← Tom Bilyeu's Impact Theory
Tom Bilyeu's Impact Theory
The Once-In-A-Lifetime Crash No One’s Ready For (Worse Than 2008?)
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2008 the housing market is euphoric. Everyone believes it is going to go up forever. Everyone, that is, except the quants who see the truth in the numbers. They know what the rest of us are going to find out very shortly. The housing market is a giant bubble and it's about to burst. The numbers just don't add up. The subprime mortgages are a ticking time bomb. Given the default rates, collapse isn't just possible, it is mathematically certain. And then it happens. Bear Stern vanishes. In a week, Lehman Brothers collapses under hundreds of billions of toxic assets. Within days, the global credit freezes and entire industries flatline. It was the first time most people learned the words too big to fail. And the first time they watched the government print trillions to stabilize the market. But it worked well. It worked like drinking to cure a hangover works. We printed money and pushed the inevitable pain into the future. We layered on more debt, lowered rates to zero to keep the economy moving. And we somehow convinced ourselves that money really could be free. Tragically, as we're learning right now, it really can't. The illusion of free money has now metastasized into something far more dangerous than 2008. This is no longer just a housing bubble. It's an everything bubble. Stocks, real estate, crypto gold, AI investments, all of it pumped to record highs on a decade and a half of cheap money. The quants see it all again. Debt is compounding faster than income. Interest costs are outpacing growth. Liquidity is pouring into every crevice of the market, including hyper speculative asset classes purchased on margin. The math of what is coming is clear. And it won't just be housing or banks that break this time. It will be everything. And for anyone who's not prepared, it is going to be an economic bloodbath. We're going to cover what exactly is going on today in four direct parts. Part one explains why I am sounding the alarm as the market is hitting all time highs. Part two explains the math that guarantees despite the all time highs, the system is going to break. Part three is a surprise you don't want to miss. And part four is the wise man's path forward. Problems are only interesting if you have a solution. So welcome to part one. Things look great, but we are totally screwed. The s and P500 is up 16.5% year to date and all major indexes and hit record highs in late October. Home prices are still up over 45% from pre pandemic levels despite the rate hikes. Gold recently hit all time highs and the crypto market cap is back above $3 trillion. And the Dow Jones it just posted its longest winning streak since 1987. If you're a part of the 10% of Americans that own 93% of the assets that this year you have laughed all the way to the bank. Money is cheap, plentiful and flooding into the market right now, driving valuations up on everything. Even Pokemon cards are selling for thousands of dollars per box. But the question is, what's really going on? Are asset values actually going up? Is the value of the dollar just going down? Is this a bubble filled by euphoria and speculation or is it actually different this time? Is the economy somehow so strong now that it will go up forever? Is modern monetary theory right and we can just print money without any negative consequences? And why, if things are so good, is the average person needing to buy things on layaway? Basic things. And why should you care? Statistically speaking, much to my dismay, odds are low that anyone hearing this right now has a meaningful percentage of their income in assets. All right, let's speedrun those questions and then I'm going to tell you exactly why you should care. Because regardless of how much of your money is tied up in assets or not, what's going to happen next is going to affect everyone. Are asset values actually going up? Yes. Asset values are a function of supply and demand. Is the value of the dollar going down? Yes, it is racing to zero. We add a trillion dollars to the deficit every 100 days. It will swallow the earth soon. Is this a speculative bubble? Aggressively humans are hyper prone to psychological contagions. It's one of the key drivers of markets. Is it different this time? No, it's never different. Because the economy responds in predictable ways to stimulus. It's a complex system, but it's still a system. And like all systems, it obeys rules. If you hear people saying it's different this time, sell everything. Now, I'm not saying the economy is perfectly predictable. It is not far from it. But I am saying that money has something akin to physics. And what we're seeing right now is not normal market growth. It is a financial pressure cooker built on cheap printed money that drives inflation and extreme speculation, creating bubbles everywhere. When the dollar is devaluing through money printing, smart money flees into assets. When interest rates are low, money is easy to borrow, people borrow, and it floods into assets. When you can borrow money at 6 or 7% and the S&P 500 is growing by 16.5%, you can understand why people borrow money at historic levels and plow it in into the stock market on margin. But when you have that much liquidity flooding into the system, you begin chipping away at the stability of the economy as a whole. Because everything becomes a bubble. And all bubbles burst eventually. And unlike in 2008, which was largely a housing and banking crisis, this time everything is inflated. Stocks, housing, bonds, crypto art, even consumer collectibles. They are all levitating on the same tide of easy money. Created a government that never met a dollar it didn't want to print out of thin air. Now, do not get me wrong, bubbles can inflate for a very long time. And I get why people want to get while the getting is good. But there is a structural, mathematical reason why this bubble is nearing the end of its ability to keep inflating. So welcome to part two, the physics of money. Since 2020, the US money supply, known as M2, has grown by more than 40%, the fastest expansion in modern history. Roughly one quarter of all US dollars in existence were created in the last five years. Every 100 days, as I said, the federal debt increases by another trillion dollars. The national Debt now exceeds $37 trillion, up roughly 11 trillion since 2020 alone. Interest payments on that debt just crossed $1.1 trillion per year. That's more than the entire US defense budget. At current borrowing levels. Every 1 percentage point rise in rates adds roughly $370 billion a year in new interest costs alone. If average treasury yields returned to just their 2007 levels, annual interest expense would blow past $2 trillion a year. That's roughly half of all tax revenue. Federal deficits are now running above 6% of GDP during peacetime, a level that we normally only see in an extreme crisis. US debt to GDP sits around 122% and is projected to exceed 130% within a decade, the threshold at which nearly every country in history has collapsed, gone into revolution or defaulted. Meanwhile, the Federal Reserve has already had to take on over $7 trillion in assets to prop up the market. And it can't sell them off without crashing the bonds market. And if it just keeps printing money to buy more assets to keep the markets humming, it will crash the value of the dollar itself. On paper and in real life, this situation is mathematically impossible to sustain. Debt is compounding faster than the income needed to service it. Think of it as a debt flywheel that is now running out of control. And unless the flywheel of accumulating compounding debt faster than revenues increase is halted, there will be blood. Remember, compounding interest is a perpetual increasing machine. Left alone, the debt just grows bigger and bigger by the day until the country has to default on its debt, obliterating its ability to raise sensible debt, which is actually necessary to run a country. And that's why economic warning lights are beginning to flash all over over the place. Markets are really just confidence Ponzi schemes, don't forget that. And as long as people believe they work. When people lose confidence, however, the markets crash. And right now it looks like people are beginning to lose faith. Crypto's momentum is fading. Gold has fallen off of its all time high. Housing is bending under interest rate pressure. Commercial real estate delinquency rates are now higher than they were in 2008. The stock market long ago detached from fundamentals. Michael Burry, the big short guy that called 2008 right, is saying it's an everything bubble. Ray Dalio, the world's most successful hedge fund manager, thinks we're headed towards civil war. And legendary investor Warren Buffett says there are no deals to be had and is holding a massive amount of cash. Add to that the fact that there's over a trillion dollars in margin debt for the first time in history, and hopefully it is very easy to see why we are in a very precarious situation. Hang tight. We'll be back in just a moment.
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All right, thanks for sticking with us. Let's jump right back in. If I'm right and these are signs that people are losing confidence in the market. If any kind of event comes along that causes distress in the market, prices can reset violently across virtually every asset class all at once, causing a massive loss in individual wealth. For everyday investors, the risk is massive. Home values could plunge. Retirement accounts could get slashed and hyped. Assets like AI and crypto could vaporize in a dot com bubble style moment with a massive contagion effect that will threaten many sectors of the economy. This time we are not going to be able to print our way out of it because we have already done as much of that as we can possibly do. As the math verifies, for 15 years, every crisis was papered over with cheap money. The mantra was to push interest rates lower and lower, but the economy runs on physics and prolonged cheap money creates bubbles. Now, if you're only half listening, this is the point where you stop and pay close attention because I'm about to steal most people's copium. If you're thinking we can just keep printing money or tax our way out of this, consider this. After 2008, the Fed faced an impossible choice. Let the system burn or print insane amounts of money and flood it with liquidity. They chose the flood. A biblical flood, the kind of flood that would have drowned Noah. Quantitative easing. The rainwater was supposed to be temporary, an emergency measure to restore confidence after the banking collapse. But when trillions in printed money stabilized the market and asset prices roared back, we learned a very dangerous lesson. That printing money works. And a little rain can't hurt us. By 2010, the Fed had already expanded its balance sheet from under 900 billion to to over 2 trillion. Within a decade, that number would exceed 4.5 trillion. But it worked well enough, right? So when Covid hit, they didn't hesitate. They printed even more money and bought up even more assets to prop up the market. Between 2020 and 2021 alone, the US printed roughly 27% of all dollars ever created in the nation's history. Stimulus checks, PPP loans, corporate bailouts. Over $6 trillion conjured out of thin air in less than two years. And once again, it worked. Markets soared, unemployment collapsed. Confidence returned. But here's the problem. Every time we used money printing to solve a crisis, we made the system more fragile. The dose that once saved us in terms of money printing, now we're barely gets as high. And that's why the Fed's balance sheet now holds a ridiculous $7 trillion. The floodwaters are truly getting deep. The economy has officially become addicted to artificial stimulus. We just keep deficit spending and printing to cover any and all shortfalls. And though we can look around and see the mass of Americans drowning in debt, unable to make ends meet, we just keep pretending that money printing works. Because markets keep rising and inflation is confusing enough that the average person just accepts it. But the reality is that debt compounds. We mathematically cannot just keep printing money and not end up going bust. As a country, we now spend over $2 trillion more each year than we collect in taxes. We already spend the 1.1 trillion in interest payments that we were talking about earlier. And there is no signs of that number slowing down. And because money has physics, we are now trapped. You can't print real prosperity. You can only borrow it from the future. And we have borrowed every dime that we can because that future always arrives. It's here, and it expects to be paid back with interest. The laws of money are simple. If you inflate the money supply faster than entrepreneurs can create new goods and services that people want to buy, prices will rise. If you borrow to pay debt, your interest costs will rise. And that's where we are right now, in the phase economists call fiscal dominance. Fiscal dominance means the government's spending and debt burden is now so big that the Fed can't raise rates without seizing the credit market and causing the government itself to default, which would cause an economic calamity. The current bubble can't keep inflating because the central bank has officially lost control of its ability to mediate the markets through monetary policy. And that is why Trump and Powell are fighting. Here's how the fiscal dominance trap works exactly. When the economy is too hot, people are too exuberant and bubbles are forming, the Fed needs to tighten the interest rate to slow everybody down and slowly deflate the bubbles. Money therefore becomes more expensive to borrow. People can get a higher risk free rate of return in treasuries and bonds. More money goes into government debt where it's safe and overall asset prices cool down. That's where we are right now. That's what we need to do. But the Fed can't raise rates right now because we already have too much debt. If the Fed tried to raise rates right now to cool asset inflation, the cost of servicing the $37 trillion in national debt that we already have would spike, forcing the treasury to issue even more debt just to make the interest payments. That would mean printing even more money, which would drive the debt and the interest payments higher cost, creating the need to print even more. And on and on it goes, in a flywheel of death. On the other hand, if the Fed tried to cut rates to alleviate the burden of the interest payments and ensure the government remains solvent, the cheaper credit would now flood the system with more money and the bubbles would continue to inflate until everyone loses faith in the system. As we have already covered, we're already seeing the first signs of of this happening. People are losing faith either way right now. No matter what the Fed chooses, it is a self reinforcing doom loop. Lower rates create bubbles, higher rates create defaults. Either path feeds the same fire. That's the problem of fiscal dominance. So the question now becomes, if it's inevitable that these bubbles are going to burst, when are they actually going to burst? Welcome to part three. Timing is everything. The government is now borrowing $50 billion every single week. In the past 18 months alone, the US Treasury Department has raised roughly $2.5 trillion in new debt, largely purchased by the flood of excess private cash that had been sitting idle in the money market funds, that pool of easy buyers, is now almost entirely drained. But the government's need to issue even more new debt hasn't slowed at all. In fact, it's speeding up. As of today, the treasury is on pace to issue over $2.9 trillion in new debt this year alone, which is the largest peacetime borrowing binge in American history. But this time, there's no spare $2.5 trillion in private money sitting around to buy it. That means the debt issued this year and in future years, if we make it that far, will need to be financed by pulling liquidity out of banks or the stock market or other risk assets by offering yields high enough to attract new buyers. But as we covered in the previous section, the Fed can't raise rates without breaking the system. So how do you keep raising new debt? Said simply, eventually you don't. And even if you did, you'd be pulling money out of the part of the system that's already working. It does not take a genius to understand that someone with nearly $40 trillion in debt who counterfeits their own money, spends like an unhinged hoarder on meth, and borrows $50 billion a week isn't exactly credit worthy. So eventually, eventually people stop extending them credit. Eventually, the constraint isn't liquidity or rates, it's confidence. People will not extend credit if they don't think they're going to get paid back. Markets can absorb almost anything except disbelief. When investors stop believing that the Fed, the Treasury, or the dollar itself can manage this mountain of debt without destroying the currency, that's when the system breaks. And it does not happen gradually. It happens all at once. A sudden loss of faith that freezes the financial world overnight. But the trillion dollar question isn't if it'll happen, it's when it will happen. And the only honest answer is no one knows for sure. But here's why. The answer, mathematically, must be soon. Right now, interest on our debt is the third largest line item behind only Social Security and Medicare. And based on the latest Congressional Budget Office projections from its budget and economic outlook, interest payments will eclipse Medicare before the end of this year 2025. For fiscal year 2025, the government collected $5.23 trillion in tax revenue. That means the interest payments alone already eat roughly 20% of of all tax dollars collected. And here's a fun fact. The interest payments in raw dollars are expected to roughly double in the next 10 years. But in reality, I cannot imagine that will actually happen. Because who in their right mind would still be buying the debt at that point? And if people stop buying the debt, the government will be forced to default. And that is financial Armageddon. Stick around. We'll be right back after this. All right, we're back. Let's get into it. So here is the cold fact we all have to face. When your debt is this large, there's only one real way out. You have to grow your revenues faster than the debt obligations compound. Everyone is going to scream, tax the rich. But even if you confiscated 100% of their wealth, forget tax, not even just their income. If you confiscated their total net worth in a fantasy land, you would still only get about $7 trillion. And if you tried to do it in reality, even if you jailed everyone so they couldn't leave, the value of everything that they owned would plummet as you flooded the the market. Wealth is a trapped asset. It is not that easy to turn into actual dollars. But even if you were able to get the fantasy payload, you only buy yourself a couple of years. A couple of years. So instead of calamity happening in, let's say six or seven years, you become an evil dictatorship that strips your citizens of their freedoms and you steal all of their shit. And calamity still happens, but in eight or nine years, boy do I hope that sounds as obviously stupid as it is in reality. So that leaves growth. It is your only hope. We have to grow our way out of this problem if we want to delay what is currently mathematically inevitable. That's exactly what the Trump administration is attempting to do, all in an effort to to lengthen the Runway. They've got a three part strategy that looks something like this. Part one Tariffs. Tariffs are essentially just taxes under a different name. They're designed to raise revenue without having to call it taxation. It has raised additional revenue and the additional revenue is definitely helping, but it comes at a cost that could further weaken the system because tariffs also raise prices, which acts very similar to inflation. This will further pressure the Fed to tighten rates to try and tame true inflation, which is also concurrently driving prices up. Part two is deregulation. The administration is trying to cut red tape and remove barriers to innovation, which spurs growth by kickstarting productivity and attracting investment back into US industries. The logic for sure is sound because if we can make it cheaper to build, innovate and hire, we can grow GDP faster than we are now and generate more taxable revenue and personal incomes. But the positive effects of deregulation take time and the compounding effects of debt wait for no one. And it is not enough to grow. You have to grow faster than the debt compounds. And so far there are no signs, no matter how much deregulation you do, that we're going to be able to pull that off. The third part of their playbook is to create new demand for US debt behind the scenes. This is probably the most novel and consequential idea that they've got. The push to back stablecoins with US Treasuries. I cover this in detail in this video so you can learn more about it. But for now just think of it as using sensible crypto regulation to create international access to dollars through stablecoins. It would be a huge win for people around the world that don't have access to a stable currency in general and US dollars specifically. And if the regulations forced stablecoins to back one to one with US Treasuries, it would be Great for protecting the public who have to fear Ponzi schemes. And perhaps most importantly, it would incentivize the private sector to hold more U.S. debt. It's a very clever strategy which will help a little. But honestly, unless we balance the budget, it only buys us a little bit of time. It does not actually defuse the bomb. Better than nothing to be sure, but we still have a bomb that is counting down. But it is the kind of thing that makes the job of predicting when exactly the credit markets will freeze and the US will be forced to default, ushering in the economic apocalypse that much harder. Now, before I put a final answer to how long this thing is going to take, let me add one more log to this raging inferno of warning signs. Once a government spends more on interest payments than it does in defense, infrastructure or health care, every election becomes a zero sum fight over a shrinking pie. Each party stops debating how to grow the economy and starts fighting over which side gets what. The nation turns inward and begins attacking itself. The debt becomes the underlying cause of a domestic civil war, first fought through policy, then eventually fought through outright violence. And that's what history has shown over and over and over. As countries cross 130% debt to GDP, they break into outright violence, revolution or just full on collapse. And Right now the US is currently at 122%, a number expected to cross 130% within a decade. That's why social unrest and political violence are on the rise in the us. When the pie shrinks, people fight to ensure they get as much of the pie as possible for their team. And if our debt trajectory keeps climbing, America is just going to race further and further down the path of violence until ultimately revolution tips the tables of all of the debt system, the economic apocalypse happens, and America finally hits the reset button. Now if history is any guide, despite the reset, this is a brutal period of violence where exactly no one wins. But. But the final question remains, what will ultimately snap the system? When's that going to happen? What actually turns unsustainable into active collapse? There are a few possibilities. A failed treasury auction would do it. That's when investors just refuse to buy our debt. Without much higher yields, this would serve as a signal that confidence really is gone. It's the modern version of the Nixon Gold shock. The moment the world realizes the US promises are not going to be honored. In the 70s, though, we still had plenty of tricks up our sleeve for dealing with a crisis. Now we have few to none other than AI becoming a miracle of productivity that Allows us to grow our way out of this. A credit market freeze would also do it. When repo markets seize because there's not enough collateral to roll overnight loans and liquidity vanishes in hours. Or inflation could just re accelerate. If prices spike again and the Fed is forced to tighten into an already weakening economy, that would trigger a cascade of defaults across both public and private debt. The treasury would then have to choose between honoring its obligations or stabilizing the system. Either path is going to end in what Ray Dalio calls an ugly deleveraging, where debt restructuring on a national scale happens under emergency circumstances and the market just gets slaughtered. If any one of these catalysts hits the everything bubble doesn't just deflate slowly, it pops and the reset begins. Now, how long do I think this is going to take? Based on the things we just walked through? I'm going to say no more than 10 years. But honestly, the debt flood waters are rising so fast and the system is so structurally unsound. I'm trying to build my ark now. So welcome to part four, Surviving the Flood. Where we go from here. Every collapse is also a transfer of wealth. Money moves from people with debt, people with, to the people who are liquid and can buy the distressed assets. Money flows from the emotional to the disciplined. So the question isn't whether the system resets or even when it's going to reset. It's whether you're going to be solvent, educated and ready when it resets. First of all, please do not try to outsmart the market. Accept radical uncertainty. Getting the timing right in the market is next to impossible. Even heavy hitters like Michael Burry and Peter Schiff have been criticized for predicting 20 of the last two recessions and the biggest names in the game. People like Soros understand how unpredictable things can be left to their own devices. So big secret. They don't leave things to their own devices. They get involved in international politics. They fund campaigns, NGOs and foreign governments. Soros is famous for literally breaking the back of the British pound. And guess who helped him? The current Secretary of the Treasury, Scott Bessant. These guys know how to play games that the average person is just not prepared for. When you're playing in the market, you're going up against people like that have the humility to know there are people and forces at work that are effectively impossible to map accurately. Worst of all, you can be right on the direction of things and still get the timing wrong. I remind myself of this constantly. And if you're leveraged, getting the Timing wrong is the same as being wrong. So your edge is discipline, preparation, position sizing, having personal rules, hedging your bets and being patient. Think Dalio's approach of systems and diversification over trying to outsmart the quants and and the ultra wealthy who can sway international markets. Or Buffett, who takes a fundamentals and price approach. Eternally being patient and looking for good deals and only moving when there's a deal to be had. Here are the kinds of operating principles to consider if you're going to take this approach. Build a portfolio around uncorrelated asset classes that won't all go up or down at the same time. It's going to limit your upside, that is true, but it's also going to limit your downside. This is what Ray Dalio calls an all weather strategy. Remember that financial assets have fundamentals that make them attractive in the long run. Focus on those fundamentals and look for quality assets at the right price. Look for businesses and assets that can withstand funding stress and price shocks. Never forget that liquidity is oxygen. Debt gives you leverage, but it also puts you at risk. Keep cash on hand to keep your options open. The levered die first inflation is a risk to watch out for, but it's not nearly as risky for the average person as debt. Build your portfolio based on rules, not on your certainty around where the market is going, because you're inevitably going to be wrong about that. The only thing I can guarantee you about the future is that it will surprise you in some way, even as it adheres to timeless patterns. Again, you can be directionally correct and still get clobbered by bad timing. All right, that covers the Dalio and Buffett approaches, at least in a nutshell. But there's a new voice that shares Dalio's historical lens, internalizes the influence that debt and policy have on economic movements and puts together a game plan for investing during fiscal dominance, that phase where government spending and debt are so insane and over the top that the Fed can no longer come to the rescue. It's a plan popularized by Lynn Alden and it goes like this. There are three pillars to her diversification strategy. Pillar one profitable growth equities. This is about 50% of your portfolio and is focused on businesses with pricing power, real margins and and the ability to grow cash flow even when the market is distressed. Pillar 2 Defensive assets in the form of cash and cash equivalents. These are short duration, high quality and instantly deployable. They provide optionality and safety when volatility hits. This should be about 20% of the portfolio. Pillar three is inflation protection in the form of commodities and hard monies. Think energy, commodities, precious metals like gold and silver, the companies that pull them out of the ground, and things like Bitcoin. This is going to be about 30% of the portfolio. Exact percentages will vary based on your own assessment of the markets, expected returns, et cetera. But that gives you a rough idea of how to hedge against uncertainty during fiscal dominance. Now, why these approaches work in an everything bubble is because they acknowledge the inherent uncertainty of timing while accepting that the math is clear. The debt flywheel guarantees that the bubble is going to burst because the economy is full of wild distortions right now brought on by government interventions that have walked us into a trap where we break the system no matter what we do, short of extremely unlikely levels of unprecedented growth. Burn into your psyche that you don't beat a debt cycle with clever trades. You survive it with positioning that acknowledges the inherent uncertainty around timing. If you're trying to nail the exact top or bottom, you're competing with supercomputers, AI and people rich enough and well connected enough to move global markets. You will lose that game. You win by preparing for the fact that in a true ugly deleveraging wealth moves from the leveraged to to the liquid. So your job right now is to get liquid enough to capitalize on opportunities, stay disciplined enough and avoid emotional moves, and stay in the market enough to not get eaten alive by inflation. Should this all play out on a longer than expected timeline, what you should staunchly avoid doing is all in all out flips based on headlines reaching for yield and junky hyper speculative assets based on FOMO using margin to buy the dip. Assuming everything will just keep going up forever and saying anything even remotely like this time it's different. Math is math. It's never different. In the end, what's happening right now is not about fear. It's about the physics of money. We've acted for so long like we can deficit spend forever and that money can be printed for free. But now the bill has come due and we realize there's no free money. The only way to avoid the devastation of compounding interest is to pay off your debt. But we've pathologically refused to even balance our budget, let alone pay our debt. So now the floodwaters really are rising. Barring historic levels of growth. We have no reason to believe will happen. The economy is going to break under the weight of our debt. The final boss of the economic game is always compounding interest. It eventually demonstrates to the market that the debt will not get paid back, that debt holders will lose their money. And when that happens, confidence disappears. And when that happens, the government can no longer raise money through debt. And when that happens, the country defaults. And when that happens, it's game over. So plan now. Build an all weather strategy now. Because when the flood happens, it will be a flash flood and only those on an ark are going to survive. If you guys are getting value out of this, make sure that you leave us a five star review wherever you listen to your podcasts. And until next time, my friends, be legendary. Take care. Peace.