It's NOT a German problem. It's a a symptom of a Global Malaise.

The political center in Germany is collapsing. Sunday’s election results confirmed a trend that has been unfolding for decades; mainstream establishment parties are losing their grip, and the electorate is shifting towards the extremes. The CDU/CSU and SPD, once the dominant forces of German politics, secured a combined vote share of just 45.0%—the lowest on record, continuing a sharp decline from their 91.2% peak in 1976. The SPD in particular saw its weakest showing since 1887. Meanwhile, the far-right AfD surged to 20.8%, while the far-left Die Linke and BSW collectively took another 13.7%, cementing a broader polarization that mirrors trends in France, the UK, and beyond.

The root cause? Stagnant economic growth and rising inequality. The cause? Policy makers and complacent central bankers attempting to centrally plan and print their societies and respective "states" to prosperity. 

Decades of sluggish expansion from these failed initiatives and theories have left a growing portion of the electorate exposed to economic hardship, and in response, voters are abandoning the center in favor of parties that challenge the status quo. The political realignment is further fueled by globalization and immigration—issues where mainstream parties have been accused of being out of touch with public sentiment. While economic prosperity might have once dulled concerns over these topics, weak growth has made them defining issues of the modern political landscape. 

This should not be surprising at all. When people feel as though they are losing it all.... they lose it. This being said I believe we're likely to see increasing polarization and where the chips fall we may not exactly know; However, I don't feel it will be on the side of health and prosperity for all. Ideology seems to be driving the populist impulse (on both sides). 

At the heart of it all is an economic paradox: the modern system relies on ever-increasing debt to sustain growth, and without it, the political center will continue to erode. The response from policymakers? More debt. The forces of economic stagnation and political instability are reinforcing each other, making it increasingly clear that the future will bring greater political conflict within developed nation borders. Not just in Germany, but across the world.

Corporate Credit Complacency: A Ticking Time Bomb in a Fragile Economy

Corporate credit markets have reached an extreme level of complacency; spreads have narrowed to levels not seen since 2007 just before the global financial crisis and in some cases, they are as tight as they were in 1998 before the Asian financial crisis. Despite this, Wall Street is not unaware of the risk; rather, market participants fully recognize that credit spreads are historically mispriced and that the risks they are accepting are not being adequately compensated. The prevailing mentality is not one of ignorance but of waiting; the entire market understands that it is holding onto a fragile situation, effectively grasping a tiger by its ears, only willing to let go when specific conditions emerge to justify a rapid unwinding.

This is what happened in August of last year; it was not so much that a sudden trigger collapsed the carry trade but rather that fears of such a signal emerging led to a sharp repricing. Now, in early 2025, those same conditions appear to be forming again, with a resurgence in ultra-low spreads coinciding with data that suggests economic momentum is rapidly fading. The U.S. economy, after a minor boost at the end of last year, is now showing signs of rolling over, and if that continues, then these compressed credit spreads may indeed be a tinderbox ready to ignite.

Historically, extreme levels of complacency have never been a positive sign. While they are not timing signals in and of themselves, they indicate that risk is being severely mispriced. The last time credit spreads were this tight was June and July 2007, right before the financial crisis began; before that, in 1998, spreads reached similar levels just prior to the Asian crisis. Looking at Triple B-rated spreads, which represent a middle-tier risk within corporate credit, they have now fallen below 100 basis points; levels last seen in 1998. Bank of America Merrill Lynch’s Master 2 Index, which tracks a broader set of corporate credit spreads, has fallen to around 260 basis points, the lowest level since 2007.

Credit spreads represent the additional yield demanded by the market over and above comparable U.S. Treasury bonds. In theory, riskier debt should offer a higher return; the more risk perceived in a debt instrument, the greater the return an investor should demand. Yet for the past several years, spreads have been compressing, offering increasingly lower risk premiums despite worsening economic conditions. This divergence has reached a level where even Wall Street analysts are beginning to sound the alarm. Bloomberg recently reported that corporate bond price movements have become so stable that some money managers are questioning whether the relentless rally in credit is itself a red flag. Franklin Templeton Investment Management and AXA Investment Managers have already begun reducing exposure to corporate bonds in favor of government securities and cash, citing the inadequate return relative to risk.

Despite these warnings, capital continues to flow into corporate bond funds, and systemic traders remain highly leveraged in corporate credit. This is not because investors believe risk has disappeared but because they do not know when market conditions will shift. The complacency stems from the belief that the lack of immediate danger means there is no need to act preemptively. David Zahn, Head of European Fixed Income at Franklin Templeton, pointed out that the risk of a policy mistake across multiple jurisdictions remains high. What he is really saying is that central banks have held interest rates at restrictive levels for too long, increasing the likelihood of an economic downturn. While many interpret this as a warning of monetary policy missteps, the reality is that economic weakness has long preceded the Fed’s rate hikes; the economy that “forgot how to grow” has been deteriorating for years.

Recent economic data further supports this thesis. The downturn in Europe is accelerating, and momentum in the U.S. is fading. Australia, once considered among the strongest economies, has now resorted to cutting interest rates, further underscoring the global slowdown. Zahn’s total return fund has already reduced its exposure to credit from over 40% last summer to just under 25%, shifting to safer government bonds. The corporate credit market’s volatility has nearly disappeared; spreads have remained unnaturally tight for an extended period, reinforcing the idea that the market is underpricing risk. However, history suggests that such stability is illusory and that once a shift begins, the correction will be rapid and severe.

In 2022, credit spreads widened sharply for two reasons: (1) the economy showed signs of instability, and (2) the prospect of higher interest rates raised concerns about corporate solvency. As central banks continued to raise rates aggressively, corporate bond investors feared that weaker companies would struggle to survive in a high-interest-rate environment. This led to substantial selling in risky corporate credit, driving spreads higher. However, by late 2022, the bond market stabilized, with interest rates plateauing. The corporate credit market interpreted this as a sign that central banks had reached their peak in tightening and that financial conditions would not worsen further. This perception fueled a rally in corporate credit and a continued compression in spreads, despite worsening economic conditions.

At the same time, corporate credit markets mirrored the stock market; both were waiting for specific recession signals to confirm the need to sell. The conventional indicators, negative GDP growth, rising unemployment, and a sharp deterioration in payrolls, never materialized in the traditional way. This allowed complacency to persist. Instead of recognizing the broader economic deterioration, market participants continued to rationalize tight spreads, believing that as long as headline data did not confirm a recession, risk assets could continue to perform well. This self-reinforcing cycle has driven spreads lower than at any point in nearly two decades.

In the summer of 2024, these assumptions were briefly challenged. The carry trade blowup in August was not an isolated event; it was a symptom of deeper concerns about the labor market. Japanese investors, who had been heavily invested in similar structured credit products, became nervous as U.S. labor market data weakened. The fear was that if job losses accelerated, the long-awaited recession signals would emerge, triggering a mass sell off in corporate credit. This led to a spike in spreads, widespread deleveraging, and a downturn in equities. While markets recovered, the underlying risks never disappeared; the structural weaknesses in the economy remain, and the same triggers that spooked investors last summer are resurfacing now.

The issue with credit spreads is that they reflect perceptions of risk rather than objective economic conditions. When spreads are at extreme lows, they signal that the market is severely underpricing risk. However, they do not provide a reliable timing signal; spreads will remain tight until a recognizable trigger emerges. The problem is that by the time those signals appear—such as negative GDP growth or substantial job losses—the reaction is already underway. This is what happened last August; the sell-off began not because of actual economic collapse but because investors feared that such a collapse was imminent.

As the economy continues to weaken, the likelihood of those triggers appearing increases. Consumer confidence has rolled over sharply, labor market data continues to erode, and retail sales have disappointed. The same conditions that led to the credit spread blowout last summer are re-emerging. Despite this, credit spreads remain dangerously compressed, reinforcing the market’s fragile equilibrium. When the inevitable shift occurs, the unwinding will be swift and indiscriminate; investors know this but remain trapped, unwilling to exit their positions without a clear signal.

The most dangerous aspect of today’s market is not the level of interest rates or central bank policy; it is the extreme level of complacency. 

The last time markets were this indifferent to risk, they were on the precipice of collapse. The economy has not recovered, and now conditions are aligning for the next stage of deterioration. Investors may believe they have time, but the reality is that when the shift comes, it will come quickly; history has already provided the blueprint.

The Blame Game is Only a Symptom - The Problems are Still Unaddressed.

Silicon Valley Bank’s collapse in March 2023 was assumed to be a contained event, a momentary banking scare that didn’t metastasize into anything close to 2008. Yet, the evidence has always been that that this wasn’t just a regional banking issue or a case of poor risk management by a few unlucky institutions. It was a broader systemic event that highlighted the already determined trajectory of the global financial system, the monetary order, and, by extension, the real economy. This was just one of the first "few bumps" down a derelict road. And while the immediate panic was subdued thanks to quick action by way of financial firefighting on behalf of the arsonists, i.e. policymakers and central bankers, the factors that led to SVB’s failure were not resolved; they merely allowed advanced further, creeping further into every facet of global finance. What continues to be portrayed as localized bank runs and deposit flights was in fact the metastasis of our financial malignancy into great bouts of credit stagnation, liquidity hoarding, and an entrenched real "on the ground" economic malaise that still grips the system today. People seem to think that because this was "so long ago," it can't have anything to do with what we are experiencing now. They couldn't be further from the truth.

The prevailing belief, that the crisis was successfully managed and left no lasting damage, is completely detached from reality and any sound economic / financial intelligence. Bond markets, global lending patterns, labor market stagnation, and credit availability all point to a persistent deterioration that has deepened ever since. If anything, this was one of, if not the, key moments where the financial markets and the banking sector conceded that the post-pandemic economic trajectory was unsustainable. This being said, policymakers were quick to prevent the screams and hide the bodies. So when we're asking ourselves why things are the way they are today and why they are likely to deteriorate further, it will be easy to blame the symptoms. But it's not a new administration, tariffs, inflation, deflation, rising or lowering interest rates that have caused these problems. The root of the issue is ongoing and structurally systemic monetary issues that all these new "symptoms" will only exacerbate, making the potential day of reckoning much, and I stress much, worse.

SVB’s implosion did not occur in a vacuum. Credit Suisse’s failure was a parallel event that should have shattered the illusion that this was strictly a problem of U.S. regional banks mismanaging their risk in a rising rate environment. Credit Suisse was a globally significant financial institution, deeply embedded in the European banking system. Its collapse was not about deposit flight due to interest rates; it was about a structurally weak institution finally reaching its breaking point in an environment where the systemic imbalances built up over years could no longer be ignored. This was the real warning: a fundamental shift in the monetary order was occurring, and the market knew it even if policymakers refused to admit it. If SVB was the match, Credit Suisse was the proof that the fire was not just a local blaze, it was a structural inferno.

Take the case of global sovereign debt markets. Germany’s two-year bond yield peaked on March 9, 2023, the day before SVB collapsed. Since then, it has steadily declined, even as the ECB continued to raise rates for months afterward. The same pattern repeated across the yield curves of major economies, with rates beginning a slow descent despite central banks maintaining their tightening stance. This wasn’t merely a reflection of monetary policy expectations; it was a signal that markets had fundamentally reassessed the economic outlook. The sharp inversion of yield curves globally, particularly in European bonds and U.S. Treasuries, became an unignorable warning that stagnation, not expansion, was the dominant force ahead.

The disconnect between policy rates and actual economic conditions has been growing ever since. The Federal Reserve and ECB continued to hike rates well into the second half of 2023, yet bank lending did not expand. Instead, the banking sector shifted dramatically toward hoarding liquidity and risk aversion. The weeks following SVB’s collapse saw a record contraction in U.S. bank credit, and while some nominal recovery occurred by late 2023, the composition of that recovery tells the real story. 

Instead of lending to businesses or households, banks funneled their balance sheets into government securities and agency debt, an unmistakable sign that they were prioritizing safety over economic expansion. The credit impulse, a key driver of economic growth, turned negative across major economies.

This is particularly evident in the United States, where total bank credit stalled in March 2023 and has remained essentially flat ever since. A temporary uptick in late 2023 was not due to a resumption of lending but an accumulation of U.S. Treasuries. When filtering out loans to financial intermediaries, the reality becomes even starker: lending to the real economy has outright contracted. This is a banking system in full retreat, unwilling to take on risk despite nominally high interest rates that should, under normal circumstances, incentivize lending.

Labor markets, too, have been quietly deteriorating in step with this contraction. The U.S. unemployment rate reached its cycle low in April 2023, only to begin rising by May. Job openings, a key indicator of labor demand, have trended lower, while job growth has decelerated across the board. Most importantly, hiring has been almost non-existent. Wage growth, once touted as evidence of economic resilience, has steadily slowed in real terms, tracking the broader deceleration in economic activity. There just is no meaningful demand for workers. 

In Europe, the situation is even more pronounced. Germany, once the engine of the Eurozone economy, has seen industrial production contract for months on end, with PMI surveys deeply entrenched in contractionary territory. The supposed post-pandemic economic recovery was never a recovery at all, it was an unsustainable rebound driven by supply chain distortions, fiscal stimulus, and a misallocation of capital into speculative ventures that could not be sustained in a normalized monetary environment.

The Federal Reserve’s handling of the crisis was, in retrospect, a textbook case of winning the battle but losing the war. They successfully prevented a full-scale banking meltdown, but at the cost of further entrenching a system-wide retreat from risk-taking. A shallow and pyrrhic victory. The consequence has been a slow but inexorable tightening of financial conditions, despite the Fed’s insistence that the crisis had been contained. This is precisely why bond yields began falling long before rate cuts were even discussed, markets understood that the damage had already been done.

The critical moment came not just with SVB’s failure but in its immediate aftermath. Banks did not resume lending; instead, they sought safety, while market expectations shifted toward economic stagnation. The yield curve has remained deeply inverted, signaling a long and grinding slowdown ahead. Even as the Fed kept rates high through 2023, the market increasingly ignored them. By the time Powell & Co. acknowledged the need for rate cuts in early 2024, it was already too late, the trajectory had been set. The fed, yet again history shows, does not control interest rates. 

This is the deeper reality: the banking crisis of March 2023 wasn’t a contained event. It was part of an unmistakable confirmation that the economy was not on stable footing, that the very distortions, i.e. policy responses, of the pandemic era had left behind a structurally weak financial system addicted to even more cheap and artificial credit, and that the transition back to normalcy was going to be anything but smooth. This being said, the aftermath, or inevitable rebalancing, is still unfolding, whether policymakers choose to acknowledge it or not.

Where does this leave us now, under Trump’s return to office? The structural weaknesses that SVB and Credit Suisse exposed have not been addressed. Further, Trump will not be an answer or a panacea. Instead, the political and economic narrative has shifted toward trade wars, tariffs, and further towards economic nationalism. While the administration pushes aggressive trade measures, 25% tariffs on Canadian and Mexican imports, 10% on Chinese goods, the deeper issue remains unresolved. These protectionist policies, justified under the guise of border security and national sovereignty, are layered on top of an already deteriorating economic environment. They are not the cause of the decline but will undoubtedly accelerate it. The last thing an economy struggling with weak credit expansion and rising financial stress needs is an added layer of trade distortions that will only further increase unemployment and weaken global demand.

So while the Fed and policymakers still scramble to present a picture of stability, the reality is that the crisis never ended. It's merely rolling itself out slowly; until it ends suddenly. Alas, however, inevitable does not imply imminence. 

SVB and Credit Suisse were symptoms of a much deeper, ongoing process, one that is still playing out across financial markets, labor markets, and global trade today. The reckoning that was delayed is still coming. The only question left is when.