Has the Liquidity Crisis of 2023 Been Forgotten?

In August of 2021, we published Junk Stocks Funded by Junk Bonds, which noted that high-yield spreads had hit record lows. Our view was that record low-spreads on record-low nominal yields were a recipe for ruin.

Using the Fed’s definition of financial fragility, we highlighted a group of equities that scored poorly on the Fed’s durability test and ranked poorly in our models.

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Here is what happened:

  • From publication through the end of December 31st, 2022, the stocks on that list suffered brutal losses averaging -44% (first bar).
  • Yet 2023 has given investors in these fragile speculations an epic reprieve: year to date, those same stocks have ripped higher, rising an average of 35% (second bar).
  • We would note that even the remarkable results YTD has left investors down -35% (third bar).

As our video, Stock Bubble Charts, explained, this reflex rally is entirely consistent with the countertrend rallies endemic to post-speculative manias. What is a little different this time is that by 2001, the Fed was already cutting rates as deflation gripped the economy. In contrast, this year began with soaring yields on government bonds, a financial crisis at regional banks, sharp contractions in bank liquidity, and central banks facing soaring interest expenses.

Yet the April 2023 liquidity crisis has, for the moment, fallen to the wayside of investors’ memories. The banking crisis metastasized out of a combustible mix of uninsured deposits and losses held on banks’ balance sheets. While Federal Deposit Insurance was used to halt a full-blown crisis in the banking sector, this hardly strikes us as a backdrop conducive to rank speculation in financially fragile firms. Yet that is exactly what has happened this year. Let’s dig in using a stock that has been a frequent topic of our research:


Carvana, a poster child of the Covid-bubble, was featured in our August 2021 list of financially fragile junk stocks.  Despite