Crises don’t always begin with recession. They begin when markets stop trusting the referee.
That’s what happened in 1987 — and the setup today looks worse. 🧵
That’s what happened in 1987 — and the setup today looks worse. 🧵
In 1987, the U.S. economy was strong. Growth was solid, unemployment was falling, inflation looked tame.
But the bond market revolted.
The 10-year Treasury ripped from 7% to 10% in months. Equities cracked. Program trading turned it into a crash.
But the bond market revolted.
The 10-year Treasury ripped from 7% to 10% in months. Equities cracked. Program trading turned it into a crash.
That crash wasn’t about growth. It was about credibility.
Markets doubted Greenspan would defend price stability the way Volcker did.
Markets doubted Greenspan would defend price stability the way Volcker did.
Fast-forward to 2025. The parallels are real.
Sticky inflation
Massive Treasury issuance
A Fed that openly tolerates above-target inflation
Fragile market plumbing (0DTE, passive crowding, private credit opacity)
Sticky inflation
Massive Treasury issuance
A Fed that openly tolerates above-target inflation
Fragile market plumbing (0DTE, passive crowding, private credit opacity)
And here’s the difference: 2025 is worse.
Debt-to-GDP >120% vs <50% in 1987
Interest costs >20% of revenues, now larger than defense spending
Inflation above 3% for 40 consecutive months
Foreign central banks are net sellers of Treasuries
Debt-to-GDP >120% vs <50% in 1987
Interest costs >20% of revenues, now larger than defense spending
Inflation above 3% for 40 consecutive months
Foreign central banks are net sellers of Treasuries
This isn’t a “growth vs recession” call.
It’s a trust call.
And trust can break overnight.
It’s a trust call.
And trust can break overnight.
The accelerant? Politics.
Powell already signaled tolerance for higher inflation to protect jobs.
Trump is promising to reshape the Fed itself.
Markets are starting to price policy capture before it even happens.
Powell already signaled tolerance for higher inflation to protect jobs.
Trump is promising to reshape the Fed itself.
Markets are starting to price policy capture before it even happens.
f confidence snaps, the sequence is brutal:
Policy signals → Bond repricing → Equity de-rating → Amplifiers fire (0DTE, passive flows) → Forced deleveraging → Credit stress → Fiscal loop → Real economy slowdown
Policy signals → Bond repricing → Equity de-rating → Amplifiers fire (0DTE, passive flows) → Forced deleveraging → Credit stress → Fiscal loop → Real economy slowdown
Tripwires I’m watching:
10yr >5% or moving +20bps in a week
Weak Treasury auction demand
Breakevens + real yields up together
MOVE + VVIX both rising
0DTE >50% SPX volume
HY spreads >600bps
A weak $ despite higher US yields
10yr >5% or moving +20bps in a week
Weak Treasury auction demand
Breakevens + real yields up together
MOVE + VVIX both rising
0DTE >50% SPX volume
HY spreads >600bps
A weak $ despite higher US yields
Some argue nominal growth will keep debt manageable. Others point to AI productivity or foreign capital inflows.
Maybe. But these supports vanish fast when credibility breaks.
Maybe. But these supports vanish fast when credibility breaks.
1987 was an equity accident.
2025 could be a systemic accident.
2025 could be a systemic accident.
Markets don’t crash on weakness. They crash on lost confidence.
And the Fed is running out of it.
And the Fed is running out of it.
Check out my full memo:
1987 Echoes in 2025: Inflation Credibility and Market Fragility
open.substack.com/pub/thealethea…
1987 Echoes in 2025: Inflation Credibility and Market Fragility
open.substack.com/pub/thealethea…
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