Big, Ugly Crisis of Confidence
Doug Nolan
Rarely, if ever, had a period so beckoned for market discipline.
It took a fateful pass.
I found myself this week pondering a fundamental Bubble Maxim: Bubbles must be quashed in their infancy, before becoming deeply entrenched by powerful self-sustaining dynamics and broad-based (universal?) policymaker, financial industry, business community, and public support.
I was reminded again that unsound “money” is the bane of Capitalism; how the scourge of inflationism devastates societies.
July 1 – New York Times (Andrew Duehren):
“Washington has not exactly won a reputation for fiscal discipline over the last few decades, as both Republicans and Democrats passed bills that have, bit by bit, degraded the nation’s finances.
But the legislation that Republicans passed through the Senate on Tuesday stands apart in its harm to the budget, analysts say.
Not only did an initial analysis show it adding at least $3.3 trillion to the nation’s debt over the next 10 years — making it among the most expensive bills in a generation — but it would also reduce the amount of tax revenue the country collects for decades.
Such a shortfall could begin a seismic shift in the nation’s fiscal trajectory and raise the risk of a debt crisis.”
July 2 – Bloomberg (Alexandra Semenova):
“Wall Street speculators have returned in full force: US stocks have snapped back from the throes of April’s tariff selloff, hovering near record highs, the pipeline of new SPACs is rebounding and Cathie Wood’s flagship fund is on a historic tear.
That’s sparked a swift jump in a Barclays Plc measure of the market’s ‘irrational exuberance’ — a phrase coined by former Federal Reserve Chair Alan Greenspan for when prices exceed assets’ fundamental values.
The one-month average on the proprietary gauge has swung back into the double-digits for the first time since February — reaching levels that have signaled extreme frothiness in the past.”
It is both stunning and unsurprising.
The vigilantes choose a curious juncture to set up camp at the Everything’s O.K. Saloon for a moonshine bender.
At this point, President Trump and Secretary Bessent have the leveraged speculating community in their back pockets.
That won’t last.
There were already this week noteworthy cracks suggesting a semblance of functioning global bond markets may be ready to reassert itself.
July 2 – Financial Times (George Parker, David Sheppard, Ian Smith and Jim Pickard):
“Sir Keir Starmer has said Rachel Reeves will be chancellor for ‘a very long time to come’ as the prime minister moved to stem speculation over her future.
UK government bonds and the pound fell sharply… after Starmer declined to back a tearful Reeves in the House of Commons…
Gilts slumped as investors grew nervous, pushing the 10-year yield up 0.16 percentage points to 4.61%, the biggest one-day rise since the global bond market rout in April and, at one point, the sharpest sell-off since then Conservative prime minister Liz Truss’s ill-fated 2022 ‘mini’ Budget.”
July 4 – Bloomberg (Alex Wickham, Philip Aldrick, and Greg Ritchie):
“UK Prime Minister Keir Starmer is caught between a political rebellion and a jittery bond market.
On one side is a big faction of his Labour Party that revolted in Parliament against his proposed welfare-spending cuts, derailing Chancellor of the Exchequer Rachel Reeves’ push to steady the government’s finances.
On the other, a cohort of fast-money global investors who are worried about rising government debt loads around the world and wield the power to send borrowing costs surging if their confidence is rattled.
Those tensions burst into view on Wednesday, when Reeves’ emotional appearance in the House of Commons fanned speculation that Starmer might replace her with someone more likely to cave in to pressure to increase spending.
Bonds, stocks and the pound all tumbled as investors quickly unloaded UK assets.”
UK gilt yields quickly stabilized, but not before the delivery of a harsh vigilantes’ wake-up call.
It’s not unreasonable logic that something similar might be in the offing for Treasuries.
Financial conditions have loosened dramatically since April’s market tumult.
After spiking to 453 bps, junk bond spreads sank 24 bps this week (4 sessions!) to 268 bps, the narrowest since February 20th.
Investment-grade spreads narrowed eight bps to 77 bps, matching the low back to December 18th – and closed Thursday only three bps above multi-decade lows.
Leveraged Laon prices closed the week at highs since February 27th.
Bank CDS prices have dropped back to March levels – at home and abroad.
JPMorgan CDS traded back down to 41.5 bps (April 9th high 71), the low since March 10th. At 99.25 bps, European (subordinated debt) Bank CDS are down from an April 7th 169 bps high - to the lowest level since March 5th.
July 4 – Bloomberg (Gowri Gurumurthy):
“US junk bonds racked up gains for the 10th straight session as investors poured cash into the asset class…
Yields hit a nine-month low of 6.99%…
US high-yield funds took a cash haul of $3.5b for week ended June 25, the largest weekly inflow in 18 months.
It was the ninth consecutive week of cash flows into these funds…
The market has already priced $6.6b in just three sessions this week after a flurry of issuance in June made it the busiest month since September 2021.”
July 1 – Financial Times (Euan Healy):
“Sales of risky European corporate debt surged to their highest ever level in June, as lowly rated companies take advantage of a capital flight out of US markets…
Issuance by high-yield, or junk-rated, companies — many of which have previously struggled to access the market — rose to about €23bn in June, according to JPMorgan...
That beats the previous monthly record, set in June 2021, by roughly €5bn.
June also saw the greatest number of deals on record at 44…
‘The market is drowning in new deals,’ said an investor at a European credit hedge fund.”
The dramatic loosening of financial conditions foreshadows upside surprises in economic activity and pricing pressures.
At Tuesday’s intraday low, the rates market was pricing a 3.64% policy rate (69 bps reduction) for the Fed’s December 10th meeting, down a notable 21 bps from the June 19th 3.85% level.
Stronger-than-expected June Non-Farm Payrolls data threw cold water on the weakening economy view.
The economy added another 147,000 jobs for the month, versus expectations of a gain of 106,000.
Expected higher at 4.3%, the Unemployment Rate instead ticked down a tenth to 4.1%, matching the low back to January.
This followed Tuesday’s 7.769 million job openings (JOLTS) data – a notable 469,000 ahead of forecast to the strongest level since November.
Weekly Initial Jobless Claims slipped to a historically low 233,000, a six-week low.
A reasonably tight labor market now faces deportation-related challenges.
A Thursday Bloomberg headline (Ellen M Gilmer, Alicia A. Caldwell, and Hadriana Lowenkron):
“US Immigration Crackdown to Intensify With $150 Billion Infusion.”
“Coming on top of the agencies’ existing budgets, it’s an unprecedented funding surge that will supercharge efforts to build new detention centers, hire thousands of immigration agents and expand border wall construction.”
July 3 – Yahoo Finance (Jennifer Schonberger):
“President Trump said Jerome Powell ‘should resign immediately’ in a Truth Social post…, increasing a White House pressure campaign on the Federal Reserve chairman that has been intensifying this week.
Trump started the week by publicly criticizing the Fed and Powell for not lowering rates.
He posted a note he sent to Powell telling the Fed chair, ‘Jerome—You are, as usual, ‘Too Late,’’ and arguing that he has ‘cost the USA a fortune’…
Treasury Secretary Scott Bessent… compared the Fed to an old person who is afraid of falling after having stumbled once and said, ‘I guess this tariff derangement syndrome happens even over at the Fed’…”
July 3 – Financial Times (James Politi and Lauren Fedor):
“Donald Trump took a victory lap at the Iowa state fairgrounds for the so-called ‘big beautiful bill’ that has consolidated his political power just as Americans prepare to celebrate independence day.
Just over five months since he was sworn in for a second term, Trump is riding high on a string of political victories…
‘I think I have more power now, I do,’ Trump said in response to a question…”
We know the President has cemented extraordinary power, we do.
He dominates the Executive Branch like no other.
He completely controls the Republican-controlled Congress.
He seemingly wields extraordinary influence over the Supreme Court.
He did not hesitate to brandish American power upon Iran’s regime.
Moreover, the President is intent on dictating the global economy (Secretary Lutnick:
“Let Donald Trump run the global economy.
He knows what he’s doing.”).
Surely there is no one in the world that could convince the President that he doesn’t possess the greatest instincts of any leader in human history.
He’s always right.
Teflon.
Everything he touches turns to gold (including crypto).
Yet it’s not enough, and he’s just not going to rest.
A daily obsession, perhaps approaching torment.
He’s running roughshod, a single-minded crusade to impose unprecedented power and influence.
But there’s that damn oasis of independence just down the block at The Marriner S. Eccles Building.
And the (“stupid”) people running around down there have over the decades accumulated monumental power – over rates and unfettered “money” printing that are fundamental to power over a now colossal Treasury market, financial and asset markets more generally, and the U.S. and global economy.
In the President’s mind, it must be intolerable to not swiftly wrest power away from the Fed.
After all, it’s now the lone unachieved objective of his historic power blitzkrieg.
I’ll assume he has a team working tirelessly on a strategy, perhaps taking a few hours break for a White House barbecue, complete with B2-bomber flyovers, a beautiful bill signing, and an utterly beautiful day capped off by a dazzling evening fireworks display at the National Mall.
July 2 – Politico (Declan Harty and Victoria Guida):
“Washington’s top housing regulator is escalating his fight against Federal Reserve Chair Jerome Powell, calling on Congress to investigate the central banking chief.
Federal Housing Finance Agency Director Bill Pulte, who has increasingly complained that high borrowing costs are damaging the housing market, pressed lawmakers… to probe Powell’s alleged ‘political bias’ as well as his recent Senate testimony about the renovation of the Fed’s headquarters.
Pulte claimed… Powell lied to lawmakers last week in his characterization of upgrades at the nearly century-old headquarters, which Powell said was in need of ‘serious renovation’…
‘This is nothing short of malfeasance and is worthy of ‘for cause’ removal, Pulte said…
‘Chairman Powell needs to be investigated by Congress immediately.’
Pulte’s attacks have echoed President Donald Trump’s own criticism of the Fed chair…”
FHFA Director Pulte’s attack on Chair Powell is hideous – and I fear indicative of the administration’s decision to tighten the noose around the head of our independent central bank.
This is serious stuff.
Never has it been more critical to insulate monetary policy from a power-obsessed Executive Branch.
Our nation’s fiscal standing is rapidly deteriorating.
Pricing pressures are already elevated, with tariffs, mass deportations, and another shot of fiscal stimulus exacerbating inflation risks.
Flight out of the dollar risks turning disorderly.
In short, it’s a trajectory of One Big, Ugly Crisis of Confidence.
The system is back in precarious excess mode: financial conditions are again excessively loose and markets ridiculously speculative.
Super-Cycle Terminal Phase Excess Tenacity.
It’s not only terribly misguided to publicly administer such foolish pressure on the Fed, but also the President’s framework for the appropriate level of interest rates is deeply flawed.
This is all clear as day to interested parties around the world.
Little wonder gold advanced $63 this week to $3,337, putting first-half (plus a few sessions) gains at $713, or 27.2%.
Silver is up 27.9% y-t-d, Copper 26% and Platinum 54%.
It's paramount to safeguard Fed independence.
Hopefully, we can count on an enlightened Supreme Court.
But, candidly, I’d feel more comfortable if the Vigilantes could sober up and get to work.
You gave the President his big, beautiful bill.
Time now to draw the line.
On a final note, today’s precarious excess mode is a global phenomenon.
The Great U.S. Bubble has at this point fully exported key financial structures, strategies, institutions and speculative impulses (and worse) to the world at large.
I’ll assume the liquidity overabundance inflating securities markets worldwide has, as it does here at home, its roots in egregious speculative leverage.
A noteworthy development today for a key U.S. Bubble operator on the other side of the globe in India.
July 4 – Financial Times (Robin Wigglesworth):
“The big news this morning is that India’s financial regulator has banned Jane Street from the country’s markets for a ‘sinister scheme’ to manipulate Indian stocks and derivatives.
The Securities and Exchange Board of India allege that the US trading firm made $550mn of illegal gains from these strategies, which it is now wants back before the ban will be lifted.
The Securities and Exchange Board of India said its decision to limit Jane Street’s access to India’s securities markets stemmed from a months-long investigation.
‘JS Group was undertaking an intentional, well planned, and sinister scheme and artifice to manipulate cash & futures markets and hence manipulate the BANKNIFTY [Indian bank stocks] index level, to entice small investors to trade at unfavourable and misleading prices, and to the advantage of the JS Group,’ the regulator said…”
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