The Sugar High and the Hangover

There’s a particular kind of optimism that takes hold near the end of a party, the kind where everyone’s having such a good time that no one notices the host nervously checking the clock. That’s roughly where we are right now in American markets. The punch bowl is spiked with both fiscal and monetary stimulus, the music is loud, and everyone’s convinced they know exactly when to call their Uber home.

Spoiler: they don’t.

I’ve been watching a massive disconnect open up between market prices and what’s actually happening in the businesses those markets are supposed to reflect. The people running companies (the ones dealing with supply chains, hiring, and operations) are seeing a very different reality than the one priced into equity indices. And the gap between those two things is wide enough to drive a truckload of future regret through.

Here’s what markets are seeing: an administration explicitly focused on American prosperity in a way we haven’t witnessed in years. Deregulation that signals the country actually wants its commercial class to succeed. Corporate America is genuinely enthusiastic. There’s a palpable sense that someone in Washington is finally rooting for the home team.

This isn’t nothing. The American commercial class (that ambitious, occasionally reckless, frequently brilliant collection of entrepreneurs and risk-takers) has created a stunning amount of wealth over the past fifty years. A massive portion of invested capital sits in businesses that didn’t exist when Nixon was president. The world watches this happen and feels something between admiration and envy.

But here’s where the narrative gets complicated: we’re running stimulus you’d normally deploy in the middle of a brutal recession, except we’re doing it with near-full employment, years into the business cycle. It’s like ordering a second dessert after you’ve already had the cheesecake. Feels great in the moment. The bill comes later.

Small and mid-sized firms that single-sourced to Asia are facing unimaginable tariff burdens relative to their business models. They don’t have the flexibility that large conglomerates have to re-architect entire supply chains. They’re just getting hammered.

I recently spent two days with a large group of U.S. executives. The amount of energy being devoted to tariff navigation was staggering. Teams working six, seven days a week on supply-chain redesign. That leaves exactly zero bandwidth for M&A strategy, expansion plans, or any of the growth initiatives that actually create value.

For M&A and IPO activity to re-accelerate, Washington needs to provide perceived policy stability. Even positive long-term policy changes create short-term winners and losers, which slows everything down. Negative long-term changes? Even worse.

Tariffs historically push firms back to domestic markets where they often deliver inferior products at higher prices, become uncompetitive globally, and retreat. That’s precisely the wrong direction for America.

Markets seem to think tariffs are in the rearview mirror. They’re wrong about that. What’s actually in the rearview mirror is the conversation about tariffs. The consequences, particularly the inflationary ones, are still riding shotgun.

There’s this weird collective assumption that the inflation genie will simply drift back into its bottle like nothing happened. As if monetary policy, fiscal policy, and immigration policy can all point in wildly pro-inflation directions and somehow we’ll get deflationary outcomes because... we really want them?

The dollar has depreciated roughly 10% in the first half of this year, the biggest six-month decline in fifty years. Gold is at record highs. Crypto is doing crypto things. People are actively looking for ways to de-risk their exposure to U.S. sovereign risk. When was the last time you heard someone describe gold as a safe-harbor asset instead of the dollar?

Yet markets remain bizarrely calm about the prospect of substantially higher inflation. It’s like watching someone stand under a leaky roof during a rainstorm, insisting they’re not getting wet.

The Federal Reserve is trying to thread a needle while riding a unicycle on a tightrope. It’s choosing between buying downside protection for the labor market and managing inflation. And right now, it’s making the choice that puts it at serious risk if inflation re-accelerates in early 2026.

Which it probably will.

Janet Yellen had a reasonable framework when she became Fed chair: the country had just crawled out of a massive recession, and the risk of another one, with all the associated job losses and evaporated human capital would have been catastrophic. So she made dovish decisions that, in retrospect, made sense.

But that argument is much harder to sustain now. We’re not in crisis mode. We’re in “maybe we should pump the brakes a little” mode. Except the Fed is still acting like we need rescuing.

The reason Fed independence matters isn’t some abstract institutional principle. It matters because sometimes the Fed needs to make deeply unpopular choices, like raising rates high enough to actually crush inflation. Volcker-style decisions. The kind that cost politicians elections.

If the Fed becomes politically captive, which politician is going to argue for slowing the economy and costing jobs? None. And if you fail to break inflation when you have the chance, you risk the kind of runaway inflation that absolutely devastates the most vulnerable, particularly retirees who can’t easily adjust.

Undermining Fed independence isn’t just bad policy. It’s a strategic mistake with decades-long consequences.

Both parties are guilty of absolutely profligate spending. We’re running a deficit near 6–7% of GDP (the kind of fiscal stance that makes sense when you’re digging out of a recession), except we’re years into growth.

During the late Clinton years, we ran a surplus. Remember those? Now we’re debating government shutdowns over relatively trivial amounts while neither party addresses the elephant doing backflips in the room: we need actual fiscal reform to get on a sustainable long-term path.

Why isn’t this discussed? Because it’s politically suicidal, and political time horizons have shrunk to the point where anything beyond the next election cycle might as well be science fiction.

Spend time with any serious asset manager (the kind with scar tissue from multiple cycles) and U.S. fiscal policy is in their top three concerns. Often it’s number one. Asset prices reflect today’s exuberance, but the people with real money on the line are quietly terrified.

The way out starts with growth, which is why deregulation matters. But you can’t just cut taxes late in the cycle and call it a plan. Nobody wants higher taxes (I certainly don’t) but if you’re not on a sustainable policy path during good times, what happens when bad times arrive?

Do we end up with wealth taxes? European-style marginal rates of 50–60% when the bill comes due? What are the long-term consequences of choices we’re making right now? Those debates are coming in 7 to 15 years, and they could have seriously adverse effects if high tax rates blunt the entrepreneurial drive that actually powers American prosperity.

We’re facing a sub-replacement birthrate. Without immigration, the population shrinks over the next fifty years. Yet we’re making it harder for the best and brightest to come here, build careers, and put down roots.

Every STEM graduate should get a green card stapled to their diploma and a path to citizenship. Roughly half of Silicon Valley startups were founded by immigrants. We’ve been winning the global talent war. Why would we voluntarily forfeit that advantage?

The recent surge across the border needed to be addressed. Some countries genuinely did empty prisons and send people we absolutely shouldn’t welcome. But the people who are here, working and contributing in agriculture, construction, and leisure (jobs brutally hard to fill with U.S.-born labor) aren’t “taking jobs.” They’re enabling businesses to thrive and hire more broadly at higher wages.

The bigger worry isn’t the one-time visa policy costs. It’s the brilliant student in India who doesn’t come to America. The gifted mathematician who stays in China. National pride now attaches to breakthroughs that don’t have American-educated authors. That has long-term consequences we’ll be dealing with for decades.

AI is having a moment. But it must deliver trillions in value to justify current valuations. I hope it does. But the pace of change may be slower than the hype suggests.

The PC revolution took decades to play out and is still unfolding. Large language models are only a few years old. The visions being pitched may take 20–30 years to materialize, not 3–5.

The dot-com era is the right analogy: no one doubted the internet would change the world (it did) but it took longer than anyone expected, and there was a brutal sorting of winners and losers along the way.

Expect ups and downs. Valuations are elevated. Markets are deep in a bull run and FOMO is extraordinarily powerful. But markets also “looked past” the 1987 crash until they didn’t. The news that day was trivial. The market still dropped nearly 25% in a single day.

Late in the cycle, turns can be sudden and painful. And they don’t always need an obvious catalyst.

Here’s what actually worries me: we’re making short-term policy choices with long-term consequences, guided by advisers who aren’t sufficiently grounded in economic theory.

The intent is good. With rare one-party control, there’s a two-year window to implement changes that could benefit the country for decades. But good intentions plus bad economic advice equals policy mistakes that compound over time.

The country has too much at stake to pursue policies that don’t rapidly grow the pie. We need sound economic counsel. We need immigration and education policies that position America to win for the next generation. We need fiscal discipline during good times so we have room to maneuver during bad times.

And we need markets to price in actual risk instead of assuming everything works out simply because we’d prefer it that way.

Markets are pricing in best-case scenarios while ignoring increasingly obvious risks. The dollar is weakening dramatically. Inflation concerns are being dismissed as yesterday’s problem even as pro-inflation policies stack up. Fed independence is being undermined precisely when we need it most. Fiscal policy is unsustainable. Policy uncertainty is paralyzing corporate decision-making.

But everyone’s having such a good time at the party that no one wants to be the person who points out it’s getting late.

I’ve been doing this long enough to know how these stories tend to end. The music keeps playing — until suddenly it doesn’t. The liquidity is there, until it isn’t. The correlations hold, until they break.

The question isn’t whether reality eventually reasserts itself. It always does. The question is whether you’re positioned for it when it happens.

Most people aren’t.