The weekender: Something rotten in the credit Kingdom

Something rotten in the credit Kingdom

The Street is finally hearing the pipes groan again. What started as a single drip from Zions’ loan book has turned into a rhythmic clank echoing through the entire banking sector. Thursday’s tape was a horror reel for regionals—ZION, WAL, JEF all caught in the same downdraft, the kind that makes even hardened traders glance at their screens like they’ve just seen a ghost crawl out of the Bloomberg terminal.

The question flooding trading desks wasn’t about nuanced macro or Fed-speak. It was primal: “What the hell is going on?” Wall Street’s bank sales desks lit up Friday morning with the same question echoing from every corner of the institutional universe. The answer, of course, is anything but clear — we’re in the “discovery phase,” that uneasy stretch between rumour and realization when no one knows just how deep the hole goes.

Zions’ $50 million charge-off on two supposedly clean commercial loans might sound modest in isolation, but isolation is precisely the problem. Every time one of these “isolated incidents” pops up, the market remembers the old trader’s adage: there’s never just one cockroach in the kitchen. And sure enough, Western Alliance’s $100 million legal tangle suggests the infestation might be spreading. Court filings, cross-exposures, NDFI lending webs—suddenly, every regional’s loan book looks like an attic filled with old wiring and a faint smell of smoke.

Traders know the sound of panic when they hear it—it’s not screaming, it’s silence. Bid-ask spreads widen, clients stop joking, and the chatrooms go quiet as portfolio managers start running internal fire drills. By mid-session, regional banks were off 7%, money-centers nearly 4%, JEF down double digits, and even the financial “defensives” like card networks and exchanges couldn’t find a bid. The move was violent, indiscriminate, and utterly mechanical—risk-off quants dumping exposure as the machines detected contagion patterns.

The irony is, the trigger wasn’t systemic—at least not yet. It was a story about misrepresentation, bad collateral, and borrowers vanishing behind a legal fog. But the real contagion isn’t the credit itself—it’s the trust deficit. Once the market starts doubting underwriting standards, especially among the smaller regionals that have been juicing growth through NDFI (non-depository financial institution) loans, confidence evaporates faster than capital.

That’s the crux: NDFI lending, a once-esoteric corner of the loan market, has become the new frontier for regional growth—a place where banks lend to shadow finance players, private credit intermediaries, and consumer credit outfits. It’s been a profitable playground while the cost of deposits was low and yield hunger ran high. But now, as real rates grind higher and liquidity thins, this pocket of leverage looks more like an unregulated gas line running beneath the system. One spark, and the whole block could go up.

Investors are asking sharper questions: How did three separate “frauds” slip through underwriting in six weeks? Who’s stress-testing these loans? Have regional banks loosened standards to meet growth targets, turning a blind eye to cracks just to keep Wall Street happy? It’s not just about credit—it’s about credibility.

In the process, a strange rotation is taking shape: larger banks, better capitalized and better supervised, are outperforming the minnows by 300–1000 basis points. That’s not a trade—that’s a migration. Money is flowing toward perceived adult supervision.

Still, what unnerves the market isn’t the loss number—it’s the pattern. Every few months, a new ghost story surfaces from the regional vaults, and each time the refrain is the same: “isolated.” The market’s collective eye-roll is almost audible now. These so-called one-offs are starting to rhyme. And traders know—when events start to rhyme in finance, they often start to rhyme in price action too.

By the close, the tape looked like a battlefield. Financials bled out across the curve, defensives failed to defend, and even insurance names were dragged into the undertow. The one that really spooked people, though, was the regional name supposedly ripe for a buyout—it dropped nearly 10% after expressing interest in buying. In this market, curiosity alone is a liability.

Something feels off. And markets, like animals, can smell fear before they can see it.

There’s a moment in every credit cycle when the narrative flips from “contained” to “connected.” That may be where we are now. The plumbing of U.S. credit—once thought sturdy after the post-SVB tightening—has sprung a fresh leak. This isn’t a meltdown yet. But the water is rising fast, and the Street’s starting to grab the sandbags.

In trader terms: this isn’t about today’s losses—it’s about tomorrow’s questions. And right now, nobody’s got enough answers.

The relentless bull and the October mirage

Markets, like seasons, have their traditions — and October has always been the month where conviction meets volatility. This year’s version feels like a carnival mirror: headline shocks bending perception while underneath, the structural bull refuses to break stride. Beneath the noise of systematic churn, retail euphoria, and volatility jitters, the primary current of this market still runs forward — mostly resilient, unshaken, and almost unnervingly confident.

The market’s rhythm these days resembles an overcaffeinated dance between human emotion and algorithmic reflex. Every twitch in the VIX sends a mechanical wave through vol-control models and CTAs, forcing them to trim or reload equity exposure. It’s a plumbing system that leaks only when volatility spikes — and when it does, the flush is automatic. However, between these jolts, equity indices continue to grind higher, driven by retail inflows, corporate buybacks, and the momentum of passive demand.

The real story is the crowd beneath the surface — the new generation of traders who don’t flinch. Retail money is still the bloodstream of this market. Twenty-four straight weeks of call-buying — that’s not exuberance; that’s identity. It’s the TikTok-era trader who sees every dip as a discount code. Retail has become a structural feature, not a sentiment blip. And when 36 cents of every SPY dollar chases the Magnificent Seven, it’s no wonder the indices behave like they’re on rails — until they don’t.

Institutions, of course, are the nervous adults in the room — hedging, rolling puts, muttering about macro risk, and waiting for earnings to deliver the next dopamine hit. Yet, despite the hedges, they stay benchmark-long. There’s FOMU — the fear of material underperformance — gnawing at every PM who’s watched the index melt higher without them. So they stay in, reluctantly bullish, mechanically exposed.

Earnings season, as ever, will serve as both mirror and excuse. The bar is modest, the beats will come, and the machines will re-calibrate. It’s a stock picker’s tape in name only — correlation may be low, but crowding remains the silent puppeteer. Every big bank print or mega-cap whisper now carries the weight of rebalancing flow. The system digests, adjusts, and resets.

What makes this moment fascinating is its duality: structurally bullish, tactically fragile.

Buybacks — the market’s invisible hand — are set to re-emerge from blackout season in early November, armed with more than a trillion dollars of dry powder. That’s not sentiment; that’s physics. November and December are historically their peak execution months, and this year’s authorization pace is already the fastest on record. Those corporate bids, paired with passive inflows, form the bedrock under this market’s staircase pattern — the escalator up, the occasional elevator down.

Still, October remains a treacherous month for the complacent. The data tells us that late-month pullbacks tend to set the stage for year-end rallies. October 26 and 27 — statistically, the seasonal lows. What comes after is typically a glide into November’s sweet spot, when positioning resets and buybacks reopen. The pattern has the reliability of a lunar cycle: the spook before the Santa.

The risk is that the system is full — and fragile. Trend-followers are long but weakening; vol-control strategies are maxed out; and any meaningful pickup in realized volatility could turn orderly rebalancing into mechanical selling. If that happens, shallow dips could metastasize into liquidity air pockets — not because of fear, but because of flow.

So, the roadmap is clear but narrow: respect October’s chop, hedge the noise, and lean into November’s structural bid. Retail remains the relentless bull, corporates are the silent buyer, and the institutions are stuck between cynicism and benchmark gravity. This market may wobble, but its foundation — the combination of liquidity, passive inertia, and generational participation — remains remarkably intact.

The illusion of fragility may persist, but beneath it lies the kind of structural resilience that turns volatility into opportunity. In other words, October is the mirage — November, the oasis.

Gold’s revenge: The honest yardstick in a debased world

Every generation rediscovers gold — not because it changes, but because everything else does. This time, it took another Trump tariff broadside to remind the market what “real money” looks like. The week opened with shockwaves through equities, a selloff in Bitcoin that looked more like a tech tantrum, and a dollar whose swagger suddenly gave way to self-doubt. Yet amid all that noise, the one ancient instrument that never speaks still told the clearest truth: gold doesn’t need to shout to be heard. It just breaks records — again — soaring past $4,300 an ounce as faith in the system itself began to wobble.

The irony is exquisite. For decades, policymakers treated gold like a cranky relative — tolerated, mocked, and dismissed as a “barbarous relic.” Yet the very people who wrote it off are now the ones quietly buying it back. Central banks, supposedly the high priests of modern monetary orthodoxy, have become the largest hoarders of an asset they once declared obsolete. They now hold roughly one-fifth of all gold ever mined — and for the first time in modern history, those holdings surpass the value of their U.S. Treasury portfolios. The symbolism is stunning: the keepers of fiat’s flame hedging themselves against their own creation. It’s as if the firefighters started stockpiling water because they no longer trust their hoses.

Gold’s latest surge isn’t about inflation hedging, nor about geopolitical shock — it’s about credibility. The world’s reserve managers are voting, with their vaults, against the dollar’s durability. They see the same arithmetic the rest of us do: a U.S. fiscal deficit that behaves like a runaway algorithm, a Treasury market where “safe” has become a relative term, and a yield curve warped by policy improvisation rather than organic demand. You can manipulate repo markets, suppress volatility, or jawbone the yield curve — but you can’t print trust.

In the old days, Treasuries were the bedrock — the cleanest dirty shirt in a messy world. Now, even that shirt looks stained. Confidence in U.S. debt isn’t collapsing, but it’s fraying at the edges — the way dry rot spreads before the floor caves in. That’s why central banks are swapping IOUs for ingots. It’s not that they expect the world to end; they just no longer assume that the Fed will have the last word when it does.

Investors, of course, love their illusions. They celebrate stock-market highs as if those numbers were divine truth — forgetting that they’re measured in a currency being quietly diluted. When you re-denominate those indexes in gold, the picture changes dramatically. The S&P’s supposed triumphs fade into mediocrity; the “Magnificent Seven” look more like the “Mildly Profitable Five.” What appears to be prosperity in nominal terms is merely the reflection of a mirror that keeps warping to flatter us. Gold, inconveniently, refuses to bend the glass. It’s the honest yardstick in a hall of monetary mirrors.

Even Bitcoin — once hailed as the digital heir to gold’s throne — has stumbled on its own mythology. After the tariff shock, Bitcoin didn’t hedge; it cracked. The world’s most decentralized asset behaved like the world’s most crowded trade, tumbling from $125,000 to $107,000 while gold simply stood still, glinting in quiet superiority. Bitcoin may be programmable, but gold is incorruptible — and that’s a distinction that matters when markets are ruled by emotion, not code.

There’s a cruel symmetry to all this. Gold is rising not because humanity has learned something new, but because its stewards have repeated all the old mistakes — debt explosions, monetary hubris, and a belief that financial engineering can replace fiscal discipline. The central banks that now hoard bullion are defending themselves from the very volatility they created. They have become both arsonists and fireproofers in the same play.

And yet, even for those of us who’ve held gold through every storm and lull, the coming weeks will not be calm. Gold is about to take some monumental swings — the kind that make headlines, rattle newcomers, and test conviction. But that’s the nature of truth in a world addicted to illusion: it moves violently when reality intrudes. As a long-term holder, I’ve learned not to flinch. I never let the swing factor jolt me; I simply add when the price looks obscenely cheap relative to risk. Gold rewards patience the way markets punish arrogance. It doesn’t demand timing — only discipline.

Because the real game isn’t about calling the next tick — it’s about understanding why the pendulum swings at all. Each violent move is just the system confessing its imbalance, the fiat world gasping for credibility while the metal quietly absorbs the panic. And when the smoke clears, the chart always looks the same: new highs for gold, new excuses for everyone else.

The truth is, gold doesn’t rise — everything else sinks. It’s not an investment; it’s a confession. A confession that the monetary order, built on debt and discretion, is once again debasing itself into the same cycle of inflation, denial, and rediscovery. The “barbarous relic” endures because it is immune to barbarism. It has no CEO, no central bank, no quarterly guidance — only 5,000 years of proof that when confidence erodes, substance outlives story.

The markets may spin new narratives — AI, tariffs, digital assets, whatever catches the wind — but gold doesn’t trade in stories. It trades in truth. And as of this week, the truth weighs about 20% of all the gold ever mined and sits silently in vaults across the world, reminding every policymaker and trader alike: you can ridicule gravity, but you still can’t defy it.

The great recalibration: Beijing’s next five-year spell

Beijing’s fourth plenum is no ordinary political retreat — it’s the ritual where the Party turns its compass toward the next chapter of China’s economic odyssey. Every quinquennial cycle, the Central Committee gathers behind closed doors to redraw the script for a system that never sleeps, never admits weakness, and never truly changes its direction—only its rhythm. This week’s conclave will draft the scaffolding for the 2026–2030 plan, a document less about targets and more about tone — a signal to the world of what kind of empire China intends to be in an era where power is increasingly measured in chips, grids, and algorithms rather than tonnage or tanks.

The mystery of the plenum is part of its choreography. Delegates are locked away, information drip-fed like a state secret, and when the curtain finally lifts, the communique will read less like a policy document and more like a coded hymn to Party resilience. The illusion of consensus will be perfect; the message — that China remains unflinchingly in control — will be unmistakable. The public won’t see the edits, the buried disagreements, or the bodies quietly moved offstage.

But beneath the lacquered unity lies a clear dilemma: the same one haunting every policymaker since Deng cracked open the doors to the world. China has built the world’s most efficient factory floor but struggles to fill its own shopping malls. The model that once fed its ascent — export-led growth, industrial dominance, and relentless infrastructure spending — now resembles an overworked engine running on stale fuel.

So this new five-year plan will likely promise to “rebalance” the economy toward domestic demand, but rebalancing in Beijing often means a subtle pivot, not a revolution. The rhetoric may praise the consumer, but the capital will still chase the machines. Policymakers may speak of “common prosperity,” yet the gravitational pull remains toward the command levers that built electric vehicle titans, solar behemoths, and the world’s largest grid of AI-powered surveillance. The message will be one of consumption, the money will flow to factories — especially those producing the technologies that Beijing sees as its shield in the coming decade of rivalry with Washington.

And rivalry now sits at the heart of every plan. With the Trump tariffs back on the horizon and rare earths once again weaponized, the Party no longer hides its intent. Economic planning has become strategic defense — the spreadsheet as a fortress wall. Every yuan directed toward semiconductors, batteries, or aircraft is a yuan hedging against Western supply-chain dominance. China doesn’t see the five-year plan as technocratic — it’s a battlefield map in a world where trade, technology, and territory now overlap.

Expect no consumer miracle; instead, expect a steely reaffirmation of industrial policy — a doubling down on self-sufficiency even at the cost of short-term demand. That will keep global disinflation alive, debt climbing at home, and geopolitical frictions simmering abroad. The world’s second-largest economy is now the world’s largest exporter of deflation — and that may prove as strategically potent as any export control or tariff retaliation.

So when the plenum doors close and the brief communique lands, traders will scan it not for poetry but for patterns: how many times “security” outranks “growth,” how much “technology” eclipses “consumption,” and whether “reform” still appears at all. Beijing’s next five-year spell won’t be about chasing prosperity — it will be about building insulation. In a world breaking into rival spheres, China’s planners are not just drawing a roadmap — they’re laying down the contours of a moat.

Chart of the week

US economic activity indicator declines in September

Some US economic data have been unavailable this month because of the US government shutdown. One proprietary indicator from Goldman Sachs Research has fallen recently.

The Current Activity Indicator, which measures present economic performance, fell to 1.6% in September based on preliminary data—down from 2.2% in August. The indicator, which contains a range of factors, has fallen for two consecutive months.