Market participants are conditioned to expect a dramatic "Minsky moment." However, the more probable reality is a slow, grinding decline characterized by a decade of flat equity prices, compressing multiples, and degrading returns—a "death by a thousand cuts" rather than one catastrophic event.
Related Insights
While societal decline can be a long, slow process, it can unravel rapidly. The tipping point is when the outside world loses confidence in a nation's core institutions, such as its legal system or central bank. This triggers a sudden flight of capital, talent, and investment, drastically accelerating the collapse.
Drawing from his time at the US Treasury, Amias Gerety explains that recessions are about slowing growth. A financial crisis is a far more dangerous event where fundamental assumptions collapse because assets previously considered safe are suddenly perceived as worthless, causing a "sudden stop" in the economy.
Contrary to popular belief, the 1929 crash wasn't an instantaneous event. It took a full year for public confidence to erode and for the new reality to set in. This illustrates that markets can absorb financial shocks, but they cannot withstand a sustained, spiraling loss of confidence.
During profound economic instability, the winning strategy isn't chasing the highest returns, but rather avoiding catastrophic loss. The greatest risks are not missed upside, but holding only cash as inflation erodes its value or relying solely on a paycheck.
The S&P 500's high concentration in 10 stocks is historically rare, seen only during the 'Nifty Fifty' and dot-com bubbles. In both prior cases, investors who bought at the peak waited 15 years to break even, highlighting the significant 'dead capital' risk in today's market.
The feeling that today's economy is uniquely precarious is misleading. While recessions and inflation have always existed, the 24/7 news cycle creates an unprecedented intensity of negative information, leading to paralysis. The solution is to manage information consumption and focus on long-term strategy.
Contrary to intuition, widespread fear and discussion of a market bubble often precede a final, insane surge upward. The real crash tends to happen later, when the consensus shifts to believing in a 'new economic model.' This highlights a key psychological dynamic of market cycles where peak anxiety doesn't signal an immediate top.
The underlying math of U.S. debt is unsustainable, but the system holds together on pure confidence. The final collapse won't be a slow leak but a sudden 'pop'—an overnight freeze when investors collectively stop believing the government can honor its debts, a point which cannot be timed.
For 40 years, falling rates pushed 'safe' bond funds into increasingly risky assets to chase yield. With rates now rising, these mis-categorized portfolios are the most vulnerable part of the financial system. A crisis in credit or sovereign debt is more probable than a stock-market-led crash.
The U.S. economy's only viable solution to its long-term debt and inflation is a "beautiful deleveraging"—a painful but controlled economic downturn. The alternative is delaying and being pushed off the cliff by market forces, resulting in a much more severe and uncontrolled crash.
