Weekly Commentary: A Feature, Not A Bug

2025-10-04 03:35:00 ET

It's the type of extraordinary backdrop that flashes "critical juncture". Ongoing "Terminal Phase Excess" is the culmination of a historic multi-decade global Credit Bubble. The post "liberation day" tariff pause rally - fueled by short covering, the unwind of hedges, powerful FOMO, and feverish late-cycle speculative leveraging - stoked epic excess, certainly including the global AI mania and arms race.

Pertinent insight is gained from mortgage finance Bubble dynamics. While that Bubble imploded during Q4 2008, Credit excess had peaked the preceding year. Non-Financial Debt growth reached a nominal $692 billion during Q2 2007. Broker/Dealer Asset ($682bn) and system repo ($436bn) growth peaked during Q1 2007. Growth in Corporate Bonds reached a record $471 billion during Q3 2007 (record holding until the pandemic). The S&P 500 reached a cycle high on October 11th, 2007.

I point to the June 2007 implosion of two Bear Stearns funds - the High-Grade Structured Credit Fund and the Enhanced Leveraged Fund - as a key Bubble-piercing catalyst. These funds employed sophisticated CDOs, derivatives, and heavy leverage - an aggressive "cutting edge" strategy that beamed brilliance - until it abruptly blew apart. As is commonplace during "Terminal Phases," "sophisticated" strategies that incorporate derivatives and aggressive leveraging rest on the specious assumption of liquid and continuous markets....

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