investing

• Today’s economy is being reshaped by powerful supply-driven forces that make inflation more unpredictable and traditional diversification less reliable.
• As bonds stop behaving like dependable hedges, investors are discovering that many long-held portfolio assumptions no longer hold.
• This blog explains how to adapt to this new regime and position portfolios for a world defined by structural change rather than familiar cycles.

For decades, investors learned to think about the economy in a familiar and predictable way. Growth fluctuated, and inflation remained relatively stable. Today, the world operates quite differently. The shocks that move markets no longer look like the ones investors were trained to understand. They come from supply, not only demand. They create inflation that behaves in unpredictable ways and forces policymakers into difficult choices. They make traditional diversification weaker, not stronger.

We entered this environment gradually, then all at once. Crises like the pandemic broke supply chains; the war in Ukraine forced countries to rethink energy dependence. Tariffs returned as an accepted tool of statecraft, demographics shifted, and geopolitics fragmented. Technology began altering capital flows at a speed that surprised even the optimists.

The old environment did not disappear. It was replaced, which is the heart of the supply shock economy. It’s a structural evolution. 

A World With Sticky and Spiky Inflation

If inflation today feels strange, it’s because it behaves in ways investors are not used to. It doesn’t trend steadily upward. It doesn’t fall in a smooth line. It doesn’t settle where policymakers want it. Instead, inflation bumps along at levels that are neither comforting nor alarming. It dips, stalls, and then rises again.

This stickiness has a cause: Supply constraints, regional shifts in trade, labor shortages, and pricing power all feed into a pattern of inflation that is uneven rather than trending. It is not soaring, but it is not falling cleanly either. It has what HSBC Asset Management’s Global Chief Strategist Joe Little described as a “spiky” character. Small shocks create outsized effects, and minor disruptions take longer to unwind. Costs become embedded faster.

A world with sticky and spiky inflation is fundamentally different from one with gently drifting prices. It introduces uncertainty into the foundation of portfolio construction. Because inflation sits at the base of every valuation, every discount rate, every risk model, its unpredictability reverberates through the investment ecosystem.

The most important consequence may be psychological. Investors have stopped asking whether inflation will fall back to 2 percent. They ask whether 2 percent is even relevant anymore, as targets that once felt like gravity now feel like mere suggestions.

The Policy Trap

Central banks rarely admit when the world has changed, but you can see it in their actions. When inflation comes from supply shocks, cutting rates does not magically fix the problem. At the same time, keeping rates high risks slowing growth. This creates the dilemma at the core of today’s policy regime.

The Federal Reserve can’t support growth and control prices with the same moves. Each choice has consequences. Lower rates may fuel demand and asset prices, but they can also make inflation stubborn. Higher rates may calm price pressures, but they can weaken the parts of the economy that remain sensitive to borrowing costs.

This tension didn’t exist for most of the last twenty years. Now it sits at the center of every policy decision.

The result is more volatility around expectations. Markets are forced to reprice policy paths every time new data arrives. This back-and-forth creates sharp reversals in both the equity and bond markets. It creates rallies that overshoot and corrections that feel abrupt, and it makes investors feel like the ground beneath them is shifting even when economic conditions haven’t changed much.

Policy no longer feels like a steady hand. For many across the globe, it feels like another source of uncertainty.

The Reverse Conundrum

One of the clearest signs that the world has changed is happening in bond markets. Short-term rates are falling as central banks ease policy, yet long-term yields are not following suit. In many cases, they stay elevated or even rise.

This is quite unusual. Historically, when policymakers cut rates, the entire yield curve moves lower. Today, the opposite happens. The curve steepens, long bonds refuse to rally, and term premiums rise. It looks like the bond market is sending a different message from the policymakers who set the short end.

This “reverse conundrum” reflects deeper forces.

Investors see debt levels rising in large economies. They see fiscal commitments that are difficult to unwind. They see structural deficits that do not shrink with growth, and they see funding needs climbing year after year. In that environment, it is harder for long-duration assets to behave like safe havens.

When the long bond stops acting like a reliable hedge, the logic behind traditional diversification weakens. Duration becomes less about protection and more about valuation. Bond portfolios become vulnerable to forces that are not directly tied to interest rate cycles, and investors are forced to accept that the simplest tool for risk management no longer works the way it used to.

The Weakening of Traditional Diversification

The erosion of the stock-bond relationship is one of the more important shifts in modern portfolios. For years, bonds have cushioned equity drawdowns almost automatically. If stocks fell, yields dropped and bond prices rose. This allowed investors to own aggressive risk assets with less fear of loss. The bond market absorbed some of the shock.

That relationship is no longer consistent. A supply shock world produces inflation that can rise even when growth slows. It creates policy uncertainty that affects both asset classes simultaneously and produces valuations that move together rather than apart.

The rise in positive stock-bond correlation reflects this development. When both sides of the portfolio respond to the same forces, diversification loses its power. Investors must work harder to find resilience and must diversify the diversifiers.

This is the structural challenge of the next decade. It is not simply that returns may be lower or volatility may be higher. It is that the foundational relationships investors rely on are no longer stable.

What about US Exceptionalism?

The United States outperformed the rest of the world by a wide margin for decades. Strong earnings, a powerful tech sector, and a steady economy all contributed to a narrative of American exceptionalism. Markets rewarded that narrative with valuations that reflected confidence in structural outperformance.

Now the picture appears to be shifting. The US economy remains relatively strong, but growth outside the US is picking up. Europe looks more stable than it has in years, while Asia is supported by targeted fiscal policy and renewed manufacturing investment. After a difficult stretch, China is showing signs of a more balanced recovery. Emerging markets demonstrate a level of strength that surprises many investors who still think in outdated stereotypes.

Profits outside the US are positioned to grow faster. Policy support is more visible. Demographic advantages in parts of Asia and Latin America create favorable long-term conditions, and currencies in many emerging economies may still be very undervalued.

This broadening of global growth challenges the assumption that the US must always lead. It opens up more paths for investors, and it reduces the need to rely solely on a narrow set of assets for returns.

The old pattern of synchronized global cycles is giving way to a world where different regions move on their own timetables. That creates opportunities for diversification at the geographic level, even when traditional asset class diversification becomes more challenging.

The Rise of Emerging Market Resilience

Perhaps the most underappreciated development is the growing maturity of emerging markets. Many have established stronger policy frameworks, deeper domestic investor bases, and more flexible currency regimes. They are less vulnerable to external shocks, and they rely less on foreign capital. They manage inflation with more credibility.

This does not mean emerging markets are risk-free. But it does mean the nature of the risk has changed. Volatility is lower, and sensitivity to Federal Reserve policy is lower. Dependency on commodity cycles is lower, while correlations with developed markets are lower.

Because investors need independent sources of return, this matters. Emerging markets may no longer be the fragile beta trade they once were. They may become one of the few places where structural improvements align with attractive valuations and favorable long-term growth.

This is a big change. It reflects the multipolar world we now inhabit, and it suggests that investors who view emerging markets through the lens of the past may miss some of the more critical changes happening today.

Building a Portfolio for the Supply Shock Era

If the world has changed this much, how should portfolios change with it? Here are some principles that matter most.

1. Accept inflation volatility as part of the landscape.
Trying to predict inflation precisely is less important than building portfolios that can withstand a range of outcomes.

2. Reduce reliance on duration as the primary hedge.
Long bonds may still have value, but they cannot carry the full burden of portfolio protection.

3. Add return streams that behave independently.
Inconsistent inflation, policy volatility, and rising term premiums all reward strategies that thrive on diversification of drivers rather than diversification of exposures.

4. Look globally for growth rather than assuming it will concentrate in one region.
The next decade is unlikely to mirror the last. Broadening is a real theme.

5. Reevaluate emerging markets on their own terms.
Many have outgrown the vulnerabilities they were defined by 20 years ago.

6. Build for a range of possible futures rather than one central scenario.
The defining feature of the supply shock economy is uncertainty. Resilience comes from expanding the distribution of outcomes a portfolio can survive.

This New Era Requires New Assumptions

The world investors now face is not inherently more dangerous than the world that came before it. As always, it has simply evolved. The drivers of economic cycles have shifted. Policy reactions have changed, and inflation is behaving in unfamiliar ways. Bonds are responding to new forces. Global growth is more balanced. Emerging markets are more resilient.

In this environment, one big challenge is not that investors take too much risk. It’s that they cling to assumptions built for a world that no longer exists. The supply shock economy rewards humility but punishes rigidity. It offers opportunities to those willing to adapt.

Portfolios built on yesterday’s rules will struggle, while portfolios built on today’s reality will thrive.

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 Newsletteror subscribe on your preferred podcast platformso that you don't miss out on future episodes.

In 2025, one force overshadowed almost everything else in markets. While familiar threats such as inflation, volatility, and growth uncertainty dominated the headlines, it was politics that proved to be the more powerful driver, influencing flows, sentiment, and decision-making across asset classes.

The conversations on Top Traders Unplugged this year repeatedly returned to power, policy, and control. Who decides the rules, and how far will they go to enforce them?

The Move Towards Deglobalization

One of the most persistent themes throughout 2025 was the slow but unmistakable retreat from globalization.

Tariffs moved from being tactical tools to strategic weapons. Trade was no longer framed around efficiency, but around leverage. Countries became more inward-looking, cooperation more conditional, and markets had to adapt.

This shift matters deeply for investors. Many of the assumptions that underpinned portfolio construction over the last few decades were built on a world that was broadly integrated, where capital flowed freely, supply chains optimized globally, and the dollar sat comfortably at the center of the system.

In 2025 and moving forward, that framework feels less secure.

US Politics as a Market Variable

No country shapes global markets more directly than the United States, and in 2025, that influence was impossible to ignore. Conversations repeatedly returned to the impact of US political decisions, not only on domestic assets, but on the structure of the global system itself. Tariffs, fiscal expansion, and the increasingly explicit use of economic policy as a political tool fed directly into market behavior.

One topic that consistently surfaced is the tension around central bank independence. Who ultimately controls monetary policy, and how much political pressure can the Federal Reserve absorb before its credibility begins to erode? What once felt like a theoretical concern now carries real market consequences.

The debate around future Fed leadership also sits at the center of this shift. The choice of the next Fed chair is a serious potential catalyst for changes in inflation expectations, risk premia, and global capital flows. Investors are already weighing how markets might behave under different political configurations, well before any decision is made.

The result has been a higher and more persistent level of uncertainty. For investors, this environment challenges traditional portfolio construction. Assumptions built on stable institutions and predictable policy responses are increasingly becoming less reliable. As a result, diversification needs to be revisited, not just across assets, but across regimes, behaviour, and policy outcomes.

The real lesson here is not about taking a political view but understanding that politics is becoming a structural source of risk that investors must live with.

Is Trust in the Dollar Fading?

As politics moved center stage, questions around dollar supremacy naturally followed.

The US dollar remained dominant, but the conversations were no longer complacent. Our guests discussed not just whether the dollar would lose its status, but how trust in the system has evolved over time.

Sanctions, trade disputes, and other forms of weaponized finance raised uncomfortable questions. If access to the dollar system can be restricted or influenced politically, what does that mean for reserve management, capital flows, and long-term allocation decisions?

These were not alarmist discussions. They reflected a growing awareness that monetary dominance is as much about trust and stability as it is about scale. For investors, this meant revisiting assumptions about currency exposure, geographic diversification, and what safety really looks like in a more fragmented world.

The Need to Revisit Diversification

One of the clearest conclusions to emerge from our conversations this year was that “true” diversification can no longer be ignored. The 60/40 portfolio, which served as a reliable default for years, worked well enough that many investors stopped questioning it. In 2025, it became far less dependable. Why? Because the world it was built for no longer looks like the world we are investing in today.

Higher interest rates have fundamentally changed the role bonds play in portfolios. Acting as both income generators and shock absorbers, they were the perfect major addition to portfolios. But in a world that is shaped by higher inflation, larger fiscal deficits, and more politicized monetary policy, bonds have behaved less reliably. At times, they have amplified volatility rather than dampened it. That shift alone forces a reassessment of what balance really means in a portfolio.

At the same time, uncertainty itself has become more pervasive. Markets have always dealt with the unknown, but 2025 felt more abrupt. Political decisions landed suddenly, and geopolitical tensions flared without much warning. Drama and disruption showed up from places investors were not actively watching. Even if the future was never predictable, it now feels less linear and more prone to surprise.

Another important theme was dispersion. Even within alternative strategies that are often grouped together, outcomes varied widely. In the CTA and trend-following space, for example, performance diverged meaningfully across managers. Differences in time horizons, portfolio construction, risk management, and execution mattered a lot. This dispersion was not a weakness but evidence that diversification within strategies is just as important as diversification across them.

Taken together, these dynamics point to a broader shift in thinking. Investors must now understand what truly drives returns and risk in different parts of a portfolio. Holding exposures that respond differently to stress, policy shifts, and structural change is more important than relying on things to stay the same or hoping for the best. This is a necessary response to a market landscape that is more uncertain and far less forgiving of complacency.

Where to Find Diversification

Of course, we did not spend the year only talking about what has stopped working. Just as much time was spent discussing where diversification might be found in a market environment that feels less predictable than the one investors have grown used to.

One area that came up repeatedly was managed futures and CTAs. These strategies tend to operate across many markets, including equities, bonds, currencies, and commodities, and are designed to adapt as conditions change. Their ability to go both long and short, and to respond dynamically to price behavior, makes them structurally different from long-only allocations.

We continued our mission to educate our community about trend following, which has long been a core pillar of the show and, personally, my favorite approach. Does it promise certainty? No, quite the opposite. What makes trend following appealing in uncertain environments is that it does not try to predict what comes next. It simply responds to what is already happening.

Beyond systematic strategies, real assets featured more prominently in the conversation this year. Commodities were discussed in the context of supply constraints, geopolitics, and the move toward a more fragmented world. Land also came up as a long-term asset that behaves differently from financial markets. Unlike paper assets, it is largely insulated from the day-to-day noise of markets.

Another important area of discussion was options and volatility. These were not framed as tools for speculation, but as ways to better understand and manage risk. This focus ultimately led us to the launch of U Got Options, a new series created in collaboration with the Chicago Board Options Exchange (Cboe). This series brings you closer to the mechanics of the market by learning directly from practitioners who work with options and volatility every day. And so far, it has been a huge hit.

As always, it is important to be clear about intent. None of these discussions were meant to tell anyone what to invest in or how to allocate capital. Markets are complex, and every investor’s aspirations are different. The goal is to broaden thinking around diversification in a changing world, not to offer investment advice.

Closing Reflection

As we step into 2026, there is no sense that the uncertainty is fading. If anything, 2025 sharpened our awareness of just how quickly the landscape can change.

What this past year did give us was clarity of a different kind. It reminded us that process matters more than prediction, and that staying flexible is a necessity. It also reinforced the value of revisiting first principles, especially when the world no longer behaves the way it used to.

Finally, none of this would be possible without our guests who generously share their thinking, challenge our views, and bring depth to every conversation. Nor without the extraordinary co-hosts whose perspectives, debates, and disagreements shape the tone and integrity of the show week after week. Top Traders Unplugged is a collective effort, and we are grateful to everyone who helps make it what it is, not least the amazing team that operates and produces the show behind the scenes.

Thank you for listening, engaging, and thinking alongside us. We look forward to continuing the conversation in 2026!

This is based on episodes on 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.

• The global economy is shaped far more by land, housing, and credit structures than most people realise.
• Rising land values lock governments, banks, households, and entire regions into a system that becomes almost impossible to escape.
• This blog explains how the land trap works, why it persists, and what it means for the future of wealth and economic opportunity.

Land is the oldest asset in human history. Long before stocks or bonds existed, long before anyone thought about portfolio theory, compounding, or credit spreads, the soil beneath your feet defined wealth. Thousands of years later, that fundamental truth remains unchanged. Land is now worth about twice as much as every publicly listed company on earth. It secures the majority of credit creation. It shapes generational wealth, and it’s the starting point for many of the imbalances that dominate the global economy.

Mike Bird, author of The Land Trap, makes something clear: Land is not simply another asset class. It’s a system, a machine that affects financial stability, political behavior, household balance sheets, entrepreneurship, inequality, and even the character of cities. Once an economy is organized around land, it becomes almost impossible to reorganize it around anything else.

Many people intuitively understand pieces of this story. They know housing is expensive and they know credit is tied to property. They know young buyers struggle, and they know regional inequality has increased. But Bird’s explanation shows why this is structural and self-reinforcing. It’s a trap that countries fall into slowly but cannot escape without major upheaval.

Understanding how it works begins with three basic features of land. These features sound simple, but they create complicated outcomes.

The Three Traits That Give Land Its Power

Land has a fixed supply; it cannot move; and it doesn’t decay.

You can make more software and build new machines. You can expand manufacturing lines and grow companies. You can relocate factories. You can replace old products with new products. Land does none of these things. Because it cannot move and cannot be produced, the economic activity surrounding it determines its value. A small plot in Manhattan is worth millions. A similar plot in central Pennsylvania is worth a fraction of that. The difference is not in the land itself but the life that clusters around it.

This is where luck also plays a role. Two families who owned similar homes in Detroit and New York in the 1950s started with roughly equal assets. Their futures could not have been more different. The New York property increased in value many times over. It unlocked access to credit, and it allowed the next generation to take more risk with their careers. It doubled as collateral for business formation. Meanwhile, the Detroit property lost real value. It trapped the family in a weaker labor market and provided little credit capacity. It offered no springboard for entrepreneurship, which underscores a key point: Land magnifies regional divergence because it amplifies whatever is already happening in the local economy.

How Land Became the Backbone of Credit Creation

This brings us to the heart of the system. Modern credit creation is built on land. One hundred years ago, mortgages represented a minor share of bank lending. Now, they dominate it. Many advanced economies now have mortgage lending that represents more than 60 percent of total bank credit. Small businesses follow the same pattern. In the United States, unincorporated firms borrow more than five trillion dollars against real estate. Seventy percent of their borrowing is secured by land or housing.

This isn’t because banks are foolish. It’s because lending against collateral is easier and safer than judging the quality of an idea. Land doesn’t run away. It doesn’t evaporate. It is ideal for a lender who wants to limit downside risk. A bank has limited upside on any loan but full downside. In that world, valuing collateral is often more appealing than valuing creativity.

The result is a form of lazy banking, not because banks do less work, but because the system rewards the simplest form of risk management. The banking sector becomes a machine that pulls future land rents into the present. When home values rise, credit expands. When home values fall, credit tightens. Human capital becomes secondary. A person with a great idea but no collateral struggles to borrow, while a person with a house in a booming area can borrow easily, even without a great idea.

Human Capital That Cannot Be Unlocked

Economists like Hernando de Soto have described the problem of dead capital. People own land or assets informally and cannot use them as collateral, which traps them in poverty. Bird extends this idea. If you cannot borrow because you lack collateral, your talent cannot enter the market. Your ideas cannot be funded. Human capital itself becomes dead capital. This is one of the story's most overlooked consequences: When land becomes the foundation of credit, those who start life without it lose access to mobility.

The trap grows deeper when politics enters the scene. Homeowners want prices to rise while young families want prices to fall. Governments want stability, banks want collateral to remain valuable. None of these interests align. Policymakers become stuck between affordability and asset protection, a choice that cannot be reconciled. You cannot maintain rising home values and widespread access simultaneously. Every attempt to fix one side worsens the other.

China Shows the Land Trap at Full Scale

China provides the most extreme example of the trap. In the 1990s, a tax reform changed the fiscal structure of Chinese governance. Local governments lost revenue and turned to land sales. Households had limited investment choices due to financial repression, low interest rates, and capital controls. Property developers stepped into the gap and became the bridge between governments and households. Local officials wanted rising land prices. Families wanted returns on savings. Developers executed the transaction.

This created a bubble with unique characteristics. Chinese cities now show the symptoms of both shortage and surplus. Urban housing costs are extraordinarily high. At the same time, millions of units sit empty. Developers relied heavily on presales. Households relied heavily on appreciation. Local governments relied heavily on land revenue. Once this machine was set in motion, it became almost impossible to slow down.

A Market That Cannot Reset

Evergrande's collapse raised fears of a systemic break that would resemble Lehman Brothers. But China operates a financial system that remains tightly controlled by the state. A conventional bust requires price discovery, forced selling, and reallocation. China did not allow that. Instead, the market froze, prices stayed stable, transactions disappeared, and developers lost access to funding. Households lost confidence. Nothing reset, nothing cleared. The system entered a form of suspended animation that still persists.

That stasis may be more harmful than a downturn. A cycle that never resets prevents capital from moving toward more productive uses. It slows innovation. It slows entrepreneurship. It locks savings into a stagnant asset. Policymakers have not resolved the problem because they face the same impossible choice: either let prices fall and wipe out household wealth or keep prices high and suppress economic dynamism.

Singapore Offers a Rare Alternative

There are a few examples of countries that escaped this trap. Singapore may be the only large-scale success story. When Singapore gained independence in the 1960s, the government seized most of the land under the Land Acquisition Act. It used that land to build an affordable ownership system through the Housing and Development Board. Singapore now has one of the highest homeownership rates in the world, yet affordability remains reasonable, and speculative investment is limited. Most households can buy one home; very few can buy several. Landlords don’t dominate the system.

The catch is that Singapore achieved this during a moment of political transformation. It acted before private land ownership became widespread and altered the system before a constituency could form around rising home values. Most developed economies are long past that moment. They cannot unwind ownership without violating property rights. They cannot force down prices without political cost. They cannot replicate Singapore without changing the structure of their societies.

Why the Land Trap Persists

The land trap is a system that reinforces itself. Rising prices create political support, political support protects rising prices, and rising prices anchor credit creation. Credit creation pulls forward more demand, and once enough households have staked their futures on land, no government can afford to break the cycle.

This doesn’t mean catastrophe is inevitable. It does mean that stability comes at a cost. Credit cycles become tied to geography, and innovation becomes dependent on collateral. In many ways, wealth becomes a function of where your grandparents lived. Regions without growth fall further behind, while regions with growth become more exclusive.

The oldest asset we have still plays a massive role in our future.

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 Newsletteror subscribe on your preferred podcast platformso that you don't miss out on future episodes.

• The investors who win over time are the ones who can slow down at the right moment and survive every turn.
• Real resilience protects compounding by helping portfolios survive correlation spikes and sudden stress.
• Strong brakes give you the confidence to take smart risks and capture the big opportunities that shape long-term wealth.

Inspired by our recent conversation with our friend Dave Dredge who reminded us that in racing, the fastest driver is not always the one with the biggest engine or the lightest car. It’s typically the one with the best brakes. Good brakes let you enter a corner at full speed because you know you can slow down at exactly the right moment. They give you the confidence to explore the edges of the track rather than tiptoe around them. In a long race, that confidence compounds.

Investing works the same way. What separates the portfolios that thrive over decades from those that stumble is not really the ability to predict what happens next. It is the ability to survive whatever happens next. Good brakes are what allow an investor to take intelligent risk. They are the difference between a portfolio built to explore and one built to fear.

The irony is that many investors spend their time trying to optimize the engine. They look for the perfect stock, the clever factor tilt, the alternative strategy that promises just a little more horsepower. Far fewer focus on the more important question: What happens when the track changes?

Survival is the foundation of compounding, yet survival is not always what people optimize for. A portfolio without brakes looks efficient during calm laps and can look brilliant in the backtest. It looks smooth and predictable when the sky is clear and the pavement dry, but when the weather shifts and the corners tighten, that same portfolio becomes fragile.

The market rewards resilience. It punishes fragility. Over a lifetime of investing, that difference dwarfs every clever trick.

The Compounding Path That Few Measure

What matters most isn’t the average return. What matters is the path your capital takes to get there. Two portfolios with identical average returns can finish in much different places depending on how they handle big gains and big losses.

This’s where resilience shows its power: A portfolio with real brakes can lean into the right tail of opportunity and can withstand turbulent periods without being forced to sell. It can even accelerate into periods of dislocation while others pull back. Small behavioral differences become large mathematical differences.

The opposite is also true. A portfolio that cuts off its own upside to feel “safe” ends up hurting itself. Many investors cap gains in exchange for the illusion of lower risk. They give up the very fuel that powers long-term compounding while keeping all of their downside exposure. That’s like installing a governor on your car to limit speed while leaving the brakes worn and unreliable. It feels prudent until you reach the first difficult turn.

What destroys compounding paths isn’t necessarily bad years. It’s the combination of limited upside and occasional catastrophe. A small number of extreme outcomes drive the difference between wealth and disappointment. The investors who capture the upsides and survive the downsides win, while the rest fall behind.

The Risk No One Measures

Most risk conversations revolve around familiar buckets: equity, rates, FX, credit, inflation. But the biggest risk rarely lives inside one of those silos. It lives between them: It is the surge in correlation at precisely the moment investors need diversification most.

Diversification is typically discussed as if holding many different assets ensures safety. But most assets in the modern world move to the same underlying rhythms. Trillions of dollars of equities, bonds, private equity, private credit and real estate all share common drivers so, when the system is under stress, those drivers converge.

Correlation tends to go unnoticed until it becomes unavoidable. A portfolio that looks diversified in fair weather can behave like a single concentrated bet in a storm. That jump in correlation is not a theoretical problem. Rather, it’s the force that turns ordinary drawdowns into lasting financial damage, and it is the force many investors forget to measure.

A resilient portfolio is built to survive correlation shocks, with elements that behave differently when everything starts moving together. It includes assets that thrive when leverage unwinds and it includes true diversifiers that are not only low correlation on a spreadsheet but negative correlation in moments of stress.

Brakes are not there for the straightaways. They are there for the moments when everything tightens at once.

Looking Where Others Do Not

Some of the best opportunities for resilience lie where few people look: Volatility in foreign exchange markets. Complex optionality tied to interest rates. Convex instruments buried inside structured products. Those corners of the financial world can be ignored because they feel unfamiliar, but they are also where supply and demand imbalances can create powerful mispricing.

In certain markets, corporate hedging programs generate constant supply of options. In others, structured product flows suppress volatility for years. In some, regulations encourage behavior that looks stable on the surface but hides enormous tail risks underneath. All these forces can create moments where the price of protection detaches from the true level of vulnerability.

Value investing in volatility is no different from value investing anywhere else. It begins with price. When protection is being sold for too little because an entire ecosystem is incentivized to ignore the tail, resilience is on sale. When the cost of convexity collapses, it becomes the most attractive asset in the market.

But cheap is not the same as good value. Some markets stay suppressed for long periods because the supply is deep and persistent. The art is not only finding low prices but understanding why they are low and knowing who is supplying the volatility, how they are hedging, what pressures sit behind them, and what events can force a change. The most durable resilience is built from optionality that is inexpensive and structurally mispriced.

When the Future Cannot Look Like the Past

Each generation of investors faces a world that feels familiar on the surface but much different underneath. Today’s difference begins with demographics, as many developed countries are moving into an era with fewer workers, fewer savers and fewer taxpayers. That shift affects everything from economic growth to government budgets to the cost of capital.

For decades, policymakers relied on financial repression to soften economic challenges. Low interest rates supported asset prices. Wealth effects supported consumption and debt served as a bridge to the future. That future has now arrived, and it contains fewer shoulders to carry the load.

A smaller working population creates a simple arithmetic problem. Growth becomes harder to produce, debt becomes harder to service, and the temptation to use inflation as a release valve becomes stronger. The incentives to manage markets rather than allow them to “clear” become unavoidable.

The result is a world where the range of possible outcomes widens. Some paths lead to deflation driven by aging populations and shrinking demand, while others lead to inflation driven by fiscal pressure and political necessity. Investors must be prepared for both, because the average of these paths is meaningless. What matters are the extremes.

Resilience is the one quality that helps across all futures. It allows an investor to hold assets that benefit from inflation while also holding assets that protect against deflation, and it allows a portfolio to respond rather than react. It keeps optionality alive.

Where Convexity Still Lives

Despite all the talk about diversification, real diversifiers are scarce. Yet some remain hiding in plain sight.

Volatility in currencies behaves differently from volatility in equities. Interest rate optionality reacts to forces that do not drive stock prices. Gold has shown an ability to reflect monetary stress and geopolitical tension. Certain forms of digital assets have gained traction, not necessarily because of their technology, but because of their portability and their appeal to the next generation of wealth holders.

These assets share something important. They are not tied to the same economic assumptions that bind most of the global portfolio and they do not depend on the same borrowers, the same balance sheets or the same policy choices. They are imperfect, but they are different. On a planet with growing correlation and mounting macro tension, “different” is valuable.

A portfolio that includes real brakes pairs these diversifiers with intelligent growth assets. It seeks convexity on both sides: protection that expands during stress and participation that expands during opportunity. That combination is what turns resilience into compounding.

The Race Is Long

Many investors think in single laps. The headlines scream short term. Many investors optimize for the next quarter or the next year, but the real challenge is the forty lap race. The conditions will change many times and the track will shift. The crowd will cheer and then go silent. There will be stretches of calm and stretches of chaos.

The investor who wins is not necessarily the one who guesses the most corners correctly. It’s the one who builds a car that can handle all of them. Good brakes create courage. Courage creates exploration. Exploration creates compounding, and compounding, over time, creates everything else.

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 Newsletteror subscribe on your preferred podcast platformso that you don't miss out on future episodes.

Most economic puzzles have simple explanations on the surface. Something becomes scarce, so the price goes up. Something becomes abundant, so the price goes down. But every so often you stumble across a market that behaves in ways that seem to defy the basic rules. Beef is one of them.

Over the past decade, American consumers have paid more and more for the same steaks, burgers, and roasts. For many families, beef is becoming a luxury. Yet during most of the same period, the ranchers who supply the cattle were stuck with stagnant or falling prices. An industry built on millions of small farms saw more than half of them disappear in a generation.

This is the kind of paradox that demands a deeper look. It’s also a reminder that markets are never only math. They are stories, incentives, history, and human behavior woven together. When something looks irrational on the surface, it usually means the incentives underneath have shifted in ways we do not see. Beef is the perfect example.

The Disappearing Rancher

In 1980, the United States had about 1.3 million beef cattle operations. Families raised calves, grazed them on grass, and sent them downstream to feedlots before they became beef on grocery shelves. It was one of the most widespread agricultural livelihoods in the country. There was no single dominant buyer. Price discovery happened in open markets across the country, and the system had flaws, yes, but it resembled something close to healthy competition.

If you bought a dollar of beef in 1980, more than sixty cents of that dollar went back to the people who raised the cattle. Less than forty cents went to the meatpackers and retailers.

Now fast forward to today. More than half of all cattle operations are gone. The country has lost a quarter of its breeding cow herd and only four packing companies now control about eighty percent of the processing market. The balance of power in the supply chain has flipped. Now the packer and retailer keep more than sixty cents of the beef dollar, and ranchers get the minority share.

Whenever the economics of an industry invert this much, something fundamental has changed. If you ask ranchers, many will point to the same villains: consolidation, weak antitrust enforcement, and a market that slowly moved from competitive to controlled.

In a fully competitive system, such a dramatic reversal would not happen. Competition forces margins to spread evenly across the chain. When a handful of companies dominate, they can tilt the playing field, and tilt it they have.

When Prices Rise Without Benefiting the Producer

Beef has been expensive for years. Ground beef has roughly tripled since 2010. Steaks have become materially pricier. For many households, meat is one of the most visible signs of inflation.

But the strange part is what happened upstream. For most of the past decade, while consumers paid more, cattle prices were falling or stagnant. The relationship between beef prices and cattle prices, which should move in harmony, became unhinged. The people raising the animals received less, even as the finished product sold for more.

This is not supposed to happen in a simple supply chain. Cattle are the primary input for beef. When the value of the output rises, the value of the input should follow. That is how competitive markets work.

The breakdown occurred because the market stopped functioning competitively. A small group of packers became the only real buyers, which meant ranchers were no longer price makers. They were price takers. Meanwhile, those same packers and retailers set the price of the finished product. The grocery store shelf reflects the decisions of a few companies, not an open marketplace.

Markets become inefficient when participants are forced sellers or forced buyers. Ranchers are forced sellers. When a finished steer reaches the end of its feeding cycle, the seller has a very small window to market it. It cannot sit in inventory, and every extra day adds weight the market does not value. That built-in time pressure creates an imbalance. When sellers are pressed, and buyers have options, prices skew. That’s exactly what happened.

The Hidden Role of Imports

When people hear the phrase beef imports, many assume the outcome is obvious. More supply should lower prices, and at first glance, that is what elementary economics teaches. The reality is more complicated.

The United States imports large volumes of beef from countries like Australia, Brazil, Argentina, and Mexico. This meat enters the supply chain without a clear country label on store shelves. Consumers see a USDA inspection mark and reasonably assume the product is American. Without clear labeling, packers do not need to cut prices to sell imported meat. They simply blend it into the mix and sell it at the same price as domestic beef.

The price savings don’t reach the household. They get captured in the middle. This also reduces the demand for American cattle. If a packer can buy cheaper beef overseas and sell it as if it were equivalent to domestic product, then the rancher’s leverage declines. The market becomes less about raising the best cattle and more about navigating the preferences of a few importing and processing giants.

Markets rarely lie, but they tend to whisper truths instead of shouting them. The truth here is that imports did not lower the cost of beef for consumers. They lowered the value of cattle for ranchers.

Drought, Biology, and the Slow Clock of Nature

Economists sometimes forget that agriculture runs on biological time, not financial time. You cannot speed up a pregnancy cycle to meet demand faster. You cannot raise a calf to market weight by throwing labor at the problem. A cow calf born today will not become beef for about two years.

So when drought burns pastures across the American West, ranchers liquidate herds. They have no grass and feed is too expensive. They sell cows they would normally keep for breeding. The short-term impact is more beef entering the system. The long term effect is the opposite. Once the breeding herd shrinks, future supply collapses.

That is what happened starting around 2020. It was the deepest cattle liquidation in decades. By 2024, the herd had fallen to its lowest level since the early 1950s. Layer strong consumer demand on top of scarce cattle, and prices rise quickly. That’s what consumers are seeing now.

Yet here is the part that reveals the psychology of markets. Ranchers should be expanding their herds. Prices are high. Demand is strong. The textbook says they should buy replacements and rebuild. But many remember what happened the last time prices reached record highs. In 2014, analysts projected years of strong returns. Within a year, cattle prices collapsed faster than at any other time in modern history. Ranchers felt whiplash.

Humans remember pain more vividly than pleasure. They remember losses longer than gains. Skepticism becomes a survival instinct. Many ranchers today simply do not trust the market enough to expand, even though conditions suggest they should.

This is one of those situations Howard Marks describes as second-level thinking. The first-level answer is that high prices cause more production. The second level answer is that trust, scar tissue, and volatility shape decisions more than price alone.

The Last Frontier of Vertical Integration

There’s another trend running quietly beneath the industry. Poultry consolidated decades ago and hogs followed. In both industries, integrators control genetics, feed, growing conditions, processing, and the final sale. Farmers own the barns, while companies own everything else.

Beef is the last major protein sector that still functions through independent producers. That independence is now at risk. Large retailers and packers are moving upstream, investing in processing plants and feedlot infrastructure and trying to influence the genetics and production practices of ranchers. Some see this as innovation, others see it as the early stages of turning cattle ranching into the next contract grower system. Once the competitive cash market disappears, the transformation becomes permanent.

People tend to underestimate slow changes. They ignore the power of compounding in both wealth and decline. A market does not become consolidated in a single year. It becomes consolidated one bargain at a time, one acquisition at a time, one quiet policy decision at a time.

The beef market didn’t break overnight. It bent slowly until it could bend no further.

What This Means for Consumers and Policymakers

Most consumers simply want affordable food, a very reasonable desire. But affordability does not come from squeezing ranchers. It comes from healthy competition, transparent labeling, and a supply chain that rewards rather than penalizes domestic production.

Policymakers should recognize that beef is not only another commodity. It’s a slow biological system wrapped inside a highly concentrated industrial system. If the country treats it as a short-term price problem rather than a structural market problem, the long-term outcome will be fewer independent producers, more reliance on imports, and less resilience in the food system.

Food security matters. The United States could produce nearly all of its own beef, yet today it imports more than one-fifth of what it consumes. A nation that worries about relying on foreign semiconductors might consider the risks of relying on foreign protein as well. Markets work best when incentives align. In beef, the incentives have been misaligned for decades, and the result is visible on nearly every supermarket shelf.

Final Thoughts

Beef prices are high because the market is telling a story about consolidation. It’s also a story about drought and a story about a shrinking herd, strong demand, and a supply chain that no longer behaves like a competitive market.

But more than anything, it’s about how systems change quietly long before people notice. When they finally look up, the outcome feels like a surprise. In truth, it was years in the making. Most important things are.

• Markets today appear calm on the surface, but slow forces like drift, AI, and global fragmentation are quietly making the system more fragile.
• More than just creating dramatic headlines, these forces are building tension silently and reshaping investor behavior in a big way.
• Understanding this hidden risk regime can help investors stay adaptive and position themselves for this environment before everything finally breaks.

When people think about market risk, they tend to picture crashes, sudden drops, panics, and headlines that feel like the front edge of a historical turning point. Our psychology leans toward imagining risk as a lightning bolt, but the trouble usually begins with something far less cinematic: It begins with erosion.

Erosion is simple, whether it’s the wind that moves a grain of sand, or the water that takes a small bite out of a coastline. It rarely looks important in the moment. But leave it alone long enough and you return to find an entire landscape reshaped.

Markets can work the same way, with long stretches where little seems to happen can change everything about how investors behave, how liquidity forms, and how risk gets mispriced. Today’s market environment is increasingly defined by this kind of erosion. Volatility comes and goes, but the larger story is the formation of a new regime that does not announce itself. It accumulates.

This is the hidden risk regime, and it’s built on three forces that reinforce one another: drift, AI-shaped noise, and global fragmentation.

Drift Risk: The Market That Wears You Down

Drift is not usually the word people associate with danger. Most investors are comfortable with boredom, but drift creates a different kind of risk. Imagine markets that don’t fall, but also don’t reward. Markets that don’t send clear signals, but continue pulling capital deeper into low-conviction trades. Markets where liquidity looks abundant until someone actually needs it.

Drift quietly rewires the decision-making environment. It shows up as prolonged low dispersion across assets, shallow volatility despite rising uncertainty fewer opportunities to anchor expectations, and a slow decline in the reward for making decisions at all.

The danger of drift lies in that it creates a false sense of stability and encourages investors to reach, to push, to optimize, to convince themselves that small edges will forever remain available. Then, when the regime turns, investors who were stretched thin discover they were not prepared for anything other than calm.

What makes drift challenging is that it doesn’t scare people into action. It lulls them, tempting them into thinking that nothing is happening. But drift isn’t the absence of narrative; it’s the slow formation of a new one.

AI and the Compression of Noise

The second force impacting markets is artificial intelligence, not because AI can predict markets, but because it changes the structure of noise.

For decades, noise has been the friend of human investors. Inefficiencies arise from confusion, differing interpretations, and the messy nature of information. Noisy markets create opportunity: The randomness is the medium through which skill can occasionally shine.

But AI is starting to compress easy noise. Models scrape, categorize, and convert vast oceans of data into structured signals. Information that once created small edges gets absorbed. What remains is a landscape with less randomness, but not more clarity. Markets become smooth until they aren’t.

The danger is less in AI identifying patterns that humans can’t see but more so that AI convinces the market that certain patterns are durable even when they are not. When large numbers of models digest the same data and reach similar conclusions, noise becomes synchronized.

The result could be an environment that feels predictable but isn’t. Investors mistake alignment for truth, correlations snap not because something new happens, but because the illusion of stability was built on machine-driven homogeneity. Markets shaped by AI tend to look calm while they are becoming fragile, and like anything that grows fragile subtly, the break tends to surprise people who thought the environment was safe.

For systematic investors, this new type of noise has a silver lining. Trend strategies thrive on transitions. When models crowd into similar signals, the moment they unwind tends to produce clean, directional moves. What looks like chaos to discretionary investors can look like structure to systems. But that doesn’t make the regime any less risky. It simply means the risk has changed shape.

The Rise of Regime Zones: A Fragmenting Global System

The third force in the hidden risk regime is geopolitical fragmentation. The world is no longer defined by a single global cycle. It’s being carved into a series of regime zones, and each zone behaves according to its own incentives, its own policy imperatives, and its own vulnerabilities.

There are:

• security blocs focused on military alignment
• commodity blocs defined by resource strength
• production blocs optimized for manufacturing
• instability blocs where volatility is more common than order

Each zone creates different pressures. Supply chains that once stretched cleanly across continents now bend, twist, and reroute. Policy choices diverge. Inflation doesn’t move in synchrony. A country raising rates to slow its currency may be sitting next to a country cutting them to defend growth.

The old assumption that the global economy moved like a loosely coordinated orchestra no longer holds. Today’s world is a series of overlapping solos, each playing in its own tempo. The transitions between them create the kind of discontinuities that investors rarely expect.

Fragmentation reduces the reliability of historical relationships. It breaks old correlations, produces returns in places people stopped watching, and surprises in places they assumed were safe. But above all, fragmentation increases the energy stored beneath markets and creates the conditions for sharp, concentrated moves after long periods of stillness. Which brings us back to the hidden risk regime.

The Subtle Convergence of Drift, AI, and Fragmentation

Each of these forces matters on its own, but together, they form a regime that is subtle, powerful, and easy to underestimate.

Drift creates the illusion that nothing is happening. AI reduces noise until markets become overconfident. Fragmentation loads the system with hidden asymmetries. It’s the interaction of the three that changes everything.

A market with low dispersion, machine-shaped expectations, and geopolitical asymmetries feels calm until the moment it doesn’t. These environments are defined less by spectacular events than by systems that absorb tension quietly for long periods.

When the release comes, it rarely aligns with anyone’s calendar. Investors tend to prepare for crises by looking backward. They imagine the next shock will resemble the last one, but the next meaningful regime shift is more likely to emerge from the background forces that have been accumulating subtly, almost politely, over years.

We don’t get warnings when drift turns into instability. We only get hindsight, and hindsight is maybe the most expensive investment tool in the world.

What Works When Risk Goes Quiet

The hidden risk regime is a recognition that markets change character when three slow-moving forces overlap. In such environments, certain principles become increasingly important. First, diversification across time horizons matters more than diversification across asset labels. The surface may look calm, but the deeper currents are moving in different directions.

Second, investors benefit from strategies that adapt rather than anticipate. Systems that respond to price rather than forecast tend to remain grounded when the environment moves from drift to movement.

Third, liquidity awareness becomes essential. Liquidity is abundant when no one needs it and disappears when everyone does.

Fourth, small, frequent, risk-controlled decisions outperform concentrated conviction during periods of hidden buildup. The goal is to remain intact long enough to benefit from the eventual release of stored energy. Finally, humility becomes a competitive advantage, rewarding those who acknowledge what they don’t know.

None of these principles relies on predicting the future. They rely on recognizing that the future rarely reveals itself through obvious signals. Markets change in the subtle moments long before they change in the noticeable ones.

The Value of Looking Beyond the Noise

Key lessons in markets typically come from environments that didn’t look important at first. When the world feels loud, investors know how to respond. But when the world becomes quiet, people confuse silence with safety. The hidden risk regime is not an alarm bell. It’s an observation. The forces reshaping markets today are subtle enough to ignore, but powerful enough to define the next decade.

Risk doesn’t need to yell to matter. It can whisper, and investors who learn to listen to what is quiet may end up seeing what others miss.

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.

• The easy-money era is ending, and the forces that powered it, like cheap credit, carry trades, and endless liquidity, are starting to unwind.
• Inflation and debt are returning in familiar patterns, echoing the 1970s and forcing investors to rethink what real value means.
• As the system turns, tangible assets like gold and oil may reclaim their place at the center of wealth.

Nearly every long cycle begins with an illusion: that the rules of the last decade will govern the next one. For fifteen years, investors lived inside a system built on confidence, cheap money, and fairly low volatility. The carry trade, which is borrowing in one place to invest in another, became the heartbeat of global finance. It worked because everyone believed tomorrow would look like yesterday.

Yet cycles end not in panic, but in disbelief. When momentum stops working, when easy leverage turns fragile, when the safest trade begins to feel dangerous, the world is shifting beneath us. The last era rewarded scale and liquidity. The next might reward scarcity and resilience.

The Paradox of Inflation

Adam Rozencwajg, managing partner at Goehring & Rozencwajg (G&R) – a premier global natural resource investment firm based in New York – describes inflation as mechanical and psychological. In the short run, it is formulaic: higher energy prices, more money in circulation, lower real rates. You can model it with spreadsheets and lagging indicators. But in the long run, it becomes a matter of belief. Once people expect higher prices, they act in ways that make it true, pulling purchases forward, demanding wage increases, hoarding assets. The expectation becomes the cause.

That is the paradox of inflation. It is predictable on paper and uncontrollable in practice. Once psychology takes over, the data stops helping. In the 1970s, it took a generation to learn that lesson. Today, the early signs of that same psychology, including the acceptance that prices only move one way, are returning.

History Doesn't Repeat, But Debt Does

The stories of monetary history are rarely about new mistakes. They are about old mistakes rediscovered in modern language. In the 1960s, President Lyndon Johnson literally pinned his Fed chair against a wall, demanding easier money to fund the Vietnam War. Nixon replaced a cautious central banker with a loyal one. The result was stagflation: the toxic mix of rising prices and slowing growth that reshaped the Fed's mandate.

Today, the stage could be set up very similarly. We have high debt, political pressure, negative real rates, and a Federal Reserve caught between the fear of inflation and the fear of breaking something larger. As Rozencwajg put it, the path to a Volcker moment always runs through an Arthur Burns. Policy errors are not random. They are the system's way of buying time until the pain becomes unbearable.

The Treasury’s math shows the same trap. Once debt exceeds 100 percent of GDP, higher interest rates consume the economy’s nominal growth. To avoid a spiral, the system must keep borrowing short-term and cheap. But short-term funding is fragile. It relies on hedge funds, futures, and repo markets that can disappear overnight. The problem is that the system is working exactly as designed, just at a scale no longer sustainable.

The End of the Carry Era

The carry era is defined by trust. Trust that volatility will stay low. Trust that capital will always be available. Trust that liquidity will solve every problem. But like all long booms, it ends when trust becomes habit.

Carry trades are reflexive: the more they work, the more they reinforce the conditions that make them work. Cheap money inflates asset prices, asset prices justify more leverage, and stability becomes self-fulfilling, until it isn’t. When the cost of money rises or volatility returns, the positive feedback loop turns negative, and the world that once rewarded size and confidence begins to reward humility and flexibility.

Markets are not just mathematical systems. They are emotional ones. They oscillate between the greed of leverage and the fear of loss, and when the leverage unwinds, the world re-discovers value not in speed, but in endurance.

Gold, Oil, and the Return of Tangibility

One could make a strong case that every carry boom has an opposite: a resource boom. When leverage collapses, scarcity replaces abundance as the source of value. After years of dismissing gold as a relic and oil as obsolete, investors are rediscovering their purpose. Gold protects against monetary change, while energy fuels the physical world that no algorithm can replace.

In the 1970s, the end of Bretton Woods launched gold 25-fold. Oil prices quadrupled. The largest companies on earth were drillers and refiners, not data firms. Today, gold is again rising against every currency, and energy producers are trading for the price of their scrap steel. Offshore rigs built for billions can be bought for cents on the dollar. It’s the same story: what was forgotten becomes valuable when the world needs it most.

The irony is that the market still resists believing it. Investors cheer the idea of “Drill Baby Drill” policies without asking what geology allows. Shale fields in the United States have peaked, and Venezuela’s vast heavy oil reserves are rusted and gutted. Even if governments wish it otherwise, nature moves on its own schedule. The politics of energy may change faster than the physics that govern it.

The Unsustainable Math of Everything

Consider the scale. There are hundreds of trillions of dollars in global financial assets: stocks, bonds, private equity, credit, real estate. All of it depends on the same basic assumptions: growth, liquidity, and the ability to roll debt forward. Against that, the entire float of gold trading hands in the world is two trillion. The rest is buried in vaults.

That is the imbalance we need to keep in mind: a small door leading out of an enormous room. If even a fraction of that financial capital seeks refuge in scarce assets, the price of scarcity must rise. That’s arithmetic, not a prediction. 

Every era invents its own form of unsustainability. In the dot-com boom, it was profits deferred forever, while in the housing boom, it was debt without consequence. In this one, it might be liquidity without limit, or the belief that central banks can manage the cost of money indefinitely. When that belief cracks, the search for something tangible begins again.

When Value Changes Shape

The shape of value changes with each generation. A century ago, wealth meant land. Then it meant factories, then intellectual property. In the last two decades, it meant liquidity, the ability to move fast, scale infinitely, and never run out of buyers. But liquidity is not the same as solvency because when the music stops, the assets with a heartbeat are the ones that matter.

That means energy companies that produce real fuel, miners that extract real metal, and farmland that yields real crops. They are messy, cyclical, and politically unpopular. They are also the foundation of every abstract dollar in the system. Some refer to them as hated assets. History calls them indispensable.

Investors tend to forget that resilience compounds faster than perfection. In the years ahead, the winners may not be those who predict the next rate move, but those who understand the rhythm of cycles: the expansion of belief and the contraction of reality.

The Lesson of Every Cycle

For years, the shared assumption has been that inflation is solved, debt is manageable, and volatility can be engineered away. Let’s not forget that none of these are laws of nature. They are conditions: temporary, human, and reversible.

Tomorrow will not look like yesterday, but that’s not a reason for fear. It’s a reason for humility. The end of one system is the beginning of another, and somewhere in that transition, in the revaluation of what matters, lies the opportunity that every long cycle eventually delivers.

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.

• Every profit in markets comes from someone else’s discomfort, and understanding that truth changes how you create your edge.
• Great investors don’t seek to escape discomfort; they build systems that let them stay calm inside it.
• The ultimate trading edge self-mastery; knowing your limits, trusting your rules, and staying calm long enough for compounding to do its quiet work.

The markets look infinite, but they’re not. For every winner, there’s a loser, and every dollar of profit comes from someone else’s decision to take the other side of your trade.

It’s a fact many investors never consider. We like to think we make money because we’re smart, patient, or insightful. But a better question might not be how you make money. It’s really from whom.

In futures markets, that answer is usually clear. The counterparties are typically commercial hedgers: farmers locking in grain prices, airlines hedging fuel costs, companies transferring risk so they can focus on their core business. These players aren’t speculating. They’re protecting, and protection has a cost. Someone must be willing to take the risk they’re shedding, to absorb volatility they can’t afford to keep.

Professional traders have long understood that dynamic. They don’t imagine they’re discovering hidden patterns in the clouds. They understand they’re being paid to bear what others can’t. The market rewards whoever can take on fear, uncertainty, and complexity, and hold it longer than anyone else can tolerate.

The same is true beyond finance. Many advantages in life come from understanding where others reach their limits. The best companies profit from inefficiencies others avoid, just as the best investors endure periods others can’t stand. The best decision-makers recognise that risk is never destroyed; it’s only transferred.

What you earn depends not only on what you know, but on what someone else is willing to give up for comfort.

The Art of Living with Heat

There’s a word for discomfort: heat.

Heat is the unease you feel when your positions move against you, when your portfolio drifts into a drawdown, or when the noise of the world gets louder than your conviction. It’s not the same as volatility on a spreadsheet. It’s the volatility in your stomach, and the pressure that tests whether you really believe what you say you believe.

The great traders don’t escape heat. They live inside it. They understand that if you want to collect risk premiums, the extra return for taking on uncertainty, you have to tolerate feeling like you’re wrong most of the time.

In many strategies, that’s literally true. Systems built to absorb others’ risk can lose small amounts month after month, waiting for the moment when panic forces hedgers or speculators to unwind. When that moment comes, the payoff is enormous, but the waiting is agony.

This mirrors nearly every long-term endeavor worth doing: building a business, writing a book, raising a family, getting in shape. You lose small amounts of energy, optimism, and certainty for long stretches. The results are invisible until they aren’t.

Most people quit before the heat subsides. They want the reward of risk without the risk itself. The irony is that the heat is what produces returns. Without discomfort, there’s no premium to collect.

Learning to live with heat doesn’t necessarily mean ignoring fear. It means recognizing it as data, or as a sign you’re near the boundary of growth. Like an athlete in training, you have to distinguish between pain that signals danger and pain that signals progress.

That’s why rules and systems exist. They’re scaffolds for composure. The best investors use algorithms, position limits, or rebalancing schedules not to suppress emotion but to survive it. When the market hits 110 degrees, they can stay in the kitchen because they built ventilation in advance.

Rules and the Freedom They Create

Two traders can look at the same chart and see different worlds. One sees chaos, the other sees opportunity. The difference isn’t in the data but rather in how they relate to it.

Some people thrive on structure. They want the discipline of clear, tested systems, parameters that limit impulsive behavior. Others thrive on intuition, a sense for patterns, rhythm, and timing that can’t be captured in a rulebook.

Both approaches can work, or both can fail spectacularly. What matters is alignment between personality and process.

A trader who builds a system they don’t trust will override it the first time it hurts. A discretionary trader who lacks self-awareness will overtrade or freeze when stress rises. The mismatch between temperament and method is fatal.

This idea extends beyond trading. The most productive people aren’t necessarily those who copy someone else’s process. They’re the ones who design a structure that fits how they actually think. The writer who can’t outline shouldn’t force outlines. The entrepreneur who hates detail shouldn’t build a business that depends on it. The key is honesty and knowing what kind of stress you can bear, what kind you can’t, and building accordingly.

Rules are typically seen as constraints, but in reality, they’re a form of liberation. A well-built system frees you from the tyranny of momentary emotion. It gives you room to think long-term when everything around you screams short-term.

One paradox of markets and of life is that freedom comes from consistency. You can improvise only after you’ve built a foundation solid enough to stand on.

Detaching From Drawdowns

No matter how sophisticated, many systems spend most of their life in a state of drawdown. That’s the part few people want to talk about: Drawdowns test more than your model. They test your identity.

During such periods, people can mistake noise for feedback or convince themselves that something is broken because results aren’t immediate. They tinker, or they abandon their plans. They forget that just about every strategy, relationship, and creative pursuit has a time horizon that feels too long while you’re living it.

Many of the best market operators learn to separate self-worth from short-term results. They follow their process, not because they expect constant success, but because they’ve run the numbers and know what patience earns over a lifetime.

Psychologically, this is where many people fail. We crave certainty, and when we can’t find it, we substitute action, usually the wrong kind. Changing a system during a drawdown is like changing lanes in traffic every time it slows. It feels productive. It rarely is.

Detachment, then, is not indifference. It’s discipline. It’s the ability to act on data rather than feelings, to keep executing when the emotional reward has vanished. The best investors, athletes, and creators all share this trait. They trust the process even when it stops feeling good.

The Teacher and the Mirror

At some point, serious practitioners encounter a mentor who reflects their blind spots back at them. In trading lore, one mentor is Ed Seykota, a pioneer known for his blend of technical skill and psychological insight.

He once wrote that “everyone gets what they want from the markets,” meaning: the market gives you an external stage on which to reenact your internal patterns. The gambler finds excitement, the fearful find confirmation of danger, and the disciplined find patience rewarded.

That principle extends beyond finance. Work, relationships, and daily habits reflect who we are under pressure. We don’t tend to rise to the level of our intentions; we tend to fall to the level of our wiring.

The traders who last the longest, just like the professionals in any field, aren’t necessarily the most brilliant. They’re the ones who have come to know themselves well enough to stop fighting their nature. They build structures around it, design rules to protect them from their own instincts, and turn self-awareness into strategy.

Markets are efficient at revealing delusion. You can’t hide from your psychology when money is on the line. Every impulse is priced in and every insecurity finds expression. In that sense, markets aren’t just financial mechanisms. They’re mirrors. What they reflect, more than anything, is the human mind’s uneasy relationship with uncertainty.

The Universal Trade

Strip away the screens and algorithms, and nearly every market interaction reduces to the same fundamental trade: comfort for opportunity. You give up comfort now for potential reward later, or you buy comfort now at the cost of opportunity later. It’s true whether you’re hedging corn, building a company, or pursuing creative work.

Understanding that trade is the beginning of wisdom. It’s what separates those who view risk as danger from those who view it as currency. The question isn’t how to eliminate uncertainty. It’s how to coexist with it and to design systems, habits, and mindsets that make discomfort tolerable long enough for compounding to work its quiet magic.

At their best, the markets are a concentrated version of life itself. They remind us that success is less about predicting the future and more about surviving the present without abandoning your plan.

Risk never completely disappears, but if you can know yourself, follow your rules, and live with the drawdowns (financial or otherwise), the odds tend to tilt in your favour.

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.

• Markets are evolving as AI turns price action into self-reinforcing feedback loops that reshape risk.
• Investors are moving from trying to predict outcomes to building flexibility through optionality.
• The real advantage now lies in adaptability and the ability to adjust when the unexpected happens.

In nearly every generation, markets take on the shape of the tools we use to trade them. A century ago, ticker tape shaped behavior. Then came spreadsheets, high-frequency algorithms, and index funds. Now, artificial intelligence and structured strategies are transforming markets again.

The shift isn’t only technological, because it’s also philosophical. Markets once reflected emotion, and fear and greed moved prices in unpredictable bursts. Now, those impulses are being coded into algorithms that learn, adjust, and react faster than human instinct. In many ways, we’ve replaced the trader’s gut with the model’s feedback loop.

This change has created something subtle but profound: a new kind of reflexivity. Today, markets no longer respond to reality. They create it. Price patterns feed machine models, which feed other models, which feed behavior. Feedback has become the system itself.

And at the same time, another force is rising: a (subtle) bull market in optionality. Uncertain about what’s real or reliable, investors are shifting from owning assets to owning outcomes. They no longer want just exposure. They want flexibility.

We are living through both revolutions at once.

The Shift From Emotion to Automation

For most of history, the market’s rhythm was set by people. Traders shouted, panicked, overreacted, and sometimes refused to act at all. The beauty of that system was its imperfection: mistakes created opportunity.

Today’s markets hum to a different beat: Decisions that once took hours or days now happen in milliseconds, and patterns once hidden in noise are extracted by machines that see more data than any human ever could. Artificial intelligence doesn’t trade on emotion; it trades on probability.

At first, this made markets appear calmer. Algorithms smoothed volatility by removing human hesitation, liquidity improved, spreads tightened, and the market looked smarter.

But a new fragility has been formed. Machine learning thrives on repetition and scale. It draws confidence from what it’s seen before. The more it learns, the more it expects the future to rhyme with the past. The result is a kind of structural bias, an elegant consistency that works until it doesn’t.

When hundreds of models are trained on the same data and tuned to the same signals, they begin to move as one. The feedback loop becomes self-reinforcing: prices rise, signals strengthen, models confirm, and prices rise again. Reflexivity used to be emotional. Now it’s mathematical.

What feels like precision is typically correlation in disguise. And when the unexpected finally happens, everyone’s model fails at once.

The Optionality Boom

As markets grow more mechanized, investors are rediscovering the value of flexibility. Over the past few years, there’s been a surge in demand for instruments that don’t just bet on direction but on possibility.

Structured products, buffered ETFs, volatility strategies, even alternative assets like gold and crypto: They all share one DNA strand: convexity. They bend outcomes, allowing for asymmetry in a world that’s otherwise linear.

This rise of optionality isn’t accidental. It’s a collective response to the recognition that risk can’t be diversified the same way it once was. The traditional mix of stocks and bonds used to balance fear and greed. Now both sides of that equation depend on the same global liquidity, the same policy decisions, and increasingly, the same algorithms.

Consciously or unconsciously, investors have started buying flexibility rather than faith. They want protection against extremes, but they also want access to the upside. They want to participate without committing. In this sense, optionality is the new comfort blanket.

The irony is that this search for convexity has become a trend of its own. The more people buy optionality, the more it shapes the very markets it’s meant to protect them from. As volatility becomes an asset class, its price starts to influence everything else.

We’re in the early stages of what might be called the convexity cycle: as markets grow more uncertain, optionality demand rises, which distorts pricing, which invites more optionality strategies, which then make the system itself more reflexive.

The Paradox of Safety

Every innovation in risk management carries the seed of its opposite. Stop-losses create flash crashes, while diversification can turn correlation into contagion. Models designed to reduce exposure can end up magnifying it.

The more investors hedge, the more synchronized they become. When everyone owns the same safety valve, they all pull it at once.

Modern markets are full of such hidden symmetry. Systematic strategies rebalance on similar schedules. Trend followers chase the same signals. Volatility sellers collect the same premium until volatility spikes. These feedback loops make the market appear stable, right up until the point of sudden instability.

The paradox is that the tools meant to smooth the ride can make the eventual shocks sharper.

It’s like everyone on a plane leaning in the same direction to balance turbulence. For a while, the flight feels steady. Then one unexpected jolt sends everyone reeling.

Real resilience doesn’t come from control; it comes from diversity. When every portfolio is optimized by the same logic, the market loses its ability to absorb surprise.

The Decline of the Linear Mindset

Traditional investing assumes proportionality. Buy a stock, it goes up, you gain. Bonds fall, you lose. The relationships are mostly linear.

But the world no longer behaves linearly. Small policy shifts ripple through derivatives, options, and systematic portfolios with exponential consequences. A slight uptick in volatility can force billions in re-hedging. A rumor can trigger algorithms that trade thousands of instruments in seconds.

Investors sense this, even if they can’t always articulate it. That’s why the language of optionality, such as calls, puts, convexity, and asymmetric risk, has entered the mainstream. It’s beyond derivatives; It’s a metaphor for life in unpredictable systems.

Owning optionality means accepting that you can’t predict outcomes but can position yourself to benefit from surprise. It’s an antidote to the illusion of control.

This philosophy is spreading beyond finance. More companies build flexible supply chains, workers seek remote jobs, and homeowners favor adjustable loans. The instinct is the same: the world is too reflexive to forecast, so it’s better to design for adaptation.

Mean vs. Meaning

Artificial intelligence can process more data than any human mind, but it still struggles with context. It optimizes for the mean, not for meaning. It can identify patterns but not purpose.

That’s where humans still matter. The investor’s role is shifting from prediction to interpretation. Machines can tell us what is, but only humans can decide what matters.

This is a practical advantage. When every algorithm looks backwards, the ability to think conceptually becomes the rarest edge. The next generation of great investors won’t be those who out-compute the machines, but those who see beyond the models: to the incentives, the narratives, and the psychology driving them.

As the world becomes more reflexive, so must our thinking. The skill isn’t to fight the loop but to understand it, and to know when markets are chasing their own reflection and when they’re glimpsing something real.

The New Definition of Risk

In a reflexive market, risk no longer means volatility or drawdown. It means rigidity. The danger lies not in moving prices but in fixed assumptions.

If the last century was about building efficient portfolios, the next may be about building adaptable ones. The investors who thrive likely won’t be those with the best models, but those with the broadest range of potential responses.

In this sense, optionality isn’t a trade. It’s a mindset, specifically the willingness to accept that uncertainty is permanent and that the future will always surprise us. Maybe, then, the challenge isn’t to eliminate risk, but to design systems that can bend without breaking.

Closing Thoughts

Markets are mirrors. They reflect how we think, what we fear, and what we build to protect ourselves. In past eras, those reflections were emotional: booms and busts born of collective feeling. Today they are algorithmic: feedback loops born of collective coding.

But beneath the circuitry, the human condition hasn’t changed. We still crave certainty, and we still chase control. We still seek safety in numbers, even when that safety proves illusory. The reflexive market is teaching us a new humility. It shows that intelligence, however advanced, can’t eliminate surprise. It can only rearrange where the surprise shows up.

In this world, the most valuable asset may not be knowledge or data, but adaptability. To hold options: not just financial ones, but mental ones. To accept complexity without pretending to conquer it.

Markets will keep evolving and models will keep learning. But the advantage could always belong to those who understand the simplest truth of all: When everything reacts to everything else, the only real hedge is the ability to change your mind.

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.

• The dollar’s power has always rested on trust, and that trust, Maurice Obstfeld warns, is starting to crack.
• As tariffs turn into fiscal tools and politics blur the Fed’s independence, the system built on U.S. credibility begins to fragment.
• Obstfeld’s message is clear: the greatest threat to the dollar’s dominance isn’t abroad; it’s coming from within.

The dollar’s power has always rested on more than money. It rests on trust: Trust that U.S. leaders act predictably, trust that institutions remain independent, and trust that rules apply equally to everyone.

Maurice Obstfeld, former Chief Economist of the IMF and one of the world’s most respected voices in international economics, argues that this trust is eroding. He warns that erosion could reshape the global financial order. Here’s how.

Tariffs as Fiscal Policy

Obstfeld calls tariffs “the illusion of a free lunch.” They are sold as tools to bring back jobs or punish foreign competitors, but in reality, they function as taxes on Americans. Importers pay them, consumers absorb them, and businesses suffer shrinking margins.

The newer wave of tariffs, he says, is even more dangerous because it doubles as fiscal policy. Tariff revenues are used to fund deficits, creating a dependency that masks deeper fiscal imbalances. Many believe it’s not sustainable.

When tariffs replace taxes, inflation and inefficiency follow. Worse, they invite retaliation and distrust, the opposite of what stable monetary systems require.

History offers plenty of warnings. Nixon’s 1971 import surcharge was sold as a short-term measure to protect the dollar after the gold window closed. Trump’s 2018 tariffs were billed as leverage to restore balance. Both lingered longer than planned, distorting prices and feeding inflationary pressure. Once governments grow accustomed to tariff revenue, they rarely give it up easily.

The Dollar Was Built on Credibility

Since World War II, the dollar has served as the foundation of global finance. Nearly 90 percent of currency trades involve it. Central banks hold the majority of reserves in it. The system works because the U.S. has been viewed as a reliable steward.

That perception is changing. Some believe coercive policies, such as using tariffs or defense guarantees as bargaining tools, blur the line between economics and politics. If countries begin to see dollar reliance as a vulnerability, they will hedge by shifting toward other currencies.

The outcome is not necessarily a collapse but rather a fragmentation: a world divided into dollar, euro, and yuan blocs. That world could be less efficient, more volatile, and more political.

In the decades after Bretton Woods, credibility meant restraint. The U.S. absorbed global capital because investors trusted that politics stopped at the Fed’s door and that contracts would be honored in any court. Even during the Cold War, foreign capital saw America as the safest harbor. That sense of reliability, of rules outlasting administrations, became the true reserve asset behind the dollar. When that perception weakens, the mechanics of trade and finance follow suit.

The Rise of Financial Nationalism

At home, the risks grow from within. Fiscal dominance, when monetary policy serves political spending instead of price stability, threatens to undo decades of credibility.

Obstfeld notes that new calls to reform the Fed are not about transparency or efficiency. They are about control. The agenda is simple: keep rates low to fund deficits cheaply. It is a short-term fix with long-term costs. If the Fed becomes an arm of the Treasury, inflation expectations will un-anchor. Real rates will rise and the very asset that anchors global finance, U.S. debt, could lose its aura of safety.

The trend is not confined to Washington. Japan’s yield-curve control has blurred fiscal and monetary aims. Europe debates rewriting debt rules to accommodate populist spending, and China’s capital controls tie its currency to political objectives. Each example reflects the same instinct: to use money as an instrument of power rather than a measure of value. The more nations weaponize policy, the less faith investors place in any one currency as neutral ground.

Stablecoins and the Next Front

Even new technologies carry risks of fragmentation. Dollar-based stablecoins, meant to strengthen U.S. influence, could instead spark backlash. If other nations fear their domestic payment systems are being colonized by lightly regulated dollar channels, they may respond with digital walls: separate systems, currencies, and controls.

We are already seeing the outlines of that world. The European Central Bank is piloting a digital euro meant to safeguard monetary sovereignty. China’s e-CNY aims to bypass Western payment rails entirely. Even in Africa, regional digital currencies are emerging to reduce dollar dependence in cross-border trade. Each is rational from a domestic view, and collectively they pull the world further from the unified plumbing that once underpinned globalisation.

Obstfeld calls it a “new source of fragmentation.” What begins as financial innovation could end as geopolitical isolation.

The Cost of Losing Trust

For investors, fragmentation means higher volatility, thinner liquidity, and reduced predictability. For the U.S., it means losing the privileges that come with issuing the world’s reserve currency: cheap borrowing, financial flexibility, and diplomatic leverage.

The dollar’s reserve role delivers what economists call an “exorbitant privilege.” Roughly seven trillion dollars of global reserves sit in U.S. assets, allowing America to borrow cheaply and run deficits others could never sustain. Lose that status, and borrowing costs rise. The Treasury market’s depth, a cornerstone of global finance, thins. That cascade would touch everything from mortgage rates to military spending.

The irony, Obstfeld suggests, is that the greatest threat to the dollar does not come from Beijing or Brussels. It comes from Washington itself, from policies that confuse short-term political gain with long-term economic stewardship.

Lessons from the Past

Obstfeld does not romanticize globalization or the Washington Consensus. But he reminds us why they worked: not because of ideology, but because of credibility. Economies thrived when markets trusted governments to be predictable, when independent institutions balanced power, and when cooperation outweighed coercion.

That trust is harder to maintain in a fragmented world. Yet history shows that monetary systems built on credibility survive longer than those built on fear. The postwar order endured not because it was perfect but because it was grounded in a shared belief that openness and discipline served the common good.

In moments of uncertainty, nations often reach for protectionism and control. But every episode of financial nationalism carries the same lesson: credibility lost is not easily regained. The inflationary spiral of the 1970s, the Latin American debt crises of the 1980s, and the Asian financial turmoil of the 1990s each underscored that stable systems require restraint, not dominance.

The Fork in the Road

Global finance stands at a fork in the road. One path leads to reform: fiscal discipline, institutional independence, and renewed cooperation. The other leads to fragmentation: rising barriers, multiple currency blocs, and shrinking trust.

The U.S. can still choose which path it takes. But as economists warn, the dollar’s dominance is only as strong as the world’s confidence in the system behind it.

Once fractured, trust rarely heals quickly. It took decades for Europe to rebuild faith in monetary stability after the hyperinflations of the twentieth century. It took centuries for gold to lose its grip on global trade. If the U.S. squanders the trust that underwrites the dollar, the world will not wait patiently for it to return. A new order will emerge, not necessarily stronger but different, and rebuilding credibility will demand more discipline, humility, and cooperation than any interest-rate move could achieve.

Once that confidence fades, it may never return in full.

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.