Mounting Uncertainty
Doug Nolan
President Trump: “The Supreme Court’s Ruling on TARIFFS is deeply disappointing!
I am ashamed of certain Members of the Court for not having the Courage to do what is right for our Country.
I would like to thank and congratulate Justices Thomas, Alito, and Kavanaugh for your Strength, Wisdom, and Love of our Country, which is right now very proud of you.
When you read the dissenting opinions, there is no way that anyone can argue against them.
Foreign Countries that have been ripping us off for years are ecstatic, and dancing in the streets — But they won’t be dancing for long!
The Democrats on the Court are thrilled, but they will automatically vote ‘NO’ against ANYTHING that makes America Strong and Healthy Again.
They, also, are a Disgrace to our Nation.
Others think they’re being ‘politically correct,’ which has happened before, far too often, with certain Members of this Court when, in fact, they’re just FOOLS and ‘LAPDOGS’ for the RINOS and Radical Left Democrats and, not that this should have anything to do with it, very unpatriotic, and disloyal to the Constitution.
It is my opinion that the Court has been swayed by Foreign Interests, and a Political Movement that is far smaller than people would think — But obnoxious, ignorant, and loud!”
“A disgrace to our nation.”
“They’re very unpatriotic and disloyal to our constitution.”
“Swayed by foreign interests.”
“Ashamed of certain members.”
Decision by Justices Gorsuch and Barrett was “an embarrassment to their families.”
The President’s unique strain of vitriol, having moved through myriad district and appeals courts, advanced Friday to the Supreme Court of our land.
Undermining the trust of such a fundamental and defining institution of American government is yet another disturbing development.
JD Vance:
“This is lawlessness from the Court, plain and simple.”
Treasury Secretary Scott Bessent:
“Despite the misplaced gloating from Democrats, ill-informed media outlets, and the very people who gutted our industrial base, the court did not rule against President Trump’s tariffs.
Six Justices simply ruled that IEEPA authorities cannot be used to raise even one dollar of revenue.”
President Trump:
“We really are at a very important point.
I’ve been waiting for this decision so long.
They could have made this decision a long time ago…
They should have released this a long time ago.
We’ve waited months, and that gave uncertainty.
Now we have certainty.
I think you’re going to see the country get much stronger because of it.”
“We’ve taken the uncertainty of tariffs out.
Because we had uncertainty.
We got sued by sleaze bags, I know them well that are very outside country, China-centric, but outside country centric…
The bottom line is that the word ‘certainty’ is now in the equation.
Every single thing I said today is guaranteed certainty.
It’s been tested, as Jamieson (US Trade Representative Greer) said a thousand times… and won in all of the courts.
And we’re just going back to that…
So, we are going to keep it going just as before, probably more so, but you’re no longer going to be asking – every time I got up you’d ask – ‘well, what happens if you can’t charge tariffs.’
Now we can.
And, by the way, in their decision they specifically said we can do these – we have alternatives.”
The President’s comments notwithstanding, it was a week where extraordinary uncertainty turned only more acute.
The administration’s tariff policies are now in disarray, with the status of tariff applications and rates, trade agreements and refunds virtually unanalyzable.
Meanwhile, minutes from the Fed’s January 28th meeting revealed that several committee members raised the possibility of future rate hikes.
This week also saw further troubling Credit market developments.
February 18 – Financial Times (Antoine Gara and Eric Platt):
“Private credit group Blue Owl will permanently restrict investors from withdrawing their cash from its inaugural private retail debt fund, backtracking from an earlier plan to reopen to redemptions this quarter.
The… investment group… said investors in Blue Owl Capital Corp II would no longer be able to redeem their investments in quarterly intervals but that the company would instead return investors’ capital in episodic payments as it sells down assets in coming quarters and years.
The decision underlines the risks facing retail investors, who have ploughed hundreds of billions of dollars into funds with limited liquidity rights.
The company said the fund ‘intends to prioritise delivering liquidity ratably to all shareholders through quarterly return of capital distributions, which are intended to replace future quarterly tender offers and may be funded by earnings, repayments, other asset sale opportunities or strategic transactions’.”
Blue Owl sank another 12.1% this week, boosting y-t-d (less than 8 weeks) losses to 27.6%.
Ares Management dropped 8.0% (down 23.8% y-t-d), KKR 0.5% (down 20.6%), Apollo 4.1% (down 16.9%), and Blackstone 6.1% (down 21.3%).
Leveraged loan prices declined six cents Friday to 95.37, matching the low back to April 22nd.
Subprime lending presents inherent liquidity challenges.
While masked during periods of risk embracement and liquidity abundance, high-risk borrowers are risky for a reason: their liquidity profiles are susceptible to the whims of the marketplace.
During boom times – notably over recent years – perceptions take hold that even marginal companies will retain access to new borrowings.
This creates the misperception that subprime loan liquidity is normal and sustainable.
An enterprising Wall Street will run with such a fanciful notion, placing such loans in myriad products, where unsuspecting buyers assume their holdings will remain liquid.
“Terminal phases” are self-destructive.
Loose conditions and risk embracement ensure self-reinforcing risky lending, speculation and leveraging.
Systemic risk expands exponentially, until developments force the recognition that the cycle got out of hand.
First Brands, Tricolor and other blowups revealed major late-cycle Credit deficiencies.
Speculative flows into leveraged lending and private Credit have shifted.
Developments at Blue Owl and elsewhere have revealed liquidity issues, which will accelerate the shift from risk embracement to risk aversion.
And while Blue Owl officials trumpet that they sold loan portfolios at near par this week, savvy analysts recognize it will not take much of a market turn to have buyers completely back away from high-risk Credits.
Like subprime in 2007, market participants readily dismiss developments.
Markets and the economy appear robust.
Superficially, liquidity abundance persists.
But in important sections of the Credit market, liquidity concerns and risk aversion are taking hold.
This equates to a problematic tightening of Credit conditions for high-risk borrowers and mounting Credit problems.
February 20 – Wall Street Journal (Matt Wirz):
“Wall Street has been eagerly selling private-credit as a hot opportunity for individual investors.
That sales pitch just got tougher.
Blue Owl Capital, a poster child for the industry, said it is liquidating $1.4 billion in assets to raise money to pay out individuals who bought into some of its funds in their heyday but now want to get out.
The firm hoped the sale would shore up wobbling investor confidence.
Instead, the opposite happened.
Stocks across the private-fund industry slid as the deal raised questions about how much fund managers can count on individuals to stay invested in hard-to-sell assets for the long term.
Blue Owl's stock dropped 10% at one point Thursday and closing down nearly 6%.
Shares of other private-credit titans also sank, with Apollo Global Management and Blackstone both falling about 5%.”
February 19 – Bloomberg (Olivia Fishlow, Ellen DiMauro, and Silas Brown):
“For years, private credit funds trumpeted a key distinction from other corners of finance: insulation from liquidity mismatches.
Because investors typically commit capital for long, fixed periods, and the funds deploy that money into loans with similarly lengthy maturities, the risk of being forced to sell assets at cut-price rates to meet demands for liquidity is minimized.
At least, that’s the theory.
But recent strains within Blue Owl Capital Inc.’s business development companies suggest the industry may not be entirely shielded from that longstanding vulnerability.
The… private credit giant has faced increasing withdrawal requests from investors in recent months, fueled in part by concerns about its exposure to software companies amid the rapid rise of artificial intelligence.”
Mohamed El-Erian offered a timely tweet Thursday morning on Twitter:
“Is this a ‘canary-in-the-coalmine’ moment, similar to August 2007?”
Reuters:
“Economist Mohamed El-Erian said the changes echo the early days of the 2008 financial crisis, although nowhere near the same magnitude.”
Well, it appears Blue Owl and private Credit deterioration this week reached the point where it can no longer be ignored.
The reality is that ongoing liquidity abundance masks financial, market, economic, social, and geopolitical fault lines so much deeper and precarious than pre-GFC.
But there will be no throwing in the towel.
The stakes of high-risk lending have inflated to an unprecedented level.
Trillions of leveraged loans, private Credit and vulnerable companies today hang in the balance.
And with Trillions of AI and related arms race lending to be done, Wall Street investment bankers, lenders, securitizers, derivative operators, and fund managers will go down swinging.
February 17 – CNBC (Annie Palmer):
“Amazon shares closed up more than 1% on Tuesday, snapping a nine-day slide that shaved billions off of its market cap.
The stock shed roughly 18% of its value between Feb. 2 and Friday, marking the worst losing streak since 2006 and axing more than $450 billion in market valuation as investors question the merits of its artificial intelligence spending plans.
The selling frenzy around Amazon is tied to the company’s fourth-quarter earnings report released earlier this month.
Amazon said it expects to spend $200 billion in capital expenditures this year, a nearly 60% increase from last year and more than $50 billion above Wall Street’s forecast.”
As the money spigot is turned down for many companies, the AI bullish narrative focuses more on the fortress balance sheets of the hyperscalers.
True enough, Microsoft, Alphabet, Meta, Amazon, and Oracle together enjoy enormous cash-flow and cash holdings.
But devoting massive cash hoards, while taking on debt, in frantic AI arms race pursuits, significantly alters these companies’ risk profiles.
Having come to operate as dependable market and economy ballast, big tech and AI dreams today place much in jeopardy.
What’s more, their unparalleled capacity for massive stock buybacks has been integral to the perception of powerful market liquidity backstops.
On the subject of market liquidity backstops…
February 18 – New York Times (Colby Smith):
“Officials at the Federal Reserve signaled no rush to restart interest rate cuts after pausing reductions last month, according to minutes from January’s meeting.
In fact, several policymakers even went so far as to raise the possibility of rate increases if inflation stayed stubbornly high.
The record of the latest gathering… underscored the sharp divisions that have plagued the central bank as it contends with a mixed economic picture after a series of rate reductions last year.
Several policymakers indicated that there was still a path to lower rates this year if inflation declined as expected, while a larger group signaled support to hold rates steady until there was ‘clear indication that the progress of disinflation was firmly back on track.’
The minutes showed that several policymakers wanted the Fed to convey ‘the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation remains at above-target levels’.”
February 18 – Bloomberg (Enda Curran):
“Federal Reserve officials appeared surprisingly wary of cutting interest rates when they met last month, with several even suggesting the central bank may need to raise rates if inflation remains stubbornly high.
While the minutes of the central bank’s Jan. 27-28 policy meeting… fell far short of suggesting most officials were contemplating the possibility of rate increases, they made clear the Fed is shifting further away from agreeing on another cut.
That could put it on a collision course with President Donald Trump and complicate the task of Trump’s nominee for Fed chair, Kevin Warsh.”
Reading through the meeting minutes, I couldn’t help but sense a deeply divided committee with a growing contingent of officials determined to dig in their heels.
“The possibility that upward adjustments to the target range for the federal funds rate could be appropriate…”
At least “several” members appear eager to push back against President Trump and Chair Warsh.
I’ll assume the DOJ Chair Powell indictment was an unacceptable attack on Federal Reserve independence that crossed red lines.
February 18 – Financial Times (Myles McCormick):
“A top White House official has said Federal Reserve economists should be ‘disciplined’ for publishing a report showing US businesses and consumers were shouldering the bulk of the costs from Donald Trump’s tariffs.
Kevin Hassett, director of the National Economic Council, described the recent study from the New York Fed as ‘an embarrassment’ and said it failed to capture the full effect of the president’s levies.
‘It’s I think the worst paper I’ve ever seen in the history of the Federal Reserve system,’ Hassett told CNBC...
‘The people associated with this paper should presumably be disciplined.’
He added:
‘What they’ve done is they’ve put out a conclusion which has created a lot of news that’s highly partisan based on analysis that wouldn’t be accepted in a first semester econ[omics] class’.”
February 19 – Financial Times (Myles McCormick):
“A top Federal Reserve official has accused the White House of escalating its attack on the central bank after the Trump administration lashed out at a study that suggested tariffs were hurting Americans.
Kevin Hassett… said… New York Fed economists should be ‘disciplined’ over what he said was a ‘partisan’ paper showing US businesses and consumers were shouldering most of the cost of President Donald Trump’s levies.
Minneapolis Fed president Neel Kashkari hit back…, describing Hassett’s remarks as ‘just another step to try to compromise the Fed’s independence’.
‘Over the last year we’ve seen multiple attempts to try to compromise the Fed’s independence including… when the Department of Justice served a subpoena to the board of governors over some building expenses.
It’s really about monetary policy,’ Kashkari said…”
I’ve never been a Kevin Hassett fan.
“Discipline” Fed economists for research the White House doesn’t like?
Not only was it a completely inappropriate comment, but it was also a knucklehead thing to say.
The institution is already under siege.
And while Hassett apologized for his “emotional” comment, it was blatantly consistent with the administration’s strategy of leaning on threats and coercion.
Committee members, at least a group of them, are ready to circle the wagons to safeguard Federal Reserve independence.
The administration is only making Kevin Warsh’s leadership challenges more difficult.
This entire backdrop raises serious concerns regarding the “Fed put.”
General instability, festering Credit issues, and a vulnerable AI/tech Bubble raise the odds of risk aversion escalating into a serious deleveraging dynamic.
Might the administration’s attack on Fed independence impact the timeliness and scope of a Fed response to market liquidity issues?
Will the markets view the Fed’s liquidity backstop under Warsh as more uncertain?
February 18 – Axios (Barak Ravid):
“The Trump administration is closer to a major war in the Middle East than most Americans realize.
It could begin very soon.
A U.S. military operation in Iran would likely be a massive, weeks-long campaign that would look more like full-fledged war than last month's pinpoint operation in Venezuela, sources say.
The sources noted it would likely be a joint U.S.-Israeli campaign that’s much broader in scope — and more existential for the regime — than the Israeli-led 12-day war last June…
Such a war would have a dramatic influence on the entire region and major implications for the remaining three years of the Trump presidency.
With the attention of Congress and the public otherwise occupied, there is little public debate about what could be the most consequential U.S. military intervention in the Middle East in at least a decade.”
Crude oil surged 5.7% this week to an eight-month high, while Gold jumped $65 and silver rallied 9.3%.
Those markets appear to take war risk more seriously than stocks and bonds.
Watching a clearly outraged President rail against our Supreme Court Justices, I couldn’t help but ponder the impact his demeanor might have on Iran war plans.
President Trump will clearly not tolerate Iran’s typical negotiation stall tactics.
Experts on Iranian affairs question whether the Ayatollah is willing to abandon enrichment.
There is a view that war with the U.S. is inevitable, and that they can withstand an air assault.
Analysts suggest the U.S. might be a couple weeks from having military assets in place.
February 18 – Wall Street Journal (Lara Seligman, Michael R. Gordon, Alexander Ward and Shelby Holliday):
“The U.S. is sending significant numbers of jet fighters and support aircraft to the Middle East, assembling the greatest amount of air power in the region since the 2003 invasion of Iraq.
The U.S. is ready to take action against Iran, but President Trump hasn’t decided whether to order strikes or—if he does order them—whether the aim would be to halt Iran’s already-battered nuclear program, wipe out its missile force or try to topple the regime.
Over the past few days, the U.S. has continued to move cutting-edge F-35 and F-22 jet fighters toward the Middle East…
A second aircraft carrier loaded with attack and electronic-warfare planes is on the way.
Command-and-control aircraft, which are vital for orchestrating large air campaigns, are inbound.
And critical air defenses have been deployed to the region in recent weeks.
The firepower will give the U.S. the option of carrying out a sustained, weekslong air war against Iran instead of the one-and-done ‘Midnight Hammer’ strike the U.S. carried out in June against three Iranian nuclear sites, U.S. officials said.”
How this plays out is highly uncertain.
There are scenarios where this blows up into a major and consequential war.
The Iranian Republican Guard has significant military assets and regional proxies with depleted yet problematic firepower.
Adding another layer of complexity in the event of war, Iran is close allies with Russia and China.
President Trump’s previous military operations have been targeted and of notably short duration.
His demeanor as a war-time president is an open issue.
I see a president who has suffered a string of setbacks, including the Epstein files, Minneapolis, Greenland, and now with the Supreme Court.
TACO.
His power seems much depleted from a year ago.
The President’s threats and coercion are a lot less intimidating.
Fear of pushing back has dissipated, even within the Republican party.
The President’s physical and mental health can’t be taken for granted.
When it comes to today’s extreme uncertainty, high on the list is the President’s propensity for scorched earth.
The assumption is he’ll behave well enough to make it to the midterms.
But the extreme vitriol unleashed on the Supreme Court is concerning.
Having two of his own appointees, Justices Amy Coney Barrett and Neil Gorsuch, oppose him is a psychological blow.
Counting on the Supreme Court to champion his presidential power grab, betrayal is intolerable.
How dare they attempt to check presidential power?
Trump the Lame Duck is a big worry.
And suddenly, it feels as if it’s here already – a mere 13 months in.
His days pushing folks around – playing bully – are running short.
And that’s at home and abroad.
The usual threats and coercion will now be met with staunch resistance and resolve.
The President and his inner circle, envisaging world dominance, never contemplated such a breakneck loss of power.
And considering the administration’s previous assaults on our nation’s most important institutions, it was discouraging to see the President so recklessly undermine the legitimacy of the Supreme Court.
I imagine he’s increasingly disoriented.
Fearing a midterms debacle, it will increasingly be every Republican for him or herself.
And, for many, that means keeping more than a safe distance from our unpopular President.
And I don’t expect DJT to respond rationally to disloyalty and abandonment.
When I ponder how angry and frustrated he might become, I recall the Oval Office debacle with President Zelenskyy.
There was a deeply disturbing irrationality and loss of control.
In short, he “lost it” when Ukraine’s President stood his ground.
I question whether President Trump can maintain composure as the world pushes back and calls his bluffs.
The Supreme Court subdues his main coercion tariff weapon, and he swings back immediately with a Section 122 10% global tariff on foreign goods.
Sign of things to come.
The President will fight back hard - likely erratically and unpredictably.
We can hope an agreement with the Iranians comes quickly.
Safer to take frustrations out at home, against the Democrats and recalcitrants in his own party.
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