“From barbarism to civilization requires a century; from civilization to barbarism needs but a day.” -Famed historian, Will Durant
One From the Heart
Writing a book is a unique experience and one that demands exertion, persistence, and no shortage of frustration. For nearly everyone who attempts it, the sacrifices far outweigh the rewards. My own journey has been no exception. I’ve written two books, both self-published, and while they didn’t find a wide audience, the process itself was an education in tenacity and conviction.
With my first book, Worthless, a novel, expenses dwarfed revenues by a wide margin. So from a financial perspective, the results unfortunately flew quite closely to the title.
For my second book, Bubble 3.0 — History’s Biggest Financial Bubble: Who Blew It and How to Protect Yourself When It Blows Apart, I had much higher expectations. As readers know, it was my attempt to warn that a speculative fever had overtaken markets in 2021.
Another prime objective of Bubble 3.0 was to alert readers that unprecedented overvaluation had developed in the global bond markets. In many ways, the bond bubble was far worse overseas than it was in the U.S. At the start of 2022, there remained trillions of bonds that were carrying negative yields. In other words, holders of those debt instruments were paying the issuer to use their money.
That had never happened in the history of financial markets, going back to antiquity. Because interest rates impact the value of almost all assets, this insane overpricing of bonds was a key reason I was convinced back in 2021 we were experiencing the third great bubble of the prior 25 years.
As we began publishing Bubble 3.0 digitally, those warnings began playing out. Overpriced stocks cratered. Bonds suffered historic losses. Balanced portfolios endured their worst stretch since the 1870s. In short, many of the book’s forecasts were validated — even if its readership remained small.
Yet it was the bond market where the worst carnage occurred, particularly adjusting for the perceived lower-risk nature of the fixed-income investing world. Negative yields, particularly in Europe, rocketed back into positive territory. In the U.S., the 10-year Treasury note, the most important debt security in the world, saw its yield surge from 1 ½% at year-end 2021 to 4 ¼% by October of 2022, on its way to a peak of 5% in the fall of 2023. It was one of the worst drubbings the bond market has ever experienced.
Stocks also were punished in 2022. This one-two punch caused balanced portfolios (like half equities and half bonds) to produce their most negative returns since the 1870s when U.S. Grant was in the White House. Previously, it had been almost unimaginable stocks and bonds could experience simultaneous bear markets. For decades, bonds had nearly always rallied when stocks were slammed. This was exactly the scenario I had warned about in Bubble 3.0.
Accordingly, it seemed to me that the adverse anticipations I expressed in Bubble 3.0 were largely vindicated. (One bad call I made in it was my bearish dollar outlook; the greenback actually performed well against most currencies over the next three years, though it did slide versus my favorite de facto currency, gold.) Regardless, my search for a publisher was in vain and the readership of the book was roughly equivalent to the population of Nome, Alaska (and that might be a slam to Nome!).
Despite the lack of commercial success, I take satisfaction in knowing the work was directionally right, and that its themes — from bond fragility to fiscal excess — continue to prove prescient today.
Besides the investment implications of my IMAX-like view of the world back then, there was a philosophical angle to it, as well. Most of these musings were contained in a second epilogue I wrote in early 2022. Somewhat tongue-in-cheek, I call it my Epi-epilogue. Frankly, I was concerned that it would either be considered irrelevant or too controversial, or both. As a result, my team and I never published it.
Lately, I stumbled across it and re-read it a couple of times. As many of you are also aware, I had an epiphany in 2023 when I read Neil Howe’s The Fourth Turning Is Here. But, candidly, I didn’t go back and connect the dots with the message from my Epi-epilogue. In other words, it was a coda to a coda. That also seemed strange, which was another reason it’s been kept on ice.
However, I was encouraged lately when I read that Leo Tolstoy wrote dual epilogues for War and Peace. Somehow, I don’t think Bubble 3.0 will attain classic status, even, for its author, posthumously speaking. (But, hey, Vincent Van Gogh barely sold a painting when he was alive!).
Actually, in my completely biased view, I believe the “mega-trends” I wrote about in my second epilogue have continued and even intensified. Those include the increasingly popular and contentious political gerrymandering; the consequences of unfunded entitlements; the growing wealth disparity; the Fed’s complicity in the expanding wealth divide; its role in pumping up asset bubbles; the ongoing degradation of America’s political leadership; the related alienation of the USA’s “common sense majority”; the resulting “Great Pushback” against that disaffection; and, perhaps most critical of all, what I began referring to in 2023 as the Federal Fiscal Funding Fiasco.
While some may question the investment considerations of the above summary of our national challenges, I believe they are significant and numerous. For example, since 2022, $2 trillion annual U.S. government deficits have become endemic. They now stretch out as far as the eye—and the Congressional Budget Office—can see.
How policymakers, like Treasury Secretary Scott Bessent, cope with war- or deep recession-like federal red ink may have more influence on portfolios than even the AI revolution. Specifically, inflation-fanning moves such as yield curve control, or cutting interest rates with inflation running above the Fed’s target, may well create an entirely new class of market winners and losers. In that regard, Fourth Turnings, like the one I’m convinced we’re in, have exhibited a recurring pattern, particularly with regard to inflation, global military confrontations, and severe societal strife.
The following is less than half of the original double epilogue. The second part was comprised of proposed solutions America might want to consider to finally face and, hopefully, rectify these long-festering problems.
If you’d like to see those, please let us know. If enough of you are interested, we’ll run that as next week’s Haymaker.
Due to the personal nature of this missive, I’d appreciate your feedback. Unvarnished, though respectful, comments would be particularly welcome.
Thank you!
David “The Haymaker” Hay
The Epi-epilogue
First off, and in keeping with my usual unorthodox way of doing things, I bet you’ve never read an epilogue to an epilogue before!
But there’s a method to my madness.