How to Invest in a World Held Together by Delusion and Debt

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• The Fed’s oversized role in markets may be creating more risk than stability, and the consequences are showing up in inflation, debt, and housing.
• Investors clinging to the 60/40 portfolio could be blindsided in an environment where old assumptions about diversification no longer hold.
• If you think things will go “back to normal,” this piece breaks down why the next decade might look nothing like the last.

In markets, we like to believe in equilibrium, that there’s always a rational buyer, a seller, and a price. But when a single institution grows large enough to tilt the table, what happens to that balance?

For the past 40 years, the Federal Reserve has not only influenced markets but also reshaped them entirely. While that may have been necessary at times, we now face the consequences: massive debt, stubborn inflation, fragile housing markets, and a financial system addicted to cheap money.

We’ve reached a moment where the old assumptions no longer hold. Investors clinging to the traditional 60/40 portfolio or hoping for a return to “normal” interest rates may need to confront a difficult truth: we’re probably not going back.

From Nudger to Superpower

The original intent of the Federal Reserve was modest. It wasn’t meant to dictate outcomes, only to guide, like a parent giving the occasional nudge to a wobbly bicycle. But over time, the nudger became a lifeguard, then a lifeline, then a central character in almost every market narrative.

After the 2008 financial crisis, the Fed’s balance sheet ballooned from under $1 trillion to nearly $9 trillion. It bought Treasuries and mortgage-backed securities not as a last resort, but as standard operating procedure. Its words, dot plots, press conferences, and forward guidance moved markets as much as (or arguably more than) earnings and innovation.

Today, the Fed plays the role of both arsonist and firefighter. It sets rates near zero to stimulate growth, then raises them rapidly to tame the inflation it helped ignite. It prints money to fund fiscal stimulus, then pulls liquidity to calm overheated speculation. It leads investors “by the nose,” creating a system where perception, not fundamentals, drives prices.

This is visible in the data and in the psychology of investors who now hang on every Fed whisper as if it were gospel.

The Debt Spiral

America’s national debt recently crossed $34 trillion, but the number itself is less alarming than the trend, and what it costs to maintain. We now spend roughly $1 trillion per year on interest alone. That’s more than the US spends on defense and more than Medicare. It’s happening before any recession, before unemployment rises, before new wars or pandemics.

It’s worth pausing on that: the cost of servicing the debt is now one of the largest line items in the federal budget. And that’s assuming rates stay where they are.

For decades, low interest rates disguised this problem. Debt was cheap, so the US borrowed more. As long as the Fed kept rates suppressed, the music kept playing. But debt doesn’t disappear, it just waits.

In an environment where inflation remains fairly sticky, the Fed is hesitant to cut too fast, and long-term bond yields resist falling, the cost of that debt is finally being felt. Not just by the government, but by every homeowner, business, and investor hoping for relief.

Housing, Inequality, and the Illusion of Wealth

One of the clearest casualties of this system is housing affordability.

During the zero-rate years, mortgages below 3% became common. That created a generation of homeowners with golden handcuffs, locked into low-rate loans and unwilling to sell. At the same time, a new generation of buyers faces 7% mortgage rates and record-high home prices.

It’s a recipe for stagnation. Boomers sit on homes they can’t replicate while Millennials and Gen Z delay family formation, homeownership, and financial stability. The illusion of wealth, driven by inflated home equity and soaring asset prices, hides a deeper fragility.

This has political consequences. When people can’t afford homes, student debt rises, and wage growth lags inflation, frustration mounts. That frustration fuels populism, mistrust in institutions, and the rise of candidates promising easy answers.

The irony is that those answers often come in the form of more intervention, more spending, more stimulus, more moral hazard. We’ve created a system that largely rewards leverage, punishes savers, and keeps zombie companies alive. A system where risk simply migrates from banks to shadow lenders, from housing to credit markets, and from private hands to the public balance sheet.

The 60/40 Illusion

For the better part of four decades, the 60/40 portfolio (60% equities, 40% bonds) was gospel. It worked because of one thing: interest rates fell steadily from the early 1980s to 2021. Bonds provided ballast, equities rose, and diversification did its job.

But what happens when that trend reverses?

In a stagflationary environment, where inflation persists even as growth slows, stocks and bonds can fall in tandem. We saw glimpses of this in 2022, when both markets posted losses. It wasn’t a fluke; it was a stress test.

From 1968 to 1982, equities lost two-thirds of their value in real terms. Bonds suffered as rates rose to nearly 20%. In that 14-year window, the 60/40 portfolio delivered a Sharpe ratio of 0.45, anemic by modern standards.

Today’s environment shares echoes of that era: high debt, supply shocks, tight labor markets, rising geopolitical risk. The tools that worked then, including flexibility, alternative assets, and options-based hedging, may become essential once again.

Because the Fed no longer guarantees upside, risk must be respected. Hedging becomes a necessity.

So, What Now?

If you’re under 50, the past 15 years may have felt like “normal,” but they weren’t. They were shaped by a once-in-a-century financial crisis, a once-in-a-generation pandemic, and the most aggressive monetary policy in history. That era is ending.

Investing going forward requires a new mindset. Not one of fear, but one of adaptability:

• Accept that interest rates may stay elevated.
• Accept that housing affordability may take years to normalize.
• Accept that the 60/40 portfolio may no longer deliver the results it once did.
• Accept that the Federal Reserve, while powerful, cannot control every outcome.

This doesn’t mean abandoning equities, because stocks still offer long-term growth, inflation protection, and compounding potential. But it does mean thinking critically about concentration, liquidity, and assumptions about risk. The market’s next decade won’t look like its last, and the playbook that worked for your parents or your mentors may no longer apply.

We can’t stop cycles. But we can prepare for them by asking the harder questions now, before the tail risk becomes reality.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up for our Newsletter or subscribe on your preferred podcast platform so that you don't miss out on future episodes.