Unemployment 'Exhaustion': 40% Have 'Literally Nothing' Left

Jeremy Saffron

The Fed is halting QT effective December 1st, months ahead of schedule. BlackRock private credit CLO failed a solvency test. Oracle CDS volume and price are spiking. Continuing jobless claims near 2 million, highest since 2021.

The Fed halting QT early - is this an all-clear signal for equity investors, putting a floor under the market?

Jeremy Sappern

Danielle DiMartino Booth

The Fed stopping QT will provide only marginal support to the Treasury market via MBS roll-off being replaced by Treasuries. The real issue is hedge funds have ballooned Treasury basis trades to $2.4 trillion, relying on cheap overnight repo. The Fed's standing repo facility is not being used by banks, and the New York Fed had an emergency meeting with broker-dealers about this. Month-end and quarter-end funding dislocations are a major risk.

Danielle DiMartino Booth

The Fed stopping liquidity drain provides some marginal support for Treasury markets, mainly through MBS roll-off being replaced with Treasuries.

Mortgage prepayments increase if rates fall, allowing Fed to hit its $35B monthly MBS roll-off ceiling.

Jeremy Saffron

BlackRock's CLO fix was to waive management fees, not sell bad loans. Is this 'extend and pretend'? Does this mean true yield on private credit is negative?

If the Fed stops QT to save the repo market, are they explicitly bailing out hedge funds' $2.4T Treasury basis trades?

Jeremy Sappern

Danielle DiMartino Booth

BlackRock is too big to fail, but this signals a major problem for smaller private credit operators who lack BlackRock's liquidity. The real worry is contagion, as seen with a company financing First Brands now facing Chapter 11 itself.

Danielle DiMartino Booth

Only banks can borrow from Fed's standing repo facility; hedge funds are deep in repo market, causing funding dislocations, especially at quarter-end.

NY Fed republished paper on this and had impromptu meeting with broker-dealers about low uptake of standing repo facility.

Jeremy Saffron

Delinquencies on 2021/2022 vintage consumer debt are going vertical. If the consumer backing these CLOs is defaulting at 2008 levels, how long can managers waive fees?

BlackRock private credit CLO failed solvency test - is fee waiving 'extend and pretend'? Does it mean true yield on private credit is negative?

Jeremy Sappern

Danielle DiMartino Booth

The intersection of compromised underlying collateral (consumer debt) is the key risk. With unemployment at 4.4%, we are already seeing this level of distress. When unemployment rises, the ripple effect of contagion from bad car loans will hit the financial system.

Danielle DiMartino Booth

BlackRock is too big to fail, but it signals trouble for smaller operators; contagion is the biggest worry.

Mentions a company financing First Brands that's declaring Chapter 11 itself.

Jeremy Saffron

Headline jobs beat (119k) vs. continuing claims near 2M. Which data to trust?

Delinquencies on 2021-22 vintage consumer debt are going vertical - how long can managers waive fees before money runs out?

Jeremy Sappern

Danielle DiMartino Booth

Trust the real-time continuing claims data. There is a 40% exhaustion rate, meaning people have used up all their benefits. The June payroll number was originally 160k but was revised to a negative print. The unemployment rate is now 4.44%, 0.6% away from the Fed's year-end target of 4.5%.

Danielle DiMartino Booth

Underlying collateral is becoming compromised; distress will worsen when unemployment rises, creating ripple effect through financial system.

With unemployment at 4.4% we're already seeing this level of distress.

Jeremy Saffron

Wage growth was only 0.2%. Isn't that the definition of a soft landing (hiring without inflation)?

Headline jobs beat vs. 2M continuing claims - which data is more reliable?

Jeremy Sappern

Danielle DiMartino Booth

It would be a soft landing if not for the high number of unemployed and permanent job losers crossing the 2 million threshold (same as Dec 2007). Over 100,000 federal employees lost severance on Sept 30th, which will add to the unemployment rate. This is why the probability of a December rate cut collapsed yesterday and rebounded today.

Danielle DiMartino Booth

Trust real-time continuing claims data more; 40% exhaustion rate means people have no benefits left.

June payroll was revised from +160K to negative; Fed focusing on rising unemployment rate (now 4.44%).

Jeremy Saffron

Anything interesting from the Fed minutes?

Wage growth only 0.2% - isn't that the Fed's holy grail of hiring without inflation?

Jeremy Sappern

Danielle DiMartino Booth

Nothing unexpected. Several members didn't want to cut, several were on board with the October cut but not another, and several felt it was appropriate to cut in December. All of this was negated by the news that November payrolls won't be released until Nov 16th, 6 days after the Fed meets.

Danielle DiMartino Booth

Would be soft landing if not for high unemployment and permanent job losers crossing 2M threshold.

Over 100K federal employees no longer collecting severance, adding to unemployment rate.

Jeremy Saffron

Michael Burry is flagging the useful life of AI chips (H100 obsolete in 2 years, but companies depreciate them over 5-6 years). Is this a massive write-down cliff in 2027 that crashes the S&P?

Michael Burry flags AI chip useful life accounting - are we sitting on massive writedown cliff in 2027?

Jeremy Sappern

Danielle DiMartino Booth

The market's job is to look ahead. Burry is skeptical of the AI narrative because there has been a shift from funding AI growth with cash flow/earnings to taking on massive debt. That is the main shift in the last 12 months.

Danielle DiMartino Booth

Shift from financing AI growth with cash flow to taking on debt is the main concern over last 12 months.

Nvidia's cash flow partly from factoring receivables; investors becoming skeptical about earnings quality.

Jeremy Saffron

Nvidia and Microsoft have tens of billions in cash. Does depreciation accounting matter?

$1.5T high-grade issuance to finance AI - is boom only existing because Wall Street is leveraging it up?

Jeremy Sappern

Danielle DiMartino Booth

A viral tweet showed that a lot of Nvidia's cash flow came from factoring their accounts receivables (collecting cash early at a haircut). In the aftermath of Tricolor and First Brands, investors are becoming more skeptical about how earnings and cash flow are generated.

Danielle DiMartino Booth

Meta sold $25B bonds with $120B demand despite missing earnings - raises question: are these protected companies?

Oracle CDS costs rising shows market hedging against tech debt default.

Jeremy Saffron

$1.5 trillion in projected high-grade issuance to finance AI infrastructure. Are we creating an AI boom that only exists because Wall Street is leveraging it up?

Ray Dalio says diversify into gold - with Fed balance sheet expansion, is gold the only asset that mathematically works long-term?

Jeremy Sappern

Danielle DiMartino Booth

Meta missed earnings and its stock closed down 11%, but it was able to sell $25B in bonds with a $120B order book. This raises the question: are these companies 'too big to fail'? The cost to insure Oracle bonds is an open question.

Danielle DiMartino Booth

Gold is the ultimate hedge post-margin calls; it's the safest safe harbor during financial crises.

Tourists holding gold may not have stomach for volatility if margin calls force liquidation.

Jeremy Saffron

The Oracle CDS explosion: traders are using it as a hedge for the AI crack. Does this mean the boom is debt-dependent and fragile?

What does landscape look like in 2026 with heavier corporate maturities and exhausted consumers?

Jeremy Sappern

Danielle DiMartino Booth

We haven't talked about CDS to hedge against a company going 'poof' since 2008. This discussion indicates investors need to be defensively positioned or hedged. Margin debt as a percentage of GDP is so high that any disruption could trigger margin calls.

Danielle DiMartino Booth

Greatest risk is recognition of recession; once widely accepted, people look at portfolios differently.

2/3 of Americans foresee unemployment rising - deeply recessionary sentiment.

Jeremy Saffron

Ray Dalio says we are in a bubble, but the answer is to diversify into gold. Does the Fed's balance sheet commitment make gold the only asset that works long-term?

What happens when corporate loans reprice at double/triple interest costs next year?

Jeremy Sappern

Danielle DiMartino Booth

Gold theoretically should be the ultimate safe haven, but only after we get past the margin calls. There are 'tourists' holding gold who may not have the stomach for volatility if there is a margin call and people sell what is most liquid at a profit (like in 2020).

Danielle DiMartino Booth

Fed may be pressured to cut to zero and restart QE, but potential successors don't believe QE worked.

Jeremy Saffron

Are we close to a margin call fire sale? We are seeing a sell-off in Bitcoin.

Any safe havens outside gold? What about oil?

Jeremy Sappern

Danielle DiMartino Booth

We are too close to month-end to know. The mechanistic way passive investing works (rebalancing 401ks) could cause a huge rush of money into the market at month or quarter end, as it did in March 2020. We don't know if passive will win again.

Danielle DiMartino Booth

Oil prices reflecting slowing global demand and oversupply; behaving as asset class should based on supply/demand.

German PPI fell further into deflation; no country leading global recovery like China did in 2009.

Jeremy Saffron

What does 2026 look like with heavier corporate maturities, exhausted consumers, and a Fed that has used its ammo?

Single most important risk heading into 2026?

Jeremy Sappern

Danielle DiMartino Booth

The greatest risk is the 'recognition of recession'. 2/3 of Americans foresee the unemployment rate rising, which is a deeply recessionary print. Once there is widespread acceptance of recession, people (including retail) will look at their portfolios differently. This, combined with clear dissension inside the Fed making policy for politics, will cause disruptions.

Danielle DiMartino Booth

Follow junk bond issuance - when it stops for extended period, it signals illiquidity that can trigger market accident.

In Dec 2018, junk bonds stopped selling for 41 days, culminating in Christmas Eve 2024 bloodbath and Powell pivot.

Jeremy Saffron

2026 is the year corporate refinancing walls start. Hundreds of billions roll over at double or triple the old interest costs. What happens when those loans reprice?

Is junk bond market telling us recession has already started?

Jeremy Sappern

Danielle DiMartino Booth

The Fed will be pressured to take rates to zero and restart QE. The problem is that the main contenders to succeed Powell do not buy into the philosophy that QE worked.

Danielle DiMartino Booth

Bankruptcies at 15-year high; something clearly breaking, especially in private credit with valuation discrepancies.

Two private equity shops holding same loan with 20-cent valuation differential shows uncertainty in private credit.

Jeremy Saffron

Bitcoin has lost correlation with the Nasdaq. What is your take?

Danielle DiMartino Booth

Anything with a 99% correlation to the Nasdaq 100 should be watched. Bitcoin is the bellwether for the Nasdaq and the AI narrative. They walk hand in hand. It is the highest beta asset class on the planet.

Jeremy Saffron

Are you watching margin levels? Correlations appear at the worst moments because Bitcoin is the only 24/7 asset people can sell when margins get hit.

Danielle DiMartino Booth

Yes, I am watching margin. I just posted a chart of margin debt going to the moon. The last time margin debt was an issue (the movie 'Margin Call'), there were no triple-levered ETFs. Now there are 5x Nvidia ETFs. That is a separate, more levered form of leverage.

Jeremy Saffron

Any advice for young people facing margin calls for the first time?

Danielle DiMartino Booth

Google the word 'dividend'. There are many ways to invest. There are always winners and losers. I am not suggesting you short the market, but there are ways to protect yourself.

Jeremy Saffron

Any safe havens outside of gold? Watching oil with Ukraine/Russia talks.

Danielle DiMartino Booth

Oil prices are reflecting slowing global demand and an overabundance of supply. It is behaving as it should based on supply and demand. No country is leading a global recovery like China did in 2009. German PPI fell further into deflation.

Jeremy Saffron

Can the 'big beautiful bill' stimulus offset some of these risks?

Danielle DiMartino Booth

It depends on whether companies are willing to invest or are protecting their cash. The benefit comes from an accelerated depreciation schedule, which implies you make the investment to depreciate it faster.

Jeremy Saffron

What is the single most important risk for investors heading into 2026?

Danielle DiMartino Booth

Follow junk bond issuance. When junk bonds were not sold for 41 straight days, it culminated in the bloodbath in the stock market in December 2018 and Powell's pivot in January 2019. The trigger was illiquidity in the bond market. This week there have been one or two high yield issuances, so we are not there yet.

Jeremy Saffron

Is the credit market telling us a recession has already started?

Danielle DiMartino Booth

Whether admitted or not, it's true. Bankruptcies are running at a 15-year high according to S&P. Something is clearly breaking in the public purview, and that's not even including the private credit space. Two huge private equity shops were holding the same loan with a 20 cent differential in valuation. That is what worries you.

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