
“That’s so crazy, of course he’d never do it.”
He’s doing it.
They’re all going to do it – full speed ahead.
They need to move quickly.
Flood the zone.
No let ups - never turn back (see pertinent comparison to Viktor Orban under “For Posterity”).
For the leveraged speculating community, this has all the makings of a rather destabilizing “HOLY CRAP” moment.
It would be nice to have a week, in my son’s verbiage, “to chill.”
This was not it.
“Trump says US will ‘go as far as we have to’ to get control of Greenland.”
“Vance Uses Greenland Visit to Slam Denmark, Vow U.S. Takeover of Island.”
“Putin’s endorsement of Trump’s Greenland takeover reflects their vision of a new world order.”
“US defense chief Hegseth vows to counter ‘China’s aggression’ on first Asia visit.”
“Hegseth Tells Asian Allies: We’re With You Against China.”
“Hegseth Announces US Missile Plan Likely to Inflame China Tensions.”
“Now Europe Knows What Trump’s Team Calls It Behind Its Back: ‘Pathetic’.”
“Europe fumes at Trump team’s insults in leaked Signal chat.”
“Putin Calls for Zelensky’s Removal, ‘Finish Off’ Ukrainian Troops.”
“Trump threatens Iran with ‘bad things’ unless it accepts nuclear deal.”
March 26 – Bloomberg (Jordan Fabian):
“President Donald Trump stressed his desire for the US to annex Greenland ahead of a contentious visit by his vice president, comments likely to further stoke anger in the Danish territory.
Trump said… the mission of Vice President JD Vance and others on his team would be ‘to let them know that we need Greenland for international safety and security.’
‘It’s an island that from a defensive posture, and even offensive posture, is something we need, especially with the world the way it is, and we’re going to have to have it,’ the president said during an interview with conservative talk show host Vince Coglianese. ´
The remarks are Trump’s clearest statements yet about the intent of a flurry of visits from his orbit since he won the 2024 presidential election.”
President Trump (March 27, 2025):
“So we’ll, I think, we’ll go as far as we have to go.
We need Greenland.
And the world needs us to have Greenland, including Denmark.
Denmark has to have us have Greenland.
And, you know, we’ll see what happens.
But if we don’t have Greenland, we can’t have great international security.”
President Trump (March 28, 2025):
“We need Greenland, very importantly for national security.
We have to have Greenland.
It’s not a question of, ‘Do you think we can do without it?’ We can’t…
Greenland’s very important for the peace of the world.
And I think Denmark understands, and I think the European Union understands it.
And if they don’t, we’re going to have to explain it to them.”
March 28 – Daily Mail (Geoff Earle):
“Defense Secretary Pete flexed his muscles in a workout with U.S. troops in the Philippines as he identified China as a threat and called for deterrence.
‘There’s a long line of countries in the past who have attempted to test U.S. resolve…
We are resolved at this time… to work with our partners.’
‘Deterrence is necessary around the world, but specifically in this region, in your country, considering the threats from the communist Chinese,’ he said.
Hegseth… called for joining with allies to counter Chinese expansionist threats…
‘What we’re dealing with right now is many years of deferred maintenance, of weakness, that we need to reestablish strength and deterrence in multiple places around the globe,’ Hegseth said in response to a question about whether the U.S. would place a more visible presence in the South China Sea.”
Hegseth: “What the Trump administration will do is deliver - is to truly prioritize and shift to this region [Asia] of the world in a way that is unprecedented.”
March 28 – Associated Press (Jim Gomez):
“U.S. Defense Secretary Pete Hegseth said… the Trump administration would work with allies to ramp up deterrence against threats across the world, including China’s aggression in the South China Sea.
Hegseth… blamed the previous Biden administration for insufficient actions that emboldened aggressors like China over the years.
He said the U.S. military was being rebuilt under President Donald Trump and was re-establishing its ‘warrior ethos’ in the region…
Hegseth told a news conference with his Philippine counterpart, Gilberto Teodoro, after meeting President Ferdinand Marcos Jr...”
I’ll share excerpts from two additional news stories of intrigue.
March 27 – Axios (Hans Nichols):
“President Trump’s dramatic rug pull of Rep. Elise Stefanik's (R-N.Y.) UN ambassador nomination has given House Speaker Mike Johnson (R-La.) a new series of headaches.
Why it matters: Johnson has to reassure GOP lawmakers after their president said he’s nervous about a Trump +20 district.”
March 27 – Axios (Marc Caputo and Neil Irwin):
“The Trump administration is discussing a surprising option to help fulfill his campaign-trail promises: Allowing the richest Americans’ tax rates to rise in return for cutting taxes on tips, a senior White House official tells Axios.
The big picture: Some White House officials believe letting income taxes on the very highest earners rise would buy breathing room on other priorities, and help blunt Democrats’ attacks as they seek to extend President Trump’s 2017 tax cuts.”
Sudden concern for Elise Stefanik’s red district seat and potentially shocking volte-face consideration of higher taxes on the rich?
Is the administration sensing trouble brewing – the type of market and economic instability that would place even Stefanik’s district at risk?
Trouble that would force a focus on buttressing the MAGA base at the expense of high-income taxpayers?
We should all prepare for difficult times ahead.
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