Recalling 1991
Doug Nolan
With risk aversion gathering momentum, deleveraging looms.
“US Financial Shares Extend Selloff on Continued AI Concerns.”
“US Brokerage Shares Slide in Latest Sell-off Driven by New AI Tool.”
“Wealth Manager Stocks Sink as Investors Flee AI’s Next Casualty.”
“Insurance Broker Stocks Plunge as New App Sparks AI Risk Fears.”
“AI ‘Scare Trade’ Hits Real Estate Stocks.”
“Real Estate Services Stocks Sink in Latest ‘AI Scare Trade’.”
“Tech Rout Intensifies As Angst Over AI Deepens.”
“Biotech Contractors Extend Slump Amid AI Fears, Weak Earnings.”
“Logistics Stocks Sink on AI Fear Trade.”
“AI Panic Hits Trucking, Transport Stocks.”
“Stocks Have Few Pockets of Calm Amid AI Worries.”
“Wall Street’s New Trade is Dumping Stocks in AI’s Crosshairs.”
February 13 – Bloomberg (Carmen Reinicke):
“For three years, AI was the stock market’s savior.
Suddenly, it’s become a marauder, and virtually no corner of the equity market looks safe from its impact.
Just in the past 10 days, investors have delivered swift routs to companies toiling in industries as disparate as logistics, real estate, software, private credit, insurance and wealth management.
In each case, the release of a new artificial intelligence tool, most famously from Anthropic PBC but also from small, lesser-known startups, prompted a rapid reassessment of business prospects…
‘All we have done and seen in the past few weeks is the market torch the perceived AI losers.
Obviously the definition of AI losers is changing almost daily to the point where you can’t track it via themes or baskets,’ said David Wagner, portfolio manager at Aptus Capital Advisors.
The one constant is that AI applications have become the market’s bogeyman, capable of erasing billions in value in a matter of hours as investors question the very viability of large swaths of the corporate landscape…
‘The perception is spreading like a wildfire, and it’s spreading horizontally,’ Joseph Shaposhnik, portfolio manager at Rainwater Equity, said.
‘In other words, it was once confined to a particular sector, and now it’s spreading across sectors, the fear of the risk’.”
For starters, the “AI scare” is a catalyst exposing underlying market fragility.
In a robust market environment, we would not see such a proliferation of individual stock and sector blowups.
It’s become a minefield out there.
And it’s the type of market vulnerability consistent with incipient financial conditions tightening.
With deleveraging rocking crypto and gaining momentum in Big Tech, we’re on watch for waning liquidity and tightened conditions.
Things are anything but straightforward.
For the most part, financial conditions remain extraordinarily loose.
The iShares Investment-Grade Corporate Bond ETF (LQD) returned 0.93% this week, increasing y-t-d returns to 1.65%.
The iShares High Yield ETF’s (HYG) marginal weekly gain (0.05%) boosted 2026 returns to 0.77%.
At 79 bps, investment-grade (IG) spreads (to Treasuries) widened four bps this week.
Yet IG spreads are only nine bps off multi-decade lows – and compare to the five-year average of 104 bps.
Up a more noteworthy 30 bps from January’s multi-decade low, to 280 bps, high yield spreads have started to move (two-month highs), signaling nascent risk aversion (5-yr avg. 346bps).
To be sure, global liquidity abundance persists.
South Korea’s KOSPI equities index surged another 8.2% this week, with major indices up 5.8% in Japan, 5.6% in Thailand, 4.9% in Turkey, 4.1% in Taiwan, 3.9% in Vietnam, 3.5% in Indonesia, 2.4% in Australia, and 1.9% in Brazil and Canada.
The South Korean KOSPI’s 30.7% y-t-d gain has inflated y-o-y gains to 113%.
Japan’s Nikkei 225 Index has jumped another 13.1%, boosting one-year gains to 45.4%.
Particularly for U.S. stocks, mounting fragility coupled with general market liquidity excess stokes volatility and escalating instability.
This dynamic has manifested into extraordinary stock and sector performance dispersion, foreshadowing more systemic de-risking/deleveraging.
Such chaotic and unpredictable performance dispersion wreaks havoc on many levered hedge fund and derivatives strategies.
So-called “pairs trades” turn precarious.
Moreover, with the breakdown of traditional correlations, hedging stock market risks has turned problematic.
While many stocks and some sectors have been clobbered, the S&P500 index has declined only 1.4% y-t-d.
Meanwhile, sections of the U.S. equities market (most stocks) have performed well, offering ongoing enticing opportunities despite the “AI scare.”
The (this week) highflying Utility stocks surged 6.7% this week, boosting y-t-d gains to 8.6%.
Down this week (2.8%), the Transports still enjoy an 11.4% y-t-d gain.
The broader market has been strong.
The Midcaps are up 7.8% y-t-d (about six weeks), while the small cap Russell 2000 has gained 6.6%.
The “average stock” Value Line Index is 5.8% higher.
Providing a notably poor hedge, the Goldman Sachs Most Short Index has gained 6.8% so far in 2026.
The Mag7 Index was hit 3.2% this week (Apple down 8.0%, Amazon 4.5%, Alphabet 5.3%, Meta 3.3%), boosting 2026 losses to 7.2%.
The Crowded (previously free money) trade, long Big Tech versus short the broader market, is blowing up.
Loose conditions have combined with squeeze dynamics to create ongoing speculative opportunities.
Clock ticking.
“AI Borrowing Boom Shakes Bond Market.”
“AI Spending Surge to Pressure High-Grade Credit.”
“The AI Debt Binge is Transforming Big Tech: Everything Risk.”
“AI Debt Deluge: Tip of the Iceberg as Big-Tech Borrowing Swells.”
“AI Bond Blitz Spurs Biggest Tech Spread Penalty Since the GFC.”
“Investors Sour on Listed Credit Funds Over AI Hit to Software Sector.”
“AI Fears Weight on Call Center Operator’s $600 Million Bond Sale.”
“UBS Says Credit Markets to Price in More Pain From AI Disruption.”
‘AI-Driven Debt Binge Threatens to Disrupt Passive Credit Funds.”
“AI Scare Trade Goes Cross-Asset.”
“How Private Equity’s Big Bet on Software Was Derailed by AI.”
Stock performance from the big “private Credit” players continues to warn of an approaching Credit storm.
Apollo sank 6.0% this week (down 13.6% y-t-d), with Ares Management 1.8% lower (down 17.2%), and KKR declining 1.4% (20.2%).
Up marginally this week, Blue Owl and Blackstone are still down 17.7% and 14.8% y-t-d.
Seemingly signaling an uptick in crisis dynamics, bank and financial stocks came under heavy selling pressure this week.
The KBW Bank Index was slammed 5.5%, the largest decline since “liberation day” week April 4th.
The Broker/Dealers slumped 3.7%, also the biggest drop since April.
Notable losses this week included Ameriprise Financial 12.8%, Charles Schwab 10.8%, Citigroup 9.6%, Robinhood 8.3%, Raymond James 7.8%, Wells Fargo 7.4%, Bank of America 7.0%, Truist Financial 7.0%, Capital One 6.9%, and JPMorgan 6.2%.
Real estate kingpin CBRE Group sank 16.3%.
It’s worth noting that European Banks stocks (STOXX index) sank 5.5% - the “worst week since April amid AI worries.”
Leveraged Loan prices remained under pressure, ending the week down another 0.03 to 95.37.
This boosted one-month losses to 1.29 – the steepest decline since “liberation day” April 2025.
Treasury bonds caught fire this week.
Ten-year yields sank 16 bps to 4.05%, the low back to December 1st.
This was the largest weekly yield decline since early September (dovish Waller comments).
Data were generally supportive.
A weak December Retail Sales report (flat m-o-m) followed by favorable January CPI data were bond friendly.
Stronger-than-expected January payrolls data - 130k jobs added, 4.3% Unemployment Rate, 0.4% gain in Average Hourly Earnings – were disregarded.
I view this week’s bond market (safe haven bid) action as corroborating mounting systemic deleveraging risks.
The rates market priced a 3.00% year-end policy rate Friday, eight bps lower on the week and down 20 bps over 16 sessions – to the low since November 28th.
De-risking/deleveraging was ongoing throughout the cryptocurrency universe.
Bitcoin dropped 2.5% Tuesday, declined 1.2% Wednesday, sank 2.9% Thursday, and then rallied 5.0% (trading from 65,000 to 69,000) Friday.
“Bitcoin Traders Warn the $60,000 Mark is a Liquidation Trigger.”
February 9 – Decrypt (Vismaya V):
“Crypto’s Super Bowl presence has shrunk from a multi-company marketing blitz to a single exchange’s sing-along, with Coinbase returning to the big game alone this year, as Seattle… defeated New England… to win Super Bowl LX.
Four years after Coinbase brought its viral bouncing QR-code commercial to the ‘Crypto Bowl,’ the exchange aired the only major crypto ad during this year’s Super Bowl broadcast—unlike Super Bowl LVI, which featured celebrity campaigns from multiple firms, including the now-bankrupt crypto exchange FTX.”
February 9 – New York Times (Andrew Ross Sorkin, Bernhard Warner, Sarah Kessler, Michael J. de la Merced, Niko Gallogly, Brian O’Keefe, Ian Mount, Grady McGregor and Lauren Hirsch):
“Big Tech’s artificial intelligence spending spree has roiled the market lately.
The wallet was open for Sunday night’s Super Bowl LX broadcast, too, with a flood of A.I.-related ads that may prove more memorable than the game.
The A.I. Bowl, as some are calling it, appeared to overshadow the… Seahawks’ victory.
Yes, there were some creative gems among the commercials.
But the torrent of spending is reminding some of previous years when tech companies tried to capitalize on the Super Bowl limelight.
Those efforts didn’t end well for the advertisers.
The numbers: Almost a quarter of this year’s Super Bowl ads — 15 of the 66 spots, which sold for an average of $8 million for 30-second slots — featured A.I…”
Whether it was Super Bowl ads, equities trading or corporate Credit performance, AI dominated.
Headline of the week:
“Former Karaoke Company Drags Logistics Into the ‘AI Scare Trade’.”
AI might be the Bogeyman, but newfound negative market impacts are only a symptom.
The mind is a peculiar thing.
My thoughts this week kept returning to early 1991.
The Dow traded below 2,500 in mid-January.
GDP printed negative 3.6% during Q4 1990.
The economy was in recession, markets were in the tank, the banking system was severely impaired, and our nation was heading to war.
Prospects could not have appeared much bleaker.
The S&P500 surged 3.7% on January 17, 1991, as it became clear that Saddam Hussein’s army had no answer to initial Operation Desert Storm strikes.
What unfolded was a short squeeze for the ages.
From January lows, the S&P rallied 35% into year-end.
The squeeze triggered the start of a transformative surge in marketplace liquidity.
The Greenspan Fed had commenced aggressive rate cuts.
Starting with 25 bps (from 8.25%) on July 13, 1990 – rates were down to 4.00% to end 1991, while on their way to a then unprecedented 3.00% by September 4, 1992.
Alan Greenspan orchestrated a steep yield curve to drive banking system recapitalization, a godsend for the fledgling leveraged speculating community.
When bond Bubble deleveraging erupted in 1994, the GSEs operated as quasi-central banks to stabilize marketplace liquidity and the hedge fund industry – a role they would replay during the 1998 liquidity crisis (LTCM) and again in 1999 and 2000.
The bursting of the nineties “tech” Bubble saw the Fed slash rates 475 bps in 2001 to 1.75%, unleashing mortgage finance Bubble leveraged speculation.
The Fed responded to the spectacular 2008 bursting Bubble with an unprecedented $1 TN of QE liquidity injections.
Our central bank doubled down on QE, doubling its balance sheet to almost $4.5 TN between 2011 and 2014.
The 2020 pandemic deleveraging crisis provoked liquidity injections to the tune of $5 TN, reckless monetary inflation that unleashed history’s greatest Everything Bubble of Levered Speculation.
The March 2023 bank mini crisis triggered a swift (Fed/GSE) $500 billion liquidity injection.
More recent repo market instability elicited the restart of QE.
Back in early 1991, the financial system was deeply impaired, and illiquid markets were in the toilet.
Prospects looked dreadful.
And for 35 years, government and central bank officials have done everything imaginable (and more) to ensure liquid markets.
It’s to the point where virtually the entire market structure is built on the assumption of liquid and continuous markets.
Astounding speculative leverage has accumulated over decades, ever more certain of liquid and continuous markets.
Hundreds of Trillions of derivatives have enveloped global finance, premised on liquid and continuous markets.
Trading strategies have proliferated, and ETF structures have ballooned to the many Trillions on the assumption of liquid and continuous markets.
It's been a Credit, asset inflation, and leveraged speculation super cycle Bubble for the ages.
And, importantly, it all regressed to self-destructive “terminal phase excess” throughout the global government finance Bubble finale.
More specifically, the recent years’ government debt, “repo,” “basis trade,” money market fund, “private Credit,” crypto and AI mania/arms race blow-off excesses went completely off the rails.
Boy do things go crazy at the end of super cycles.
I thought of 1991 this week, as I monitored the makings for a super cycle deleveraging that would conclude three decades of ever-growing confidence in the capacity of governments to ensure marketplace liquidity abundance.
Market history is strewn with booms turned bust, where liquidity excess spurred speculative Bubbles that ended in illiquidity and panic.
No one thirty-five years ago contemplated the monumental transformation in liquidity dynamics that was to unfold.
Today, seemingly everyone is unprepared for liquidity challenges ahead (mildly said).
The yen’s 3% rally was another of the week’s notable developments.
February 11 – Bloomberg (Greg Ritchie):
“The carry trade in the yen is ‘a ticking time bomb,’ with the popular hedge-fund strategy vulnerable to a massive unwind, according to BCA Research...
The trade — broadly defined as borrowing in the low-yielding Japanese currency to fund purchases of higher-yielding assets — benefits from the greater ‘carry’ on these foreign investments.
But the trade unravels if the riskier assets tumble or the yen rallies.
The BCA team led by Arthur Budaghyan sees the risk of a similar collapse in the trade to those seen in 2008, 2015 and 2020…
‘Our hunch is that the next unwinding case will also be triggered by a combination of a drop in ‘carry assets’ and/or a rebound in the yen,’ the team wrote…
‘It is impossible to know which will occur first.
But they will reinforce each other, resulting in a major reversal of the yen carry trade’.”
February 12 – Bloomberg (Tasos Vossos):
“The largest wave of corporate bond supply in history is set to be met by a rapidly-growing pool of passive buyers.
Some investors are warning that disruption will follow.
As Big Tech firms rush to raise unprecedented amounts of money to build out artificial intelligence, a growing share of those deals will be bought by passive funds.
These strategies — which follow an index or buy a basket of bonds and wait until maturity — have ballooned in recent years, raising concerns that their indiscriminate style of bond buying has distorted metrics of risk and left investors vulnerable.”
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