Weekly Commentary: Deleveraging Watch

2026-02-07 02:40:37 ET

As they say, markets are all about greed and fear. There's a natural ebb and flow, as participants travel the winding road of progressive risk embracement, tested by occasional bouts of risk aversion. The force of marketplace whims is deeply influenced by the various stages of the speculative cycle. Derivatives and speculative leverage hugely impact contemporary market behavior. This is especially the case in the current late-cycle dynamic, speculative impulses crystallized from successful resolutions to a series of "risk off" episodes.

Today's late-cycle dynamics are especially affected by the perception of the all-powerful Federal Reserve liquidity backstop, coupled with an administration that will uniquely do and say anything to sustain the bull market (through the midterms and beyond).

Markets suffered a significant "risk off" period in 2022, with deleveraging dynamics gaining momentum around the Autumn UK gilts crisis. While cut short by the Fed/GSE's quick $500 billion liquidity injection, "risk off" was taking hold during the March 2023 Silicon Valley bank/bank run crisis. Japanese yen "carry trade" unwind was on the brink of triggering a more systemic deleveraging in July 2024. That September, the Fed surprised the markets with the first of three straight rate cuts. Then with April 2025 "liberation day" instability, deleveraging was at the cusp of turning highly problematic....

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