All Bets Are Off
Nobody rings a bell at the top. But this time, they may have left a foghorn running for three years and we simply chose not to hear it.
Let’s get on with things. The present global financial system is a confidence trick of such grand scale that future historians can only wonder how so many intelligent people, who were right in their faces with the facts, could have been fooled.
It is not fine.
The process that we are in the midst of in the summer of 2026 is the final stage of the most ill-considered monetary and fiscal experiment that human history has ever known. The scientists have not stopped looking at the results, but rather, the lab is still open.
The Valuation Illusion
Begin with stocks, where the fantasy is most apparent. The S&P 500 is trading at the extreme cyclically adjusted price-to-earnings (CAPE) level of more than 35, and price-to-sales multiples are expanding to exceed the dot-com era, thus entering the top percentile of historical valuations.
The bull case has three legs: Artificial Intelligence, a central bank “soft landing” and American exceptionalism. Together, they represent the most costly grain of truth ever bought by investors.
Yes, AI is driving productivity, but in 18 months it hasn’t been responsible for the $15 trillion surge of market capitalisation of a few tech companies. Macroeconomic benefits of transformative technologies take decades to materialise, and they are available to be bought now at a discount by the markets. Meanwhile, the “soft landing” theory has not accounted for the persistence of service inflation, the squeeze on real wages and the delayed impact on credit market stress from the most aggressive rate-tightening cycle in 40 years. If there is a clash between narrative and reality, repricing will not be orderly.
The Debt Supernova
See beyond stocks and bonds to sovereign balance sheets. Mathematically, global debt has become too high, too much to sustain until the next world war.
The United States has a federal debt of more than $39 trillion with an addition of $2 trillion per year during an economic expansion. Most important, interest payments on U.S. debt are now greater than defence spending. This will add to the existing debt re-up at current interest rates and will only add to the budget pressure.
The rest of the developed world is in a similar bind:
The UK is a Great Power with modest post-industrial tax revenues.
Japan uses extreme debt mechanics which are not sustainable by conventional sustainability analysis.
Systemic deficits are occurring in Europe: France is under EU deficit procedures and Italy is relying on a sort of implicit backing by the European Central Bank.
The official line of chief governments is that this debt can be inflated to extinction without any downside. It cannot.
Geopolitical Fragmentation
At the same time, the Great Power conflict has brought an end to the global economic system. However, defence spending is being pushed up in the midst of war in Europe, escalation in the Middle East, and the cold war over Taiwan, leaving less money for productive investments and making wage inflation a factor in tight labour markets.
Most important of all, the global trade fragmentation is breaking the structural deflationary engine that drove the past 30 years:
Cheap Asian manufacturing
Cheap Russian energy
A cheaper work force from Eastern Europe.
Withdrawal of all three forces. Reshoring supply chains costs a lot in terms of friction and structural cost, these will be borne by consumers directly, and put under pressure on corporate margins.
The Fourth Turning
We are now in the throes of what’s being called “a Fourth Turning”, an 80-year generational crisis that can fundamentally reshape the social, political and economic landscape. Trust in institutions is lost, centrism is lost, and public confidence in the system has been lost.
There are no easy answers to historical crisis turnings. They push for change at a systemic level, and either renew or collapse the system. However, no one is discounted the risk in the present markets. Equity risk premiums are still at very low levels and credit spreads are tight, whereas complex systems do not break linearly when stressed by multiple vectors, they break at unexpected moments.
The Unwinnable Bet
The implicit assumption of every investor who is long on stocks, of every government that is on a structural deficit, and of every central banker on a shaky credibility is that the system is stronger than it appears to be.
History tells us there is no record of any bet that has been won.
The current trend has come to an end because unpayable debt is piling up, hyper valuations are causing supply chain concern, and geopolitical war seems to be in full swing. So, the only thing left to be determined is the form in which the resolution will come.
Prepare accordingly.