Q4 2025: “Historic ‘24 Excess Portends Precarious 2025.”
It’s been an eventful few months. A pivotal election and “red sweep,” with prospects for deregulation and pro-growth policies dousing additional fuel on highly speculative markets. President Trump’s White House return, with a barnstorming number of “day one” executive orders and nonstop actions. There was a historic fire in Los Angeles, with property damage and economic loss estimates as high as $275 billion, with broad ramifications for insurance markets. We live in an age of heightened uncertainty and insecurity – along with one heck of an overheated financial sector and speculative bubble.
The Federal Reserve reduced rates twice during the quarter – two days after the election and again on December 18th. In my almost four decades following Federal Reserve policymaking, the Fed had not previously cut rates with financial conditions so loose. System credit growth remained exceptionally strong; stocks traded at record highs; the economy was resilient at 3% growth and historically low 4.1% unemployment; and inflation was stubbornly and meaningfully above the Fed’s 2% target. Nevertheless, Fed officials referenced some nebulous “neutral rate” as they slashed rates 100 bps in three months.
I struggle how best to put Q4 and 2024 excess into proper historical context. We’ve witnessed the extraordinary for so many years that it has become business as usual. My analytical framework generates maxims, including how “Things turn crazy at the end of cycles.” As noted in past calls, my macro analysis journey began in the eighties, witnessing market volatility and an equities bubble, the 1987 stock market crash, Greenspan’s liquidity assurances, and the reemergence of a more systematic bubble in credit, commercial real estate, junk bonds, LBOs, and various Wall Street excess. Post-bubble, this era was called the “decade of greed.”
Greater Fed reflationary measures stoked the nineties tech bubble. That faltering bubble provoked a stronger reflationary response – and a much greater mortgage finance bubble. A more powerful bubble deflation – and the so-called “great financial crisis” – provoked an historic reflationary response from the Bernanke Fed. But that period’s trillion-dollar QE “money-printing” operation was dwarfed by the Powell Fed’s $5 TN dollar pandemic response.
My fascination was piqued back in the nineties, and I’ve spent more hours studying the “Roaring Twenties” period than I care to admit. The analytical framework and perspective I developed through my analysis of that most critical period in U.S. history are fundamental to how I view “Roaring Twenties 2.0.”
A critical debate arose after the “Roaring Twenties” boom ended with the 1929 crash and Great Depression: The conventional Milton Friedman/Ben Bernanke view - materializing decades later - holds the Fed directly responsible. More specifically, they target the Fed’s late decade tightening measures along with their failure to print sufficient money as the boom faltered. Not coincidently, these days the Fed stops short of tightening financial conditions, while erring on the side of monetary inflation.
I’ve studied enough contemporaneous analysis from the twenties to take strong exception to revisionist dogma. It’s certainly comforting to believe that era’s prosperity – the so-called “golden age of capitalism” – was sound and sustainable if not for unenlightened policymaking. We don’t hear central bankers, politicians, or even academics these days beckoning for tighter financial conditions necessary to restrain bubble excess. The key enduring lesson from the original “Roaring Twenties” period should have been how dangerously bubble inflations evolve over years of easy money and policy neglect. Risks to market, economic, social, and geopolitical stability are much too great to allow credit and speculative excess to run unchecked year after year.
Years ago, I incorporated elements of Austrian economics into my analytical framework. There’s no doubt in my mind that the 1929 crash and Great Depression were the consequences of a protracted cycle of egregious financial excess - the evolution of a deranged financial apparatus that promoted unprecedented resource misallocation, and resulting deep financial and economic structural maladjustment. Leveraged speculation – including broker call loans and highly leveraged investment trusts – was instrumental in years of systemic liquidity-overabundance. Monetary disorder stoked self-reinforcing asset inflation and speculative excess, spending distortions, and epic mal-investment.
At this point, there should be little debate: Today’s “Roaring Twenties” excesses are the most extreme since that fateful period a century ago. Critical long-forgotten lessons from America’s worst bubble experience are most germane: Uncheck asset inflation and speculation are pernicious. Spending and investment fueled by liquidity emanating from leveraged speculation are self-reinforcing but unsustainable. Major bubbles create latent fragilities, and bubbles don’t work in reverse. There is really no cure other than to ensure bubbles aren’t allowed to inflate indefinitely.
And something else pertinent from my study of that period: manias are incredibly insidious and powerful. An astonishingly few in 1929 recognized how fragile the system had become late in the cycle – with speculators, investors, economists, Wall Street, bankers, central bankers, and government officials all captivated by markets in the throes of manic excess.
The two “Roaring Twenties” share key dynamics – both were extraordinarily protracted cycles characterized by rapid credit growth; prolonged speculative asset bubbles; far-reaching deviations in investment spending and momentous technological and financial innovation. I’ll add that historic bubble inflation has a prerequisite: the environment and prospects must appear exceptionally bright – demonstrably promising. Indeed, phenomenal technological innovation and development, along with deep-rooted optimism, are part and parcel to spectacular bubbles.
I have done many of these calls. I’ve delved deeply into my analytical framework and thesis. There’s part of my psyche that would almost prefer to say, “OK, I’m wrong on this history’s greatest bubble thesis - ready to get on with life.” The problem is the evidence of bubble excess is unequivocal and turns only more powerful by the quarter. From economic data to market behavior to social, political and geopolitical dynamics - from all directions come convincing thesis corroboration. After such a long cycle, everyone is numb. But the key takeaway from this call is that late-cycle excesses lurched to a more extreme, more precarious juncture. I’ll share some examples.
Global issuance of corporate bonds and leveraged loans last year surged 30% from 2023’s level to $8 TN (LSEG). Total U.S. corporate debt issuance ballooned more than 30% to $1.96 TN. Companies borrowed $2.22 TN of risky leveraged loans, more than double 2023’s level. Municipal debt issuance surged 32% to a record $508 billion.
While data is scant, the historic boom in “private credit” turned increasingly manic. The lack of transparency is an issue for what is essentially lightly regulated risky “subprime” corporate credit – too much of it funneled into annuities and other popular retail insurance products.
And a sign of the times from Bloomberg “The world’s 500 richest people got vastly richer in 2024, with Elon Musk, Mark Zuckerberg and Jensen Huang leading the group of billionaires to a new milestone: A combined $10 trillion net worth.” “The eight tech titans alone gained more than $600 billion…, 43% of the $1.5 trillion increase among the 500 richest…”
Signs of runaway speculation are everywhere: For a fifth straight year, the Chicago Board Options Exchange reported record trading volume across its four US options exchanges – last year reaching 3.8 billion contracts. Here, I’ll quote: “Trading in options expiring the same day averaged more than 1.5 million contracts a day in the last three months of 2024, accounting for 51% of the overall S&P 500 Index options volume…” Last year saw record trading in interest-rate and equities futures contracts (Coalition Greenwich). Another quote: “Trading volume for centralized crypto exchanges hit a record high of $11.3 trillion in December… The Bitcoin network completed more than $19 trillion in transactions last year, more than doubling… 2023.” (bitcoin news)
Average daily corporate debt trading surged 21% y-o-y (Coalition Greenwich) – and it was a record year for Treasury futures trading (CME). Quoting from the WSJ: “Investors plowed more than $1 trillion into U.S.-based exchange-traded funds in 2024, shattering the previous record set three years ago… Total assets in U.S.-based ETFs reached a record $10.6 trillion at the end of November…”
Collapsing risk premiums also evidence extreme market risk embracement: Investment-grade yield spreads versus Treasuries narrowed to as little as 73 bps in Q4 – the lowest level all the way back to March 2005. High yield spreads narrowed to 253 bps – the low since June 2007. High yield spreads traded last week only three bps off those lows.
Money market fund assets – or MMFA- expanded $873 billion, or 14.6%, last year. Even more remarkable, MMFA ballooned at a blistering 27% pace during the final 22 weeks of the year, a period when the Fed aggressively loosened policy. MMFA expanded an incredible $2.29 TN, or 50%, since the Fed began “tightening” in March 2022 – and $3.21 TN, or 88%, since the start of the pandemic (February 2020). This unrelenting historic monetary inflation basically goes unreported – completely overlooked by Wall Street analysts, the economic community, and even the Federal Reserve. I have previously discussed the interplay between the proliferation of levered speculation and growth in money market assets.
The highly levered Treasury “basis trade” reportedly surged to a record $1.15 TN (from Bloomberg) by early November – and I suspect rapid growth has been ongoing. Some of the major hedge funds finance levered Treasury holdings in the “repo” market, playing the tiny spread between cash bonds and their Treasury futures short positions. This expansion of “repo” borrowings generates new marketplace liquidity intermediated through the money market complex, resulting in an expansion of money fund assets.
Examining the data, total system “Repo” Assets inflated $678 billion, or 30% annualized, during combined Q2 and Q3 - to $7.4 TN. Broker/Dealer Assets surged $341 billion, or 26% annualized, during Q3 to a record $5.53 TN – with one-year growth of 16.2%. Here’s a data point with huge ramifications: “Repo” assets inflated $2.58 TN, or 54%, over 19 quarters.
Powerful systemwide credit growth is unrelenting. Non-Financial Debt (NFD - from Fed Z.1 data) expanded $3.47 TN over the 12 months ended September 30th. For perspective, NFD expanded $2.53 TN in 2007 - an annual record that held all the way until the pandemic. Treasury issuance continues to dominate system credit growth. At Q3’s end, Treasuries had inflated $1.97 TN over the previous year; $3.97 TN over two years; and a reckless $10.96 TN, or 66%, over the past 19 quarters.
This historic expansion of money and credit is the fuel inflating a once-in-a-century securities bubble. Total Debt and Equities Securities inflated $24.5 TN, or 19.0%, over the previous year, and $58.7 TN, or 62%, over five years – to a record $153 TN. And one of my favorite bubble ratios: Total Securities ended Q3 at 522% of GDP, dwarfing cycle peaks of 375% from Q3 2007 and 357% during Q1 2000.
And to continue this chain of bubble analysis, Household Net Worth (Assets less Liabilities) inflated $17.2 TN, or 11.4%, in the 12 months ended September 30th - to a record $169 TN. Net Worth inflated $50 TN over 17 quarters, or 42%. Another illuminating bubble ratio: Household Net Worth ended September at 575% of GDP, eclipsing previous cycle peaks 488% in Q1 2007 and 444% during Q1 2000.
This flurry of numbers will have to suffice for “egregious ‘24 excess.” I refer often to the concept of “terminal phase” excess – and for good reason. Late-cycle blow-offs are self-destructive. For one, manic speculative excess is unsustainable. Fragility grows as the crowd pushes the limits of risk embracement – the bounds of exuberance and leverage. Meanwhile, system stability is compromised by a parabolic rise in systemic risk – with the expansion of ever-larger quantities of increasingly risky credit.
The ongoing boom in “private credit” deserves a mention. As an analyst that watched in disbelief as subprime loans and related derivatives ballooned during the mortgage finance bubble’s “terminal phase”, the current manic fervor throughout subprime corporate credit and leveraged lending is even more alarming. For too long, finance has remained readily available for unprofitable and financially suspect companies. As always, high risk lending appears almost miraculous so long as companies enjoy unending market access to fund operations and roll over maturing obligations. But when the music stops, the system faces a deluge of negative cash-flow enterprises and painful debt and economic crises.
With this subprime corporate debt boom in mind, some thoughts on the historic AI bubble. This really is the embodiment of late-cycle overkill – more precisely, multi-decade super cycle “terminal” excess. We’re talking about an epic spending blackhole – literally trillions for data centers, computer servers, energy and cooling infrastructure, software development, corporate AI implementation, and so on. And while the adoption of artificial intelligence will surely have momentous positive impacts, prospects for profits sufficient to justify trillions of expenditures are anything but clear.
History informs us that these kinds of runaway manic speculation, borrowing and spending bubbles ensure a legacy of losses, insolvent companies, malinvestment, and deep structural maladjustment. Hundreds of Internet companies failed with the collapse of the late-nineties tech bubble. Most Internet IPOs from that period filed for bankruptcy. The proliferation of “Roaring Twenties”-era radio and communications companies suffered a similar fate.
It was a most pivotal election in November, and on the third day of President Trump’s term he announced an AI joint venture with Softbank, OpenAI, and Oracle - with a $500 billion investment goal. I imagine Elon Musk and other industry heavyweights will redouble their AI efforts. Friday, Meta Platforms announced plans for $65 billion of AI-related spending this year, 27% ahead of what analysts had expected – including a new data center “so large that it would cover a significant part of Manhattan.”
And then Monday markets were rocked by a small Chinese AI startup named DeepSeek – with its low-cost and impressive AI tool. Nvidia was slammed 17% - with the $560 billion evaporation of market capitalization the largest in history. The Semiconductor index sank 9%. Suddenly, key aspects of the bullish narrative look flimsy. Beyond tech - energy and utility stocks, which had been rising to the moon, abruptly headed back to earth. President Trump called it a “wake-up call.”
This historic late-cycle global arm’s race is led by an extremely well-capitalize tech oligarchy, scores of technology operators globally, increasingly by governments desperate not to be left behind, and overheated debt markets enamored by high-yielding credit.
Risks of overheating are rising. An economy that has been expanding at a 3% pace, with historically low unemployment, will now receive additional stimulus from the tech investment boom, weather catastrophe rebuilding in North Carolina, Florida, California and elsewhere, and a vigorous Trump 2.0 pro-growth agenda.
President Trump is determined to spur an economic boom. With lending and system credit growth already overheated, it’s a delicate juncture in the cycle for aggressive financial and economic deregulation.
Ten-year Treasury yields, at 3.65% the session before the Fed began cutting rates in September, ended the year 92 bps higher. Importantly, yields today are almost 100 bps higher in the face of the Fed’s 100 bps of rate cuts. This is definitely not what Wall Street and the Fed had anticipated – and I believe this unusual move portends bond market struggles ahead. It challenges the view that central bank rate cuts are always available to bolster markets in the event of instability.
Importantly, the surprising yield surge unleashed instability at the vulnerable global “periphery”. For the quarter, yield spikes included Panama’s 177 bps, Brazil’s 137 bps, and Mexico 99 bps. Many EM bond yields surged to multiyear highs, with currencies also under pressure. Losses for the quarter included 18% for the Russian ruble, 12% for the Brazilian real, and 11% for the South Korean won. For the year, the Argentine peso declined 22%, the Brazilian real and Russian ruble 21%, and the Mexican peso 19%.
UK yields surged 56 bps during the quarter - and then spiked an additional 32 bps in early January to 4.89% - the high back to July 2008. Recall that the UK “gilts” market suffered a bout of deleveraging back in Autumn ‘22. The bond market revolted against new UK Prime Minister Liz Truss’s budget – canceling her term after only 49 days.
I draw attention to this event, viewing it as a key juncture for global markets: the reappearance of the long-lost “bond vigilantes” – traders taking things into their own hands – drawing a line and finally imposing discipline on spendthrift governments. We saw during Q4 and early in January discipline beginning to be imposed universally.
There is today elevated risk that the “vigilantes” turn their sights on U.S. Treasuries. The Fed committed a major error slashing rates with quite loose financial conditions, economic resilience, and sticky inflation. Core CPI was at 3.2% in December, having declined only a tenth over the previous six months. Expected one-year inflation from the University of Michigan’s January survey jumped to 3.3% - matching the high since November ‘23.
The risk of bond market instability is high and rising. The Trump administration could enjoy a bit of a bond market honeymoon, especially if tariff directives are not as forceful and urgent as feared – or if equities falter. Speaker Johnson has announced an aggressive legislative schedule, with plans to pass “one big, beautiful bill” within three months. Congress will extend the Trump’s tax cuts while lowering the corporate tax rate. The President has reiterated his pledge to exclude tip income from taxation. He also campaigned on eliminating taxes on overtime pay and social security. Discussions are ongoing to boost the state and local tax deduction. As GOP lawmakers jostle for constituent benefits, The Wall Street Journal ran with the headline, “Tax-Cut Wish List Grows for Trump’s ‘Big, Beautiful Bill.”
And, at this point, meaningful cost cutting is a work in progress. President Trump may move forward on an aggressive tariff regime, using prospective tariff revenues to partially offset new tax cuts. The bond market could take a dim view of the unfolding budget process.
There are unrecognized bond market vulnerabilities. I mentioned earlier the instability that erupted at the global “periphery” during Q4. There has been meaningful “carry trade” de-leveraging, especially in the emerging markets. “Carry trades” proliferated over recent years, expanding to become a major source of global liquidity. Speculators borrowed at low rates in developed markets such as Japan, to lever in higher-yielding bonds from developing Latin America, Asia, and Eastern Europe.
Importantly, there is a “doom loop” dynamic associated with EM de-risking/deleveraging. The unwind of speculative leverage drives outflows, currency weakness, and EM central bank currency intervention, with forced selling of Treasuries, upward yield pressure, and more de-leveraging. And deleveraging is a liquidity destroyer.
There are complexities and analytical nuance. Instability at the “periphery” typically has initial benefits for the “core.” The Dollar Index surged 7.6% during Q4, the largest quarterly advance since Q1 2015. Dollar strength supported international flows into U.S. markets, with Treasury inflows helping to offset EM central bank liquidations.
Importantly, after short-lived benefits, deleveraging at the “periphery” elevates risk at the “core.” Contagion sees risk aversion and waning liquidity begin to gravitate toward “core” markets. Over recent years, initial bouts of “periphery” instability were reversed by a powerful combination of a booming “core,” declining global yields, and general liquidity overabundance. It’s not clear to me that “risk off” would today be mitigated by such constructive dynamics.
As noted earlier, the Fed slashed rates 100 bps, yet Treasury yields surprised with a 100 bps surge. This new dynamic raises serious issues with respect to the efficacy of Fed and central bank market backstops – with major ramifications for the risk vs. reward calculus throughout leveraged speculation. I’ll rephrase this important point: When the sophisticated leveraged players begin to question whether central banks can maintain liquid and stable markets, some paring of risk and leverage will be forthcoming. This is especially pertinent for the highly levered Treasury “basis trade.” And with markets so overheated and over-levered, deleveraging at the margin is now more likely to trigger a systemic de-risking/deleveraging dynamic.
I doubt the booming “core” can continue to bail out the fragile “periphery.” At this point, intensifying “core” bubble excess poses clear and present inflation risks that will keep Treasuries on edge. The election sparked a meaningful boost to confidence, apparent in comments from corporate CEOs and the heads of financial institutions, along with the spike in small business optimism to a more than six-year high.
From the perspective of de-leveraging risks and heightened bond market vulnerability, this is a high-risk juncture for an aggressive pro-growth policy agenda. The second term of a most determined “disruptor” administration is replete with extraordinary uncertainties. While the course of tariff and trade policy is unclear, the risk of unfolding trade wars is high. I don’t see countries easily rolling over for what is viewed as Trump bullying.
For now, I lean on the view that the President will aggressively wield the tariff flamethrower; that our trade partners are poised to retaliate; and that higher import prices will be an issue. And keep in mind that goods price disinflation was instrumental in cooling CPI - offsetting sticky services and shelter inflation. There’s talk on Wall Street and within the economic community that tariffs are a one-time price issue with only marginal enduring inflationary impact. I’m skeptical of this sanguine view – sentiments I expect the bond market to share.
Considerable uncertainty exists regarding the scope of the administration’s immigration crackdown – with ramifications for already tight labor markets. Again, there are extraordinary facets to the current environment. Huge weather-related rebuilding challenges lie ahead – and we can presume more disasters will strike. Average hourly earnings increased about 4% over the past year. Until the pandemic, it had been decades since earnings inflated at such a pace.
Our system today is impacted by myriad of what I call “inflationary biases,” significantly raising the odds of inflation surprises. Much is outside administration and Federal Reserve control. Returning to President Trump’s announcement of a major AI initiative: This will only intensify China’s determination not to be outdone by U.S. efforts.
China’s 2025 prospects. Beijing has expended extraordinary stimulus to hold bubble deflation at bay, with mixed results. 2024 was another dismal year in China’s ongoing apartment bubble collapse. Yet enormous spending on myriad new technologies - electrified vehicles, clean energy tech, renewable energy infrastructure, and the like, offset weak apartment construction and consumption. While down from 2023, massive $4.5 TN system credit growth was instrumental in sustaining growth.
But it’s increasingly apparent that enormous export-focused investment spending is unsustainable, especially with the return of President Trump. Financial stress is mounting within both local government finance and China’s bloated banking system. Markets have been frustrated by Beijing’s hesitancy to call out the stimulus bazookas. But ballooning non-productive credit risks unleashing destabilizing currency instability. China’s renminbi traded to 16-year lows to begin the year.
This is a critical juncture for China – with risks including intensifying bubble deflation, economic depression, financial system fragility, and currency vulnerability. I’ll assume Beijing prioritizes expending whatever stimulus it takes to hold crisis dynamics at bay. And Xi Jinping will demand measures affording China the strongest position for heated trade negotiations.
The exportation of Chinese disinflation significantly contributed to weaker goods prices and lower inflation in the U.S. and globally. This important inflation dynamic is now at risk. Beijing will be compelled to adopt more consequential reflationary policies. And how much tariffs increase will depend on trade negotiations. President Trump will surely be tough, focusing on Beijing’s failure to honor past commitments. I expect Xi Jinping to be unwavering in his resolve not to be bullied. Trump’s team goes into trade talks confident they enjoy the upper hand over a weakened China. If the U.S. side overplays its hand, China could raise the issues of its Treasury holdings and Taiwan. Economically, China is in a weaker position. But Xi Jinping could play hardball, believing the booming U.S. has more to lose.
Generally, I see an unfolding clash from the extraordinary power President Trumps enjoys domestically and his propensity to project such power internationally. I expect much of the world to convey a low threshold for being pushed around by an in your face “America first” administration. Trump is eager to brandish tariffs and sanctions, as we saw Sunday after Colombia refused to accommodate U.S. deportation flights. From the Financial Times: “Mexico and Canada forge united front in face of Donald Trump’s tariff threats.” I expect more nations to partake in an informal anti-American trade threat alliance. Much rides on whether President Trump backs down or doubles-down. Add trade war risk to an already hyper-risky geopolitical environment.
Exuberant U.S. risk markets are incredibly complacent in the face of myriad current and festering risks. Last year’s historic excesses – credit, speculation, speculative leverage, and the AI and crypto manias for starters – intensified latent fragilities. History informs us of the precarious nature of speculative blowoffs. They’re unsustainable and prone to abrupt and destabilizing reversals - with a propensity for triggering panic, dislocation, and market crashes. I remember clearly the backdrops for notable market blowups in 1987, 1994, 1997/98, 2002, 2008, 2012, and 2020.
Without a doubt, the current environment has risks that dwarf those from previous booms. So many things without precedent: Historic market speculation and public participation; millions trading stocks and options from their computers, tablets, and phones; $10 TN of ETFs; a $7 TN money market fund complex; approaching $8 TN of “repos”; unprecedented speculative leverage in stocks, Treasuries, and fixed-income; and hundreds of trillions of derivatives. Let there be no doubt, over indebtedness and myriad bubble fragilities pose clear threats to system stability.
I am not resorting to whackoism or histrionics. There has been nothing with comparable risks in almost a century. When I ponder the dichotomy between today’s near universal optimism and a lengthy list of things that could go terribly wrong, I think of a comment made just days ahead of the 1929 market crash from the eminent American economist Irving Fisher: “Stock prices have reached what looks like a permanently high plateau.”
I’ll conclude again with my simple wish: I hope I’m wrong.