TPSC - Weekly Commentary: Critical Market Juncture

2025-03-29 05:45:51 ET

Summary

• A disconcerting environment turned notably more so this week, with market instability becoming more serious.
• The longer the Trump administration ignores mounting market distress, the clearer it becomes that moving full speed ahead with agenda priorities takes precedence.
• Recent years have witnessed history's greatest subprime lending boom, dwarfing what was quite consequential high risk mortgage finance Bubble excess.

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 Nasdaq 100 (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&P 500 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....

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