Santa is already on the rooftop this year, sprinkling year-end gains across Wall Street like powdered sugar.
Stocks hover near record highs, traders whistle Christmas jingles. Berkshire is having a respectable year and still can’t catch the S&P.
Markets have already priced in a rate cut this week, and every financial media outlet is broadcasting the same seasonal message: Don’t fight the Fed, especially when it’s in a giving mood.
But in the yard below, under the frost-crusted shrubs, the bears are sniffing around for scraps of bloody meat.
They smell the subtle rot of credit stress, central-bank desperation, and debt that’s beginning to steam in the cold. They’re not charging — not yet. But they’re present. Watching. Testing the doors.
Retail investors, last in line, await the Fed’s final announcement of the year on Wednesday. Then the central planners of the world get their turn: the Bank of England, Bank of Japan, and the European Central Bank.
Treasuries just suffered their worst week since June. And in Japan — the quiet godfather of global liquidity — something fundamental is breaking.
Silver continues its blistering ascent. Gold and bitcoin have settled in at $4,200 and $92,000, respectively.
This big boy was undaunted by the crowds gathered on the side walk during a Christmans parade in Tennessee over the weekend. (Source: NBC News)
A few weeks ago, Andrew Zatlin said I was “preternaturally bearish.” Yeah, we had to look it up, too. According to the Oxford dictionary, it’s an adjective that means “beyond what is normal or natural.”
We do resemble that remark.
Perhaps, but we’re just preternaturally suspicious of narratives spun by Wall Street, bankers, brokers, insurance salesmen, politicians and lawyers. It might be abnormal, but we also find it to be quite healthy.
“Things,” as the song goes, “fall apart.” And when they do, unexpected opportunities arise. Bulls charge in a straight line. Bears maul whatever is in their way of a good meal.
The Santa Rally is overhead. Let’s see what the bears are sniffing in the property below.
Japan: The First Growl in the Snow
Japan’s crisis is not coming — it has arrived.
The 10-year yield hit 1.95%, just a whisker below the critical 2% stress point that global models treat like a tripwire. The 30-year sits at 3.44%. The 40-year at 3.71%. All-time records.
The Bank of Japan is carrying unrealized bond losses equal to 225% of its capital base.
That’s not “technical insolvency.” That’s “your capital is the rounding error” insolvency.
And in a move that should go into a future economics textbook under the chapter titled Hubris, Japan is raising rates into a $135 billion fiscal stimulus package. Higher borrowing costs shoved directly into the gaping maw of 255% debt-to-GDP.
Japan imports 97% of its oil — but markets missed the point entirely. Oil won’t break Japan. Japan’s bond market will break Japan… and then break the rest of us.
The carry trade is unwinding. Capital is repatriating. Japan holds $1.13 trillion in Treasurys, which, as we’ve noted, are at near-historic lows.
When Japanese institutions bring that money home, the tremors travel straight into the U.S. bond market.
A 20-year yield above 2% was the danger zone for repatriation. Today it sits at 2.94%.
AI’s Borrowing Binge: Giant Debt, Giant Expectations
Deutsche Bank identified this tasty morsel when analyzing OpenAI’s books:
“No start-up in history has operated with expected losses on anything approaching this scale. We are firmly in uncharted territory.”
Mark Zandi from Moody’s made this point on X this morning. Mr. Zandi is not preternaturally bearish. In fact, he’s typically emotionless when presenting his analysis. (Source: Moody’s Analytics)
The borrowing frenzy by AI companies — not to refinance, but to grow — now dwarfs the telecom-and-tech binge of Y2K.
These firms are shoveling debt into the furnace of future expectations, betting that revenue will someday catch up to imagination. If it doesn’t, their debts become accelerants.
The bears know that smell.
The Fed’s Shrinking Balance Sheet and the Illusion of Strength
After three years of aggressive Quantitative Tightening (QT), the Fed had pared its balance sheet by 24%. During that same stretch, the S&P rose 80%.
If you grew up on the post-Global Financial Crisis catechism that markets only rise when the Fed prints… the Fed shedding assets looks like witchcraft.
But as the past two weeks have shown, market price short-term Fed expectations, not doctrine.
The recession never arrived. Mega-cap earnings held. And traders — correctly — bet on a softer rate path long before Powell even cleared his throat.
Meanwhile, in the real economy:
Bankruptcies rising. Delinquencies spreading. Commercial real estate is still resembling an abandoned mall. Small business employment is falling at the fastest rate since the pandemic shutdown in 2020.
The S&P is not currently pricing real earnings from the real economy. It’s chasing a handful of increasingly indebted tech giants. The strange resurgence of Oracle and debt spread pricing thereof is among this fall’s biggest had scratchers.
Bankruptcies, Delinquencies & the Quiet Trapdoor
Large bankruptcies hit 717 this year — the highest since 2010. Subchapter V filings surged 83% in five years — a record. Small businesses are bleeding out faster than at any time since the pandemic lockdown.
When the real economy gets tight, the mommas and poppas typically feel it first. (Source: Epiq Bankruptcy Analytics.)
And then there’s the Coastal Journal’s “trapdoor list,” whispered in institutional hallways of banking conferences from Miami to Dubai:
Western Alliance and Banc of California standing right above the hatch.
Citi, Goldman, Morgan Stanley, Bank of America, Barclays in amber.
JPM and Wells in yellow — not because they’re safe, but because regulators will perform contortions worthy of Cirque du Soleil to keep them upright.
In this late stage of degenerate capitalism, none of these banks are in the green.
Baumol’s Bind: The Cost Disease No One Can Vote Away
Here’s the expanded version of the paradox shaping 21st-century economics — and politics.
Baumol’s Disease, the Baumol Effect, as described by economist William Baumol during the Nifty Fifty stock bubble in 1968, is a phenomenon where the cost of services rises faster than manufactured goods.
Productivity in manufacturing can explode — automation, robotics, software — but productivity in labor-intensive services barely moves.
A doctor visit still takes 20 minutes. A teacher still educates 25 students at a time. A string quartet still needs four musicians playing for the same duration it did in 1825.
Yet wages in these sectors must rise to compete with wages in high-productivity industries.
So here’s what you get:
- Rising labor costs without rising output.
- Service-sector prices rising faster than inflation.
- Manufactured goods getting cheaper in comparison.
- Aggregate productivity growth slowing as nations become more service-oriented.
This is why developed economies cannot square the political circle:
- Higher wages for native workers.
- Lower immigration.
- Cheaper services.
Pick one. Maybe two. You cannot have all three.
It’s already a predominant theme for political candidates thinking about midterms 11 months from now. Politicians only have one effect on “affordability”… by their very existence, they make the problem worse – for everyone.
But that doesn’t stop them from blathering about it in stump speeches and financial media talk-ity-talk shows.
Voters miraculously feel soothed. And the math grows more untenable every year. Perhaps, Dan Denning will be right when he says politicians will lead us into theBattle Royal in 2026.
Oil and Energy prices: Pressure Building
Energy stocks are creeping upward. Oil stays absurdly cheap relative to the money supply. This is either the coiling before a violent breakout…
or proof that global demand quietly curled up and died months ago.
Both paths attract furry predators.
We promise to bring some holiday cheer – more of the unexpected opportunities coming into view – in tomorrow’s dive. Promise. (Source: Tavi Costa on X)
On this day in 1980, John Lennon was walking into the Dakota hotel overlooking Central Park in New York City. He never made it past the turnstile. Tragedy doesn’t schedule itself. It arrives suddenly, shocks fully formed.
Financial crises behave the same way. Calm… calm… calm… and then a break that only seems obvious afterward.
The bears remember. They always do.
~Addison
P.S. If you missed the Grey Swan Live! session with Dan Denning, pour yourself something warm and listen to the replay.
We dug into Japan’s unraveling bond market, the end of QT, Dollar 2.0’s growing gravitational pull, and the anatomy of complex-system failure.
Dan brings his trademark wit, scars, and clarity — and you’ll walk away seeing the landscape with sharper eyes. Tune in before the next bear prints its paw in the snow.
If you have requests for new guests you’d like to see join us for Grey Swan Live!, or have any questions for our guests, send them here.
