Weekly Commentary: Worse Than The Worst Case

2025-04-07 12:30:00 ET

Summary

• It’s difficult to envisage the U.S. more unprepared for what will now unfold - an atrocious backdrop for heading into crisis. Stocks are only somewhat off record highs and unemployment at 4.2%.
• This week’s spread widening (87bps) was the most since the week of March 20, 2020. Spreads widened 135 bps over the past month. Spreads blowing out is indicative of the panicked unwind of levered “carry trades.”.
• Importantly, inflation is today unanchored and elevated compared to 2020, even before Trump’s historic tariffs. Powell’s Friday comments support the thesis that the Fed will be slower to react to market instability.
• The unfolding global trade war backdrop is uncharted waters. Scenario analysis should now include the possibility of things spiraling out of control over time - prolonged financial crisis, severe economic recession/depression, and even war of the non-trade variety.

“Worse than the worst-case scenario.” “Liberation day,” a day that will live in infamy. Financial Times Editorial Board: “America’s Astonishing Act of Self-Harm.” The catalyst for bursting history’s greatest Bubble was delivered Wednesday on the White House lawn – pomp and circumstance, celebratory propaganda, placards, and disinformation aplenty.

The historic, multi-decade, global Bubble was always going to end badly. The circumstances I see today are worse than what I had previously contemplated as the worst case. It’s difficult to envisage the U.S. more unprepared for what will now unfold - an atrocious backdrop for heading into crisis. Society is angry and so deeply divided – with stocks only somewhat off record highs and unemployment at 4.2%. Washington is at the brink of complete dysfunction.

The existing world order is collapsing. Extraordinary fragmentation and hostility risk great peril. The unfolding global trade war backdrop is uncharted waters. Scenario analysis should now include the possibility of things spiraling out of control over time - prolonged financial crisis, severe economic recession/depression, and even war of the non-trade variety. Financial markets will now factor in myriad extraordinary risks. At the minimum, the unfolding crisis will lack the concerted global response that has been instrumental in calming previous panics.

“S&P 500 Plunges 6% In Worst Rout Since March 2020.” “S&P 500 Ends Week Down 9.1% in Biggest Decline Since March 2020.” “Worst Stock Meltdown Since Covid Deepens as Recession Odds Soar.” “VIX Closes at Highest Since 2020 as Stock Slide Accelerates.” “Wall Street’s Fear Gauge Spikes to Highest Level Since 2020 Covid Crash.” “Junk Bonds Suffer Worst Rout Since 2020 With US Hit Hardest.” “JPMorgan to Goldman Swoon in Worst Two-Day Rout Since Pandemic” “Hedge Funds Hit With Steepest Margin Calls Since 2020 Covid Crisis.”

April 4 – Washington Post (Natalie Allison, Jeff Stein, Cat Zakrzewski and Michael Birnbaum): “Inside and outside the White House, advisers say Trump is unbowed even as the world reels from the biggest increase in trade hostilities in a century. They say Trump is unperturbed by negative headlines or criticism from foreign leaders. He is determined to listen to a single voice - his own - to secure what he views as his political legacy. Trump has long characterized import duties as necessary to revive the U.S. economy, at one point calling tariffs ‘the most beautiful word in the dictionary.’ ‘He’s at the peak of just not giving a f--- anymore,’ said a White House official with knowledge of Trump’s thinking. ‘Bad news stories? Doesn’t give a f---. He’s going to do what he’s going to do. He’s going to do what he promised to do on the campaign trail.’”

A pril 4 – Bloomberg (Catarina Saraiva and Jonnelle Marte): “Federal Reserve Chair Jerome Powell made clear the US central bank won’t rush to react to sweeping Trump administration tariffs, or to the financial market turmoil that has ensued amid fears of a global economic downturn. Tariffs are likely to have a significant effect on the US economy, including slower growth and higher inflation, Powell said Friday at a conference in Virginia. But, he added, Fed officials will wait to gain more clarity on those policies before lowering interest rates. He also emphasized that, with inflation still elevated, the central bank had an obligation to make sure a temporary price boost from tariffs doesn’t turn into something more persistent.”

This is a national crisis. Our President, too eager to brandish unchecked power, has moved forward with deeply misguided policies that risk sparking the type of financial mayhem that could induce global economic depression. It’s essentially evolving into financial, economic, political, societal, constitutional, and geopolitical crises all melded into one historic quagmire....

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