Two Decades Of Mass Financial Delusion Ends Now

Submitted by QTR’s Fringe Finance

Friday’s selloff was not a surprise.

Between deteriorating credit markets, rising Treasury yields, increasingly absurd artificial intelligence valuations, enormous amounts of leverage and an entire financial system that has spent the better part of two decades mainlining cheap money like a frat guy guzzling Jaegermeister at the bottom of an ice luge, the warning signs have been flashing for quite some time.

The only real surprise, at least to me, is that it’s taken this long for equity investors to begin paying attention. And what worries me most isn’t how far stocks could fall, but how spectacularly unprepared investors are to deal with a market that actually goes down and stays down.

I want to start with something I read on CNBC this morning, because I think it perfectly encapsulates the extraordinary complacency and all around ignorance that exists on Wall Street. Discussing whether increased debt issuance could become a systemic problem, Michael Rosen, chief investment officer at Angeles, offered the following assessment:

“The question is: Is this a systemic issue? Obviously, increased debt issuance is something to observe and continue to watch and be concerned about if it continues to get to levels of excessiveness. But we’re not remotely close to that right now.”

I’m sorry. What? We’re not remotely close to excessive debt issuance?

The United States has more than $40 trillion in federal debt. Annual deficits are measured in trillions. Interest expense is approaching levels that would have been unthinkable a generation ago. Corporations are borrowing enormous amounts of money to finance everything from acquisitions and share repurchases to an artificial intelligence infrastructure boom whose eventual returns remain largely theoretical.

And that’s before we get to the trillions in private credit, leveraged loans, off-balance-sheet financing arrangements, GPU-backed borrowing and assorted financial engineering Wall Street has stuffed into every available corner of the economy.

But don’t worry, everybody. Apparently we’re not remotely close to excessiveness. Oh and don’t worry about the market going down…Jim Cramer blamed Friday’s sell off on a “big hedge fund blowing up”.

It’s hilarious to constantly be called a conspiracy theorist and then see the financial world’s predominant retail voice blaming a 2% move lower on “possible scenarios” about unnamed rogue margin clerks and hedge funds, before hoping to “start fresh” on Monday, as though $2 trillion in off balance sheet AI debt, dogshit private credit marks, positive real rates on the largest debt bubble in history and all the natural laws of mathematics are just going to go away if he closes his eyes and wishes hard enough for it.

If this isn’t excessive, what the fuck qualifies? Does the Treasury have to start issuing debt denominated in scientific notation? Do we need to start borrowing money to pay the interest on the money we borrowed to pay the interest on the money we borrowed?

Oh, wait.

The remarkable part isn’t the statement itself. Wall Street is a cesspool of delusion and ignorance like that. It’s that I suspect a significant percentage of Wall Street genuinely believes it. We’ve spent so long normalizing financial absurdity that the concept of excess has lost its meaning. And I think that complacency is going to make the next genuine market drawdown considerably more psychologically devastating than people realize.

As part of my award-winning1 “The World Is Ending, So Please Prioritize Renewing Your Paid Subscription To A Former Bartender’s Finance Substack” Series, on September 23, I published Bonds Are About To Crash The Stock Market, arguing that rising Treasury yields were threatening to expose the extraordinary amount of leverage and speculative valuation built into financial markets. As I wrote then:

“Rising rates are a slow, methodical wood chipper for anything built on cheap money.”

And we’ve spent the better part of twenty years building almost everything on cheap money.

My argument wasn’t complicated. When the risk-free rate rises, everything built on cheap financing becomes more difficult to justify. Equity valuations compress, refinancing costs increase, leveraged borrowers come under pressure and speculative investments requiring endless access to capital suddenly discover that capital has a price. The equity market can ignore that math for a while, invent new narratives and convince itself that artificial intelligence has somehow repealed the laws of finance. But it cannot ignore arithmetic indefinitely.

As I also wrote in that piece, the market has spent the last fifteen years assuming we would eventually return to the financial environment that followed the Global Financial Crisis: zero rates, endless liquidity, cheap leverage and central banks standing behind asset prices. Then I asked a question I think is becoming increasingly relevant:

“What if we don’t? What if this is the reckoning?”

There are legitimate reasons the market could find some relief in the near term. Lower oil prices, for example, could ease inflation expectations, reduce pressure on consumers and potentially give the bond market some breathing room after scorching producer prices rose the most in 4 years this past week:

And investors will keep looking to telegraph the Fed’s next move…as long as reading the tea leaves results in confirmation bias that rates are definitely going lower very soon.

Stocks found slight intraday relief for a few moments when, speaking in Bangkok during meetings of the International Monetary Fund, Fed Chairman Kevin Warsh declined to endorse or reject recent indications from colleagues that the central bank was in no hurry to raise interest rates. Warsh said he wouldn’t prejudge upcoming meetings, adding that the Fed was entering a new chapter in which it would no longer preview its decisions.

In other words, Warsh essentially told everybody that he wasn’t going to tell them anything. And the market managed to find some relief in that.

Which tells you something about the extraordinary degree to which investors have become conditioned to hang on every syllable uttered by central bankers. We’re now at the point where the chairman of the Federal Reserve declining to speculate about future policy decisions can be interpreted as comforting news.

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For much of the recent turmoil, stocks and bonds have both been under pressure, consistent with fears about inflation, fiscal deterioration and higher interest rates. But Friday offered some evidence that the traditional flight from equities into Treasuries may finally be beginning to emerge. Longer-duration Treasuries rallied meaningfully, and the 30-year yield reportedly recorded its largest weekly decline since April 2025. That doesn’t establish a sustained rotation yet, but I think it’s something worth watching closely.

As equity losses accumulate, credit markets deteriorate and investors begin worrying less about inflation and more about preserving capital, I suspect demand for Treasuries could return in force. Yields could decline substantially even as equities continue falling. (Read: You Have To Like Bonds Here…Right?)

There is a world where falling yields are bullish for stocks because they reflect improving inflation expectations and a healthier economic outlook. And there is another world where falling yields are a symptom of investors becoming terrified of everything else. I think the second scenario deserves far more attention than it’s getting.

I suspect investors are going to be stunned if we enter an environment where Treasury yields fall, oil prices fall and equities continue getting their teeth kicked in anyway.

After years of conditioning investors to believe that lower interest rates automatically translate into higher stock prices, a genuine credit-driven bear market could be deeply confusing. If earnings expectations are collapsing, credit is tightening and investors are unwinding leverage, falling Treasury yields don’t necessarily rescue equities. They may simply indicate that the economy is deteriorating faster than policymakers can respond.

This is also why, as I wrote recently in You Have To Like Bonds Here…Right?, I’ve become increasingly interested in fixed income. Longer-duration Treasuries could benefit enormously from a serious economic contraction and eventual flight to safety. There are still risks, particularly if inflation remains stubborn or fiscal deterioration continues pushing yields higher, but I think the possibility of a reversal in rates is compelling.

And the truly fascinating possibility is that bonds could begin performing precisely when equity investors discover that the Fed can’t magically prevent every decline. (If they don’t, bonds keep crashing and gold heads toward $10,000 as the Fed implements yield curve control.)

One of the reasons I’m so concerned about what comes next is that, despite the selling we’ve already seen, I don’t believe we’ve come remotely close to clearing out the speculative excess built up during this cycle.

Take CoreWeave, which I’ve spent the last several days writing about. The company has become one of the poster children for the financial insanity surrounding the AI infrastructure buildout: enormous capital requirements, debt financing, GPU collateral, extraordinary growth expectations and a business model heavily dependent on continued access to capital. It should have never IPO’d if you ask me and if it wasn’t for Nvidia backstopping its IPO, it might not have.

As I wrote in my recent piece about Nvidia potentially being forced to support CoreWeave:

“They share an uncomfortable characteristic: the financial health of one participant increasingly depends on the continued financial health, spending and access to capital of everybody else.”

That’s a wonderful arrangement when asset prices are rising and a potential catastrophe when the music stops.

I suspect Nvidia may eventually find itself forced to intervene if CoreWeave’s financial condition continues deteriorating. Not necessarily because Jensen Huang wants to throw good money after bad, but because allowing one of the central financing mechanisms behind the AI boom to unravel could prove far more expensive than trying to save it. And even then, another investment might simply postpone the inevitable. (Read: Jensen Will Blink First)

CoreWeave is just one example, and frankly, it may be one of the more visible ones.

Look at crypto, where an enormous speculative ecosystem has developed around assets whose prices depend heavily on continued confidence, liquidity and risk appetite. There are legitimate technologies and businesses within that ecosystem, but also extraordinary amounts of leverage, financial engineering, questionable collateral and speculation.

What happens when investors discover that their crypto holdings, technology stocks and other speculative investments were effectively different versions of the same liquidity trade? And crypto doesn’t even need market forces to crash. It just needs…Democrats to win Congress in November: The Crypto Risk No One Is Discussing

Then there’s private credit, a market I’ve been warning about for quite some time. In this sector, the absence of daily price discovery is not the absence of risk. Sometimes it’s just the absence of a mirror: From Par To Pennies

Beyond that, there are leveraged loans, speculative real estate investments, private equity portfolios, venture capital valuations, structured financing arrangements and countless other corners of the market that have benefited from the same two-decade experiment in cheap money.

In my September 29 piece, It’s Official: The AI Emperor Has No Clothes, I wrote:

“Crises have a nasty habit of beginning from the ground up and working their way toward the assets everyone previously assumed were untouchable.”

I think that’s precisely the risk we’re facing now. And despite the recent selling, I suspect we’ve barely begun to uncover what’s hiding beneath the surface. The excess is still massive, the leverage is still massive, and the psychological complacency may be the most massive thing of all.

Here’s what I think people are really underestimating about the possibility of a major market drawdown: we have spent so long conditioning ourselves to believe that financial markets are supposed to go up that an actual sustained decline could produce a level of psychological hysteria unlike anything we’ve seen in decades.

I’m not talking about a garden-variety 5% correction or a couple of uncomfortable trading sessions followed by Nvidia announcing another $100 billion investment in somebody who will turn around and spend it buying Nvidia chips. I’m talking about a bear market where every rally gets sold, every supposedly cheap stock gets cheaper and every dip buyer who spent the last fifteen years congratulating himself for being a financial genius discovers that his entire investment strategy was predicated on the Federal Reserve making sure he never had to experience genuine discomfort.

I don’t think people have any idea what that would feel like anymore.

Why would they? For nearly twenty years, we’ve operated under a financial regime in which virtually every meaningful market disruption has eventually been met with lower interest rates, quantitative easing, emergency lending facilities, fiscal stimulus or outright intervention. We’ve trained investors to expect the rescue before they’ve even experienced the crisis. We’ve trained corporations to believe capital should always be available, private equity firms to believe valuations are whatever the last financing round says they are, and speculators to believe leverage is a permanent wealth creation strategy.

As I wrote in my recent piece about the potential return of boring blue-chip stocks:

“We’ve spent twenty years confusing asset price inflation with genuine prosperity, speculation with investing and central bank liquidity with actual wealth creation.”

We’ve spent two decades systematically eliminating financial discomfort, and in doing so, we’ve created a market populated by people who have almost no tolerance for it. That’s a hell of a psychological experiment, and I think we may be getting ready to find out what happens when it ends. (Read: Modern Chickenshit Monetary Theory)

The first genuine drawdown will be met with disbelief, followed by anger, accusations of manipulation, demands that the Federal Reserve do something and eventually, if the selling continues, people will be f*cking beside themselves.

And underneath all of that noise, the market will be doing something it hasn’t been allowed to do naturally for a very long time: attempting to price actual risk.

If that process really gets underway, I suspect the amount of financial garbage that gets exposed will be breathtaking. There are entire business models and sectors that have never been tested in a world where capital isn’t readily available.

Some of these assets will recover. Some will be acquired or restructured. And some will simply disappear. That’s what happens when financial markets begin distinguishing between businesses that create economic value and businesses that have survived primarily because the cost of capital was artificially suppressed.

And the process could be especially traumatic because we have an entire generation of investors who have been conditioned to regard every meaningful decline as temporary, every correction as a buying opportunity and every crisis as something that will eventually be resolved by somebody in Washington pushing a button.

We’ve become so accustomed to financial comfort that genuine price discovery could break our brains.

Of course, I could be wrong about the timing. Oil could retreat, Treasury yields could stabilize, the Fed could provide enough reassurance to spark another speculative rally and the whole circus could continue for another six months or longer. I’ve never claimed to know the precise date on which the market will finally lose its mind.

But I do believe the underlying excess is real, the financial vulnerabilities are enormous and the longer we postpone dealing with them, the more painful the eventual adjustment could become.

Imagine what happens when people discover there is no law of economics requiring their brokerage accounts, home equity, retirement portfolios or speculative investments to increase in value every year. I think it could genuinely break people’s brains.

And the irony is that none of this would be particularly extraordinary by historical standards. Financial markets have always experienced booms, busts, credit contractions, bankruptcies and periods of brutal repricing. What’s extraordinary is that we’ve spent the last twenty years convincing ourselves we’ve somehow evolved beyond them.

We haven’t. We’ve spent twenty years convincing ourselves that financial pain is optional. I think we’re getting dangerously close to discovering that it isn’t.

And when that realization finally sets in, I suspect the market crash itself may be the least remarkable part of the spectacle.

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