Weekly Commentary: Foreshocks

2025-10-25 07:05:00 ET

Future readers will struggle to comprehend how crazily unsettled things became – the markets, finance, economic function, societies, politics, and geopolitics. Stocks at new records this week, though not without more tremors forewarning of a major quake. Most have grown comfortable with, and dismissive of, the stirring drumbeat of Foreshocks. But some of us are darned worried about increasingly fragile fault lines and the eventuality of “the big one.”

The dichotomy between late-cycle speculative and liquidity excess versus a deteriorating Credit environment was front and center this week. From central bankers to bankers to Credit investors and rating agencies - perceptions are shifting. Discussions of weak underwriting and problematic market structure are no more confined to private conversations. The word “Bubble” is no longer lunatic fringe. Newfound scrutiny and resulting Credit tightening will prove problematic for scores of vulnerable borrowers and economic prospects more generally. But major impacts materialize over time.

Meanwhile, liquidity overabundance persists in key markets. In the near term, incipient credit problems have triggered a bond rally and declining market yields. Global markets remain highly over-liquefied. It’s as if festering U.S. Credit issues and rallying Treasuries have provided a meaningful jolt to global bond leveraging and liquidity. Notable liquidity-generating short squeezes have unfolded in U.S., French and UK bonds. Additionally, a more general unwind of hedges (against rising global market yields) provides a further liquidity boost.

The Japanese yen dropped another 1.5% this week, boosting October losses versus the dollar to 3.2%. The weaker yen and the prospect of a more dovish BOJ could promote aggressive yen “carry trade” leveraging and resulting liquidity creation....

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