139 Queen's Road
Central, Hong Kong
It’s April 6, Easter Monday, 2026. The S&P 500 has closed at 3691 – a 40% decline from its peak. The NASDAQ hits 8965, down 55% from its highs. Average P/E for each is still around 20 and 22, surprisingly reasonable levels, suggesting more pain to come. The unemployment rate in the United States is 8%, and things look bleak for the 2026 graduating class, with less than 30% having full-time jobs lined up after graduation. The New School, facing a historic collapse in enrollment, announces that its final commencement ceremony will be in 2030. The Federal Reserve, facing stagflation and in outright war with the White House, still hasn’t cut interest rates since 2024.
How did we get here?
A recession is always just over the horizon, a boogeyman lurking at the corner of the eye, and we pretend that if we don’t look at it, it’ll go away. It’s been 18 years since the last one, and an entire generation has come of age without experiencing anything except “up and to the right (while buying the dip)”. This is about to change.
Happy families are all alike; every unhappy family is unhappy in its own way.
Tolstoy wrote of unhappy families. Economic expansions, however, share a common structure fueled by leverage and liquidity. Yet, like unhappy families, their ends are uniquely surprising. Consider these examples:
1995-2002 (The Dot Com Crash): Easy monetary policy and low interest rates, combined with strong economic growth in the Clinton years, checked the boxes of liquidity and good times, with investors fleeing to US equities as a safe haven after the Asian financial crisis. The hype around the internet served as a convenient sponge for these incoming assets, combined with the rise of VC as an ‘asset class’. Investment banks made massive fees taking unprofitable dot-coms public while pouring fuel on the fire with flattering research reports, which were further amplified by talking heads on 24-hour cable channels. The party came to an end as the Federal Reserve started tightening and a series of corporate scandals (Enron, Worldcom) and blowups (Pets.com, eToys, Webvan) shattered investor confidence, leading to a 78% fall in the NASDAQ from peak to trough.
1986 - 1991 (Japanese Asset Price Bubble): In reaction to the Plaza Accords and appreciating yen, the Bank of Japan aggressively eased monetary policy, creating ample liquidity. Deregulation and modernization of Japanese corporations, combined with a sense of Japanese global dominance in all areas (see Rising Sun by Michael Crichton as an example of this), led to massive asset price appreciation, with the Tokyo stock market at one point accounting for over 60% of global market capitalization and the Imperial Palace in Tokyo being valued at more than the entire state of California. Things changed, though, when the Bank of Japan (BoJ), concerned with rising inflation and an asset price bubble, started to raise interest rates. This set off a cascade of dominoes, with Japanese banks and corporations all highly leveraged and dependent on high asset values serving as collateral for loans. As these started to decline, a classic death spiral began, with the spike in oil prices following the first Gulf War, as well as a US recession, serving as the final shove. This led famously to Japan’s Lost Decades (20+ years of 1% GDP growth and deflation).
1973 - 1974 (Nifty Fifty and Stagflation): The U.S. economy had grown steadily since the 1960s, creating a sense of security and complacency. Investors concentrated investments in fifty large-cap growth stocks known as the "Nifty Fifty" (including companies like IBM, Coca-Cola, and Polaroid), which investors considered "one-decision" stocks that they could buy and hold forever. Many traded at high P/Es of 50+ (with Polaroid at 91x and McDonald's at 83x). Additionally, President Lyndon Johnson's "Great Society" programs and Vietnam War spending increased fiscal deficits while the Federal Reserve pursued an accommodative monetary policy to support these initiatives. Then, on October 6, 1973, Egypt and Syria launched a surprise attack on Israel, beginning the Yom Kippur War. OAPEC announced an oil embargo, causing oil prices to quadruple, a severe supply shock that reverberated across the entire economy. At the same time, the Watergate scandal unfolded, the Bretton Woods system collapsed, and the Fed started jacking up interest rates to fight runaway inflation (11%) due to the supply shock while the economy collapsed into a horrible recession with unemployment reaching 9%, GDP falling 3%, the S&P falling 50%, and many Nifty-Fifty stocks falling 60-90% from their peaks.
(I’ll skip the 2008 financial crisis, just go read Adam Tooze’s Crashed)
Now let’s go back to the future, April 2026.
After a decade+ of zero interest rates, asset prices globally underwent an unprecedented run. Inflation surprisingly remained muted due to a combination of (1) technological change, with the internet starting to deliver on its earlier promise, (2) the rise of China, exporting deflation along with cheap and increasingly higher quality goods to the world, and (3) rising inequality, with the vast majority of the benefits of low interest rates accruing to the top 10%, which spend most of their money on handbags and vacations and shit, which doesn’t really move the needle on core inflation. Cheap money also led to massive leverage and speculation in financial markets, with the SPAC bubble, the rise of the Mag 7, meme stocks, and crypto all reflecting this. While leverage has moved out of the banks due to Dodd-Frank and Basel III, it became concentrated in the rise and dominance of pod shop multi-manager hedge funds and quantitative trading firms (averaging 5x leverage). More troubling perhaps is the rise of retail options trading, for a long time reserved only for professional investors, which allows Robinhood traders to run 100x notional exposures (fun).
For a while there, quantitative tightening, the Ukraine War and COVID looked like they might prick the bubble, with SPACs and shitcoins dying off ignominiously. However, capital flight into US markets from Chinese equities (dealing with the hangover from its own speculative property euphoria), massive fiscal stimulus, and deft maneuvering by the Federal Reserve blunted the impact. A soft landing increasingly became possible. OpenAI’s release of ChatGPT started an AI hype cycle, taking NVDA valuations to the moon. Meme finance staged a comeback.
However, policy instability in early 2025 (e.g., tariff insanity) led to a massive supply shock as China suddenly stopped exporting deflation and started exporting inflation. Additionally, faced with both policy chaos and technological uncertainty due to the rise of AI, corporations just stopped hiring. At the same time, a raft of AI startups providing automation for a slew of white-collar functions (cue mandatory plug - check out www.generis.ai for regulatory solutions) (hey, I waited like 1100 words for this) obviated the need for corporations to hire, allowing them to either quietly (or loudly) cut jobs, especially in entry-level roles. Unemployment crept up as job openings simply disappeared.
Large corporate profits, largely exempt from tariff impacts due to, let’s say, accommodative exemptions, stayed mostly robust, but small businesses were devastated. Stock prices died a slow death of a thousand cuts due to valuation compression and the threat of stagflation. This, combined with abysmal prospects of obtaining visas after graduation and general soft-power reputational decline, meant international students just stopped going to the United States. Schools dependent on this income for their survival, notably the New School in NYC, but unable to cut costs in response due to the tenure system, faced an extinction event.
This, by the way, is a best-case scenario, based on what is already happening today. What could make this significantly worse? Funkiness in the bond markets (concerns about the shallow liquidity pool materializing as market makers pull out due to unpredictable conditions), a blowup of one or more of the major pod shops (due to aforementioned bond market funkiness, with liquidity drying up and their counterparties, terrified of another Archegos situation, all pulling credit at the same time, forcing massive liquidation that cascades to the other pod shops), a crisis of confidence in US debt (the White House tries to take over the Fed / force debt holders to convert to negative real rate perpetual bonds).
The next 12 months are going to be interesting times for sure.
"The fall of Empire, gentlemen, is a massive thing, however, and not easily fought. It is dictated by a rising bureaucracy, a receding initiative, a freezing of caste, a dying of curiosity."
— Isaac Asimov, Foundation
