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When I talk of loss, people say I am spoiling the party.”

— John Kenneth Galbraith, The Great Crash, 1929.

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There is a peculiar loneliness in seeing danger before others do. When Roger Babson warned in September 1929 that “sooner or later a crash is coming,” he was derided as a spoilsport—only six weeks before the ignominious end of the Roaring Twenties.

In every age, the voices that whisper caution amid celebration sound discordant to ears attuned to gain. I understand Babson’s burden. The music plays louder each day, and no one wants to leave the (East Wing) ballroom.

I. The Music of Euphoria

Markets, like civilizations, tell themselves stories. Today’s story is that artificial intelligence will rewrite the laws of productivity and wealth. The markets have accepted this creed with evangelical fervor. The S&P 500 now depends on a handful of technology names whose combined valuations exceed the entire economies of most nations. Liquidity, leverage, and faith have replaced analysis. To doubt the narrative is to risk exclusion from the congregation.

Fred Hickey has seen this movie before. I read him faithfully when he cried out to the deaf during the second half of the 1990s. Writing from his quiet New Hampshire study, far from the echo chambers of Silicon Valley and Wall Street, he describes an environment indistinguishable from the peak of the dot-com era: options speculation bordering on gambling, margin debt in record territory, and investors convinced that the Federal Reserve will rescue them from consequence. Hickey calls today’s enthusiasm “the most over-hyped technology frenzy” of his 45 years following the industry.¹

He draws a sharp distinction between the true revolution of the internet and the mirage of generative AI. The former rewired communication and commerce; the latter, he argues, produces dazzling parlor tricks but little enduring value. The prophets of abundance promise superintelligence; the evidence so far suggests hallucination. The little boy in Andersen’s tale has once again shouted that the emperor is naked—and once again, the crowd refuses to listen.

II. The Institutionalization of Delusion

My friend Edward Chancellor, the chronicler of bubbles from Devil Take the Hindmost to The Price of Time (MCM 2022 Christmas book), detects a familiar rhythm. After every crisis, we swear fidelity to prudence, only to relapse into excess once the scars fade.²

Low interest rates, the moral hazard of repeated bailouts, and the cult of innovation have conspired to teach investors that risk is an illusion. The new orthodoxy holds that central banks have abolished downturns and that AI will abolish scarcity.

This faith is seductive because it flatters both intellect and greed. It tells the speculator he is not gambling but investing in destiny. In truth, it is leverage masquerading as vision.

III. A Century Apart, the Same Dance

William Birdthistle, a former SEC official, recently invoked The Great Gatsby to describe a Halloween party at Mar-a-Lago, complete with champagne coupes and flappers.³ The symbolism was almost too perfect: a president celebrating the excess of the 1920s even as markets repeat their fatal choreography.

The 2020s, like the 1920s, are awash in speculative credit, democratized gambling platforms, and the comforting illusion that government supervision is an obstacle rather than a safeguard.

Birdthistle notes that the administration has gutted the regulatory architecture built after 1929—the very guardrails that turned American markets into the world’s deepest and most trusted. The SEC and CFTC, skeletal and demoralized, now preside over a carnival of crypto “rug pulls” and private-equity sales pitched to retirees. When the chaperones leave the ballroom, intoxication becomes policy.

IV. The Moral Mathematics of Mania

What connects these episodes—Babson in 1929, Hickey in 1999, and our own age—is not simply valuation but psychology. Markets inflate when memory deflates. Each generation must learn for itself that wealth cannot be printed or programmed at will. The speculative impulse, like original sin, is hereditary.

Galbraith once observed that during “the glorious process of enrichment,” prophets of loss are unwelcome guests. They remind revelers that progress has limits, that euphoria carries a price. Today, to question AI valuations or monetary excess is to invite ridicule—yet silence would be a greater dereliction. The duty of foresight is not to predict but to prepare.

V. Standing with Babson

I do not relish pessimism. But optimism without arithmetic is merely denial. As in 1929, as in 2000, as in 2008, the same logic of unsustainability is at work: too much credit chasing too few real opportunities. Artificial intelligence may well prove useful, but no algorithm has repealed the business cycle. What looks like genius in the ascent becomes leverage in the fall.

Babson’s warning was mocked because it spoiled the party. Yet he understood that economic gravity eventually asserts itself. When speculative air escapes, it does so not politely but explosively. Hickey’s quiet skepticism, Chancellor’s historical memory, and Birdthistle’s institutional alarm together form a contemporary trinity of prudence. Their common theme is not despair but responsibility—the belief that truth told early can mitigate pain later.

VI. The Duty to Speak

To prophesy loss is to care about what survives it. The aim is not to gloat when markets break, but to preserve trust when they do. In the aftermath of every collapse, we rediscover that value depends on honesty, regulation, and restraint—the unglamorous virtues forgotten in the boom.

On November 18, 2024, the “Cash as Trash—or King” essay was posted to my blog site. The subject was revisited on August 6, 2025. Cash, currently trash, could regain its luster when least expected. The only asset that retains its value in a crash is today’s trash. Buying tomorrow’s opportunities with tomorrow’s losses is apostasy, not prophecy.

History does not repeat, but its chorus grows louder as we ignore it. If the past is prologue, we may already be dangerously close to the end of the script. And if Roger Babson were alive today, he would likely be dismissed once more for saying what must be said: sooner or later, a crash is coming.

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Endnotes

1. Fred Hickey, quoted in Edward Chancellor, “An Even Bigger Bubble,” Reuters Breakingviews, Nov. 7, 2025.
2. Edward Chancellor, The Price of Time (Allen Lane, 2022), and “An Even Bigger Bubble,” Reuters Breakingviews, Nov. 7, 2025.
3. William A. Birdthistle, “Trump Is Pushing Us Toward a Crash. It Could Be 1929 All Over Again,” The New York Times, Nov. 7, 2025.

“Markets exist to screw people.”
—Mark Spitznagel

Mark Spitznagel has built a reputation as the “crash guy.” A protégé of Nassim Nicholas Taleb, he has gained notoriety for designing hedges that deliver spectacular gains when markets collapse. According to Spitznagel, his firm, Universa Investments, made billions during the 2008 financial crisis, the 2015 “Flash Crash,” and again in the Covid-19 panic of 2020. 

A note of caution to readers: Much of what Spitznagel claims is unverifiable. He provides just enough detail to make his case but withholds the numbers an outsider would need to judge the results. The performance of Universa may well be impressive, but the true scale remains known only to him. Hyperbole and hypocrisy are often kissin’ cousins — and in Spitznagel’s case, they sometimes seem to share the same house..

Now he’s warning that today’s conditions look eerily similar to the late 1920s. Like then, stocks are priced for perfection, investors are all-in, and credit markets are frothy. The only consolation, he says, is that this feels like early 1929—when stocks surged before imploding.

But how much weight should we put on Spitznagel’s latest alarm? The most useful way to answer is to argue against him from two sides: first, that he’s too pessimistic, and then, that he’s not pessimistic enough. The truth, as usual, lies somewhere in the tension between those poles.

Why Spitznagel May Be Too Alarmist

History doesn’t repeat neatly. In 1929, there was no FDIC, no SEC, and no Federal Reserve willing to act aggressively. Today, guardrails exist that make systemic collapse less likely. Even in 2008 and 2020, when the system looked fragile, extraordinary interventions prevented depression.

Perpetual doomsaying carries costs. Universa’s strategy bleeds cash during calm periods. Institutions paying for crash insurance underperform until catastrophe strikes—and many lose patience before it does. Investors who followed Spitznagel’s July 2024 warning have missed a 20% rally in the S&P 500.

Bubbles can float longer than expected. Greenspan warned of “irrational exuberance” in 1996. The Nasdaq doubled again before peaking four years later. Valuations can stay extreme for years, making the “big short” an expensive waiting game.

The Fed put still matters. Spitznagel likens interventions to suppressing forest fires, but monetary policy isn’t nature—it’s human design. In 2020, liquidity injections and rate cuts created the fastest rebound in history. The system can bend without breaking.

From this angle, Spitznagel’s dire forecasts look less like prophecy and more like product marketing. For most investors, the bigger danger isn’t a 1929-style wipeout but abandoning equities prematurely and missing decades of compounding.

Why He May Still Be Too Optimistic

This isn’t just a stock bubble. It’s an everything bubble. Global debt now exceeds $300 trillion, real estate is inflated, private credit and venture capital are frothy, and cryptocurrencies are casinos. In 1929, stocks were the story. Today, there may be nowhere to hide.

The Fed’s toolkit is weaker. In 2008 and 2020, central banks could slash rates and buy assets without igniting inflation. Today, with government debt service soaring, aggressive easing could destabilize the fiscal outlook. The “policy put” may be out of ammo.

Political fragility amplifies risk. The 1930s crash fueled extremism. A major downturn today could pour gasoline on populist anger, polarization, and geopolitical conflict. Financial stress could easily spill into political chaos.

Contagion risk is greater than ever. Derivatives, ETFs, and shadow banking tie the system together in ways 1929 bankers couldn’t imagine. A modest drawdown could cascade into systemic seizure via margin calls and liquidity freezes.

Retail psychology could act as an accelerant. Apps and social media give retail traders more influence than ever. Panic can go viral. Worse, the lightning recovery of 2020 bred complacency: investors expect every crash to bounce. If the next one doesn’t, despair could deepen the spiral.

Seen this way, Spitznagel’s “firebomb” metaphor may actually be understated. We may be facing not just a crash, but the potential for a structural breakdown in trust—toward fiat money, government bonds, and the financial system itself.

Toward a Dialectical View

So which is it? Is Spitznagel crying wolf, or is he too measured in his warnings? Both arguments have merit—and that paradox is the point.

The future cannot be known in advance. That’s the essence of tail risk: inevitability without predictability. Crashes will come, but no one can time them. That’s why strategies like Universa’s exist. For institutions, paying for insurance can make sense. For individuals, the lesson is more behavioral: the biggest risk isn’t the market—it’s ourselves, our tendency to buy high, sell low, and let emotion rule.

The synthesis is this: markets are more resilient than Spitznagel admits, thanks to policy scaffolding. And markets are more fragile than he acknowledges, thanks to debt, leverage, and politics. Both truths coexist. For policymakers, the challenge is to maintain resilience without breeding complacency. For investors, the challenge is humility: to recognize that bubbles do burst, that crashes do come, and that overreaction can be as destructive as the crisis itself.

Conclusion

Spitznagel may be right. He may be wrong. He may even be both at once. That’s the nature of markets. They are perverse, as he says. They confound, they disappoint, they punish certainty.

The wiser stance isn’t to bet the farm on doom or to assume the music will play forever. It’s to accept uncertainty as permanent, to diversify, to temper risk, and above all, to keep human behavior from compounding financial risk.

Crashes are inevitable. Collapse is not. The market’s greatest trick, and its greatest lesson, is reminding us that both danger and opportunity are always present—often in the same moment.

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Author’s Note: I’ve spent decades studying financial history and writing about markets. What strikes me is how often we try to fit the future into the molds of the past—1929, 2008, Covid. History is a guide, but never a script. Spitznagel’s warning is useful not because it tells us what will happen, but because it reminds us that what we think can’t happen often does. Our task as investors and citizens is to prepare, to adapt, and above all, to keep perspective.

It has been years since I first read Ernest Dimnet’s The Art of Thinking. For a long time, it sat on the shelf, remembered fondly but not revisited. Then, not long ago, its pages came to mind with surprising clarity. To say that I was “thinking about The Art of Thinking” is either a contradiction or the setup for a comedian’s joke, but the paradox holds a truth. Clear, independent thought is rarer than we like to admit, and when it appears, it sharply contrasts with the borrowed and recycled opinions that dominate most of our daily lives.

Dimnet, a French priest writing in the 1920s, was not a market strategist. He cared little about price-to-earnings ratios or the Federal Reserve. His focus was on the habits of the mind: the tendency to replace our own ideas with others’ words, the comfort we find in repeating what’s fashionable, and how fear prevents us from questioning accepted wisdom. Yet his advice feels perfectly suited for the situation investors face today. We live in what’s called an “everything bubble.” Stocks, bonds, real estate, private equity, venture capital, and perhaps the greatest flight of fancy, not to mention outright chicanery, in modern history—crypto—are all priced for perfection, as if tomorrow will never disappoint. In such a climate, Dimnet’s warnings about borrowed ideas, herd mentality, and mental laziness seem as relevant as they are unwanted. Economist and author John Kenneth Galbraith sagely observed: “In the autumn of 1929 the speculators were in no mood to listen to warnings. They were enjoying a process of enrichment which it would have been ungracious to question.”

Dimnet’s Lessons for Investors

Dimnet wrote that most people do not truly think at all; they merely repeat what they have heard. It is a sobering indictment of human nature, but one that fits modern markets with unnerving precision. Much of what passes for “analysis” today is little more than the consensus dressed in new clothes. Central bankers speak, Wall Street strategists nod, financial journalists amplify the message, and investors quote it back to one another as if repetition were equivalent to insight. Dimnet’s challenge is to step outside that echo chamber and discover what we ourselves believe.

For him, genuine thinking only occurred when he was alone, grappling with ideas without the influence of popular trends. This is clearly applicable to investing. Markets continually pressure individuals to conform—to buy what everyone else is buying, to tell the story everyone else is telling. Thinking independently means risking looks of foolishness, accepting being out of sync, and tolerating the discomfort of silence. However, without that solitude, there’s no space for original judgment.

Clarity was another of Dimnet’s key principles. He believed genuine thought aimed to remove confusion and obscurity. In our world, investors often do the opposite, hiding uncertainty with jargon. We talk about “synergies,” “paradigm shifts,” or “AI transformation,” as if the very words give authority to our claims. Bertrand Russell, a contemporary of Dimnet though from a different background, once said that most people would rather die than think. Investors, it seems, prefer to hide behind complexity rather than state an idea clearly.

And perhaps most importantly, Dimnet believed that genuine thinking required the courage to doubt. It was not sufficient to just repeat what one had heard or to rephrase it in your own words. True thought involves daring to question existing assumptions, even when those assumptions seem safe. Every era has had its slogans: “this time is different,” “the Fed has our back,” “technology will save us.” Each of these has served as a substitute for real thinking, only to be revealed later as fragile reassurance. Doubt, though often unwelcome, is the discipline that guards us from confusing a story with reality.

The Everything Bubble as a Case Study

What we are experiencing today is not simply high valuations but the reinforcing machinery that sustains them. Speculative impulses are magnified by feedback loops of affirmation, and disbelief is suspended in favor of optimism. Risk aversion has gone quiet, and markets reward cheerleading more than doubt. It isn’t that rationality has vanished altogether, but that it is being drowned out by borrowed ideas.

Financial media, research reports, and social platforms reinforce each other in a continuous cycle of affirmation. The repetitive volume creates the illusion of truth. Dimnet’s warning that we confuse hearing with thinking has never been more relevant. In such an environment, it’s not stupidity that blocks independent judgment but fear: fear of exclusion, fear of missing out, and fear of being wrong alone. Questioning the prevailing optimism risks ridicule or, worse, underperformance.

Silence, which Dimnet believed was essential for reflection, is nearly impossible to find in today’s markets. The ticker never pauses. Headlines and alerts flow nonstop. The constant noise leaves little room to question whether the optimism is justified. Yet, it is precisely that quiet, that ability to step back from the flow, that separates the investor from the speculator. Without it, we are swept up by the crowd and mistake it for thought.

Practicing the Art of Thinking in Investing

How, then, might an investor practice Dimnet’s art? It starts with solitude. Time away from screens and feeds is not a luxury but a necessity. To reread one’s own investment theses quietly, to ask whether the logic still holds, is the closest we get to hearing our own voice amid the noise.

It requires skeptical inquiry. Every story is based on assumptions, and those assumptions need to be tested. Will earnings truly grow fast enough to justify today’s valuations? Are central banks truly all-powerful? Does enthusiasm for artificial intelligence reflect lasting economic change, or just the latest human hope? Asking these questions is not about claiming certainty but about recognizing uncertainty, and that’s the start of real thinking.

It also requires humility. Dimnet encouraged his readers to recognize their intellectual shortcomings. Investors, too, must acknowledge their vulnerability to confirmation bias, their comfort in following the herd, and their tendency to confuse noise with knowledge. Independent thought is not about feeling superior but about honestly recognizing our own limits.

And it requires courage. Standing apart is rarely easy. Contrarianism for its own sake is just contrivance, but real independence often takes us away from the crowd. When that happens, the strong urge is to go back to the comfort of consensus. Dimnet would remind us that resisting that urge is the essence of thinking.

A Russellian Echo

It is no coincidence that reading Dimnet reminds me of Bertrand Russell. Although one was a priest and the other a skeptic, both promoted mental freedom as the cure for conformity. Russell argued that the fear of being wrong—or of social disapproval—hinders true inquiry. Dimnet provided practical steps to overcome that fear. They came from different traditions but reached a similar conclusion: thinking takes courage.

A Paradigm Shift: The Investor as a Thinker

The “everything bubble” may end with a bang or a whimper; history will determine when. What is within our control is not the outcome but the quality of our thinking. Dimnet reminds us that genuine thinking is both rare and essential. Russell reminds us that most people will go to great lengths to avoid it. Together, they remind us that in markets flooded with repetition, jargon, and fear of exclusion, the disciplined investor must do what few others will: pause, reflect, and think.

The tragedy of most lives, Dimnet once wrote, is not that they fail to reach their goals, but that they never pause long enough to ask whether those goals are worth reaching. In investing, the tragedy is similar. Without the skill of thinking, we risk confusing speculation with wisdom and bubbles with wealth. Dimnet offers no market forecast, but something far more lasting: the reminder that the rarest—and perhaps the most profitable—commodity in finance is independent thought.

In November of last year, I wrote a post provocatively titled, “Cash Is Trash – or King,” challenging the prevailing Wall Street consensus that holding large amounts of cash was a failure of imagination—or worse, a sign of cowardice. Eight months later, with equity markets regularly making new highs, despite Trump’s tariff-induced global trade uncertainties on one hand and investor euphoria over artificial intelligence on the other, the second-quarter 2025 earnings report from Berkshire Hathaway adds more weight to the argument that patience is not just a virtue, but a strategy.

On August 2, Berkshire reported Q2 operating earnings of $11.16 billion—a 4% year-over-year decline—attributable primarily to weakness in insurance underwriting. Yet, other wholly owned segments (railroads, energy, manufacturing, and retailing) all posted gains. So why does the tone of the report feel cautious, even defensive?

Because Berkshire—true to form—is playing a long game in a market hooked on immediacy. Investor acronyms, ironic shortcuts themselves, abound: FOMO (fear of missing out) and YOLO (you only live once). Impervious to such distractions, the company held $344.1 billion in cash and equivalents at the end of the quarter, just shy of its all-time high. This marks the 11th consecutive quarter in which Berkshire was a net seller of equities. And notably, the company did not repurchase a single share of its own stock, despite a 10% drop from recent highs. 

Longtime observers know Buffett has been waiting, and waiting, and waiting for what he once called an “elephant-sized acquisition.” But elephants aren’t easy to find in this climate—at least not ones that meet the standards of price and permanence Buffett demands. In the meantime, cash continues to pile up. To the impatient, this might look like paralysis. To those who understand risk management, it’s discipline. Perhaps Buffett might offer an acronym of his own: POPO (patience often pays off). In an attempt at a lighthearted aside, if the POPO vowels are pronounced as long u’s, you might chuckle when recalling Nancy Pelosi accusing the president of spouting verbal excrement.

The word—discipline—is what connects Berkshire to another firm whose results are not reported on CNBC but deserve a second look: Palm Valley Capital Management. Full disclosure: I co-founded Palm Valley and remain a principal owner. In fact, Palm Valley manages all of my financial assets. You can find my bio under the ‘People’ tab on their website. This post, then, should be read in light of that potential conflict (some might say “convergence”) of interest.

Still, the comparison is fair. If Berkshire is the venerable giant exercising restraint after decades of compounding, Palm Valley is its scrappy spiritual nephew —an early-stage Berkshire circa 1965. Their flagship mutual fund (PVCMX) ended Q2 with roughly 80% of its assets in cash and equivalents. In today’s market, that positioning makes them outliers, even heretics. Yet, when valuations across sectors reflect not just optimism but exuberance, the prudent investor must ask: what exactly is being priced in?

To be clear, neither Buffett nor Palm Valley’s portfolio managers are calling a market top. That’s a game for traders, not stewards. What they are doing, instead, is managing risk. When prices no longer offer a margin of safety, the correct response is not to “stay fully invested” just to keep up with a benchmark. It is to protect capital until opportunity returns.

There’s a tendency among investors to confuse activity with intelligence. Wall Street’s machine demands motion—trades, rotations, momentum. But as Buffett once quipped, “We don’t get paid for activity, just for being right.” When cheap assets are scarce and uncertainty is high, doing nothing is doing something. 

Palm Valley’s July 2025 investor letter spells this out with refreshing candor. Seasoned and sagacious portfolio managers Eric Cinnamond and Jayme Wiggins, in their early 50s and 40s, respectively, reject the narrative that you must “do something” in every market environment. Like Buffett and Ted Williams, they prefer to wait for the sweet spot pitch, even as the insistent crowd screams, “Swing, you bum!” 

This quarter’s Berkshire report also carried an unmistakable warning about tariffs. The company stated: “Considerable uncertainty remains as to the ultimate outcome of these events,” referring to trade policy and escalating tensions abroad. The return of Trump to the Oval Office has reintroduced not only volatility but also unpredictability into the global economy. Berkshire rightly acknowledges that such policies could adversely impact most, if not all, of its operating businesses—and its equity portfolio.

This acknowledgment isn’t a political statement—it’s a business judgment. For companies with vast global exposure, such as Berkshire, protectionist policies inject complexity into everything from supply chains to profit margins. The fact that Berkshire raised a red flag, while simultaneously hoarding cash and avoiding buybacks, speaks to the seriousness with which Buffett is viewing the current landscape.

With Warren stepping down as CEO at the end of 2025, the future of Berkshire Hathaway becomes a significant question. Greg Abel, his designated successor, will ensure continuity but also bring his own influence. To be sure, Abel, long seen as the keeper of Berkshire’s industrial heart, isn’t expected to reinvent the wheel. His mandate is stewardship, not reinvention—a fact that should reassure shareholders and inspire imitators alike. The culture of “to win, first you must not lose” investing is deeply ingrained in Berkshire’s DNA. 

Palm Valley has fostered this culture from the start, even before growth potential could dilute it. That’s one of the key advantages of being small. Palm Valley can pursue investments that wouldn’t move the needle for Berkshire. Buffett has often expressed regret that his past successes can’t be replicated today—not because he’s lost his edge, but because Berkshire’s sheer size limits its agility. Palm Valley, by contrast, operates in a lively forest teeming with opportunity, where nimble predators can act swiftly. Berkshire, meanwhile, is on safari—scanning the horizon for rare white elephants large enough to matter.

As I wrote in November, cash is a tool—not a verdict. In the right hands, it’s optionality. In the wrong hands, it’s inertia. Buffett and Palm Valley show what it looks like when patience meets prudence. Their refusal to bend to market pressure is not a sign of passivity but of principle.

Whether you’re managing $344 billion or less than $500 million, the mandate is the same: protect capital, wait for value, and act decisively when the odds are in your favor. That’s not being contrarian for contrarian’s sake. It’s being rational in an often irrational world.

There’s an adage in accounting: “For every debit, there must be a credit.” Applying Newton’s Third Law from the physical domain —“For every action, there is an equal and opposite reaction”—to the accounting principle makes for an apt analogy.

The financial world—so seemingly complex, so filled with variables and nuance—is, at its core, held together by a single, inescapable principle: everything must balance since no effect occurs in isolation. In his June 2025 commentary, economist and fund manager John Hussman reminds us of this very principle: “The deficit of one sector emerges as the surplus of another.”¹

Let’s take a deeper dive since it’s more than economic trivia—it’s a framework for understanding why corporate America is thriving on the surface while the broader economic foundation may be far more brittle than the headlines suggest.

Sectoral Balances: Not a Theory, an Identity

Economies consist of three broad sectors:

1. The private domestic sector – households and businesses
2. The government sector
3. The foreign sector – our trading partners

At all times, the net financial positions of these sectors must sum to zero. When one sector is spending more than it earns (a deficit), another must be spending less than it earns (a surplus). This is not theory, it’s arithmetic.

If U.S. corporations are generating outsized profits and accumulating cash—i.e., running surpluses—some other sector must be running a deficit to finance those profits. In recent years, those deficit sectors have been the federal government (via deficit spending), households (via consumption and borrowing), and the foreign sector (via persistent trade deficits).

A Mirror Image in Plain Sight

In Hussman’s words, “The massive increase in corporate free cash flow is literally the mirror image of deficits in other sectors.”¹

• Government: From 2016 to 2024, over $12 trillion in new federal deficit spending was authorized—much of it tied to tax cuts and pandemic relief.²
• Households: Income growth has lagged productivity growth, forcing many families to stretch spending with credit.¹
• Foreign Sector: America imports more than it exports, resulting in a persistent trade deficit that mathematically requires domestic sectors to overspend their incomes.

This chain reaction has supported high corporate revenues and margins, but it’s not structural in the long run—it’s conditional on deficits continuing elsewhere.

The Illusion of Permanence

Despite sluggish GDP growth since 2000—slower than in the preceding 50 years³—corporate profits have expanded. This isn’t the result of AI or smartphones driving a productivity boom. Hussman argues that low interest costs and deficit-financed demand have done the heavy lifting.¹

Wall Street treats these inflated margins as the new normal, pricing stocks at levels that assume they will persist indefinitely. But just as profits were inflated artificially, they can also be deflated when deficits fall, credit contracts, or interest rates normalize.

Can Tariffs Reverse the Trend?

Donald Trump’s economic nationalism posits a solution: use tariffs to shrink the trade deficit and “bring manufacturing home.” In theory, reducing imports should improve the foreign sector’s surplus and encourage domestic production.

But Hussman would likely point out that you don’t fix trade imbalances in isolation. Shrinking the trade deficit without addressing underlying household income or government spending deficits shifts the imbalance elsewhere. In fact, U.S. trade deficits historically narrow most during recessions—not because of policy wins, but because consumers cut back and investment collapses.¹

Moreover, manufacturing resurgence depends on more than just protectionism. It requires long-term commitments to worker training, infrastructure, automation leadership, and global competitiveness—factors tariffs alone cannot secure. American manufacturing isn’t just competing on cost—it’s competing on time, efficiency, and scale.

The Real Reckoning

If government austerity returns, households deleverage, or foreign capital inflows recede, corporate profits will inevitably shrink. The investor who ignores this truth is like the builder who marvels at the chandeliers and marble floors, while ignoring the widening cracks in the foundation.

Hussman puts it poetically: “This is, because that is.”¹ Prosperity in one sector arises from imbalance in another. We would do well to remember that when market euphoria tries to convince us otherwise.

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Footnotes

1. John P. Hussman, The Bubble – Contains the Collapse – Contains the Resurgence, June 12, 2025. https://www.hussmanfunds.com/comment/mc250613/
2. Committee for a Responsible Federal Budget, “Trump and Biden National Debt.” https://www.crfb.org/papers/trump-and-biden-national-debt
3. U.S. Bureau of Economic Analysis (BEA), Real GDP Data 1950–2024. https://www.bea.gov/data/gdp/gross-domestic-product