Posted:January 15, 2026
Categories: Asset Allocation, Credit Creation, Emerging Markets, Gold, Government Bond Yields, Inflation, Market Update, Markets, Stocks
“Financial wealth can be created very easily and doesn’t represent its true value. Financial wealth is of no value unless converted into money to spend. Converting financial wealth into money that can be spent requires selling it (or collecting its yield), which is what typically turns bubbles into busts.” Ray Dalio1
This simple concept in the quote above, about the nature of money (physical cash/bank reserves/bank deposit accounts) versus financial assets (stocks, bonds, real estate, etc.), has been essential in my understanding of how our debt-based monetary system works. Financial wealth creation, otherwise known as credit creation (via commercial banks, central banks, and shadow banks), can be created very easily. I discuss the nature of money and credit creation here. However, at some point, people retire and need to spend down their financial assets. This action requires either drawing a yield (income) from financial assets or selling them to get the money to buy goods and services.
In a debt-based, fiat monetary system, credit creation can get out of control. This can occur through either low interest rates, deregulation of financial markets/banks, currency manipulation, or relaxed monetary and/or fiscal policies. This excess credit creation tends to create financial bubbles. A bubble exists when the amount of financial wealth (promises to deliver money) grows significantly larger than the actual supply of money. When assets are bought with credit (debt), prices rise, making people feel richer, but this creates a systemic vulnerability.
We’re definitely seeing this play out in today’s financial system. A visual representation of our current situation in the United States is shown in the chart below, which shows the value of S&P 500 stocks (financial assets) relative to the money supply (M2) from 1960 to today. As the blue line rises, financial assets increase relative to the base money supply (physical cash/bank reserves/bank deposit accounts). Clearly, the value of the S&P 500 relative to the base money supply is once again reaching high levels.
Figure 1: S&P 500 / M2 Money Supply
Source: TradingView
The New World Order
Dalio continues:
“When the promises to deliver money (i.e., debt assets) are far greater than the amount of money that exists, and there is a need to sell financial assets to get money, watch out for a bubble bursting and be sure you’re protected (e.g., don’t have significant credit exposures and own some gold). If that happens when there are big wealth gaps, watch out for big political and wealth changes and be sure to be protected against them.” Ray Dalio1
Financial assets and credit creation have risen dramatically in the 21st century during a period when globalization has reigned supreme. This is now shifting, as many nations move from multilateralism, in which global rules are overseen by international organizations (e.g., the International Monetary Fund, WTO, and the World Bank), to unilateralism, in which power rules and countries operate strictly in their own self-interest. The United States has enjoyed hegemonic power for many years, which is now driving a “Clash of Empires” between the United States and China, and a world increasingly divided into regional spheres of influence.
The US is now attempting to redirect spending on financial assets to the real economy through onshoring, AI-driven capital expenditures, and US Treasury-directed investments in strategically important companies and commodities. This activity, of course, needs to be funded through bank credit creation, investments from strategic partners overseas, Treasury/Fed US dollar swap lines, or the bond/equity markets.
Wealth gaps remain large due to excess credit creation and monetary inflation, while political environments remain polarized. In relation to 2026, Dalio suggests that markets may be priced for perfection in an environment of high social and financial fragility. He worries that political reaction to inequality, such as shifts in political power or potential tax changes, could force the selling of assets to raise cash, popping the bubble created by the disparity between financial wealth and actual money.
While I recognize this as a growing risk, I take a more balanced view of the economy and markets. As I discuss below, we very well may be in the “Roaring 2020’s,” a term coined by economist Ed Yardeni. I’ve learned that markets are impossible to predict, and furthermore, bull markets can last much longer than one imagines. Having a diversified portfolio, coupled with a solid savings and retirement plan, is a great way to weather any potential storm in the financial markets (inflation or deflation). Let’s now turn to the opportunities I see for investors in this environment.
Asset Allocation
As I examine investment opportunities, I pay close attention to economic phases and cycles. At any point, the economy is in one of the following four phases:
At present, the US and most of the developed world are clearly in an inflationary boom (upper right quadrant in the chart below). In this quadrant, prices and monetary inflation rise rapidly. Historically, this environment coincides with wars and deficit spending. Large geopolitical events, including kinetic wars, cold wars, and capital wars, are occurring worldwide. And clearly, many developing countries face large budget deficits.
Furthermore, inflationary booms lead to high levels of government debt, placing governments under pressure to raise taxes or cut spending. Both are very difficult politically; thus, most governments resort to printing money. In this environment, gold, stocks, real estate, and other stores of value assets perform well. Cash and short-term bonds tend to remain stable, while long-term bonds often perform the worst.
Figure 2: Four Quadrants
Source: Author2
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Stock Market Outlook
International stocks finally began to outperform in 2025 as the dollar weakened and investors rotated out of US stocks on the margin to rebalance into international markets. Global stocks returned 22%, with developed markets and emerging markets up over 30%. The S&P 500 ended up 18%, which historically is a great return. This was a remarkable turnaround as many markets were down 20% following the tariff tantrum in April. Global equities around the world are hitting all-time highs, as seen in the chart below.
Figure 3: Global Equities Making All-Time Highs
Source: Topdown Charts
I expect the trend of non-US stocks outperforming US stocks to continue. The level of asset flows to US financial markets over the past 20 years has been remarkable, as shown in the charts below. The US has seen net inflows of $26 trillion into our financial markets since 2006. This has enabled an incredible amount of credit creation by central banks, commercial banks, and shadow banks through collateral-based lending, driving our financial markets higher. This shows the immense power we possess through the dollar, which clearly remains the global reserve currency. However, even a small shift in this flow of capital can cause international markets to outperform relative to domestic markets, as happened in 2025.
Figure 4: US Net Investment Position
Source: DoubleLine Capital
Figure 5: US Stocks vs. the Rest of the World
A key driver to watch this year in the United States is that the AI-driven capital expenditure (Capex) boom has shifted from a phase funded by internal corporate cash flows to one heavily reliant on external credit creation. Bond issuance by big tech companies ramped up last year, from $20 billion in 2024 to around $93 billion in the first 10 months of 2025. For the markets to maintain confidence, these massive financial promises to pay (debt) must be continuously funded and, eventually, validated by returns, despite the growing risks of overvaluation and physical constraints. If all these projects are successfully funded, the markets could be off to the races.
In addition, we are seeing a structural shift from “Fed Quantitative Easing (QE)” (which boosts financial assets) to what Michael Howell dubs “Treasury QE”3 (which boosts the real economy). Treasury QE involves the government funding spending (defense, strategic reserves, targeted investments) via short-term US Treasury bills, which banks buy, effectively monetizing debt. However, if credit creation goes towards these types of projects, it must be drained from somewhere else. While this can drive strong real economic activity in 2026, it comes at the expense of financial markets, as it may drain liquidity from them to fund actual goods and production.
Therefore, I expect liquidity to tighten in the United States in 2026 and would not be surprised to see further volatility and negative markets at some point this year. The US liquidity cycle is tightening (peaking), while China’s liquidity cycle is bottoming and expected to expand.
The bear case for stocks is a range-bound or crashing market, liquidity drains, and negative equity risk premiums. The bull case is that we continue to be in the “Roaring 2020’s,” where inflationary forces drive credit creation, money printing, and debt monetization higher along with nominal growth, and ultimately the stock market.
Markets are difficult to time and predict. I remain cautious in the near term and expect to see volatility in 2026. However, I think stocks are well-positioned to reward patient investors with real returns over the long run. Regarding a global stock market index such as the MSCI All Cap World Index, I prefer to have a slight overweight to international stocks and/or strategies that have the flexibility to invest globally. Within the international slice, I prefer to overweight high-quality emerging-market stocks.
Bonds & Cash
Bonds performed well in 2025, with the aggregate bond index up 7.3%, albeit with more risk than short-term bonds, which increased 5.2%. A defining feature of 2025 was the steepening of the yield curve. While the Federal Reserve cut interest rates by 0.75%, long-term yields did not fall as significantly as short-term yields, and in some cases, they rose.
The outlook for the bond market is defined by a conflict between fiscal dominance (too much debt supply) and the liquidity cycle. From a long-term structural view, I remain bearish due to inflation, deficits, and the supply of credit that must find a home (see the chart below).
Figure 6: Debt Maturity Wall
Source: Global Liquidity Indexes
Clearly, many market participants are bearish on long-term bonds amid ongoing currency debasement. Sovereign (government) bonds experienced their worst 5-year performance ever from 2020 to 2025. See the chart below, where the long bonds of developed governments are all seeing higher yields, indicating less demand for their debt and, thus, lower bond prices. Traditional buyers (foreign central banks, BRICS, insurance companies) have slowed purchases. This forces the domestic market (banks, pensions, retail) to absorb the supply.
Figure 7: 30-Year Government Bond Yields
However, with liquidity potentially tightening this year, I see a tactical opportunity emerging in certain parts of the bond market in 2026 as the economic cycle turns. If liquidity tightens into a downturn in 2026, this may favor government bonds in the short run, causing yield curve flattening. This would be particularly good for mid-duration bonds during this phase. I continue to prefer short- to mid-duration bonds, from 0 to 5+ years, with a mix of US Treasuries, mortgage-backed securities, and high-quality corporate debt, including high-yield debt in public markets.
The rapid rise in “private credit” is alarming and is an area I would avoid. In fact, credit creation in private markets has increased the quality of credit in public high-yield markets. Cash and/or near-cash strategies remain attractive if yields remain above inflation. If the Fed lowers rates aggressively, investors should be active in this part of the market, seeking strategies that can deliver a real yield without sacrificing too much credit quality.
Clearly, the current administration wants lower short-term interest rates, which they will most likely get. Could mid- to longer-term interest rates have another “Pavlovian” crash back to very low rates again, moving in tandem with the Fed Funds rate? Sure, but probably only for a cup of coffee. If the reverse is true and long-term yields persistently rise, we may see yield curve control and interest rate caps in the future.
Gold
2025 marked a structural break in precious metals markets, with gold returning approximately 67%, ending the year at $4,318 per troy ounce. Silver staged a parabolic breakout, rising 159%. From a technical perspective, the chart below of gold looks very bullish with a healthy upward slope in the price and the 200-day moving average (blue line).
Figure 8: Spot Gold
I outlined the reasons why gold has been a recent outperformer in an October article here, where I discussed five reasons why gold has risen, including:
China and other East Asian countries have been major contributors to the spike in gold prices. Michael Howell argues that the People’s Bank of China (PBoC) is actively targeting a higher Yuan/Gold price to recapitalize its financial system and devalue its currency against real assets rather than the US dollar. This allows China to manage its debt deflation without triggering a currency war with the US. Central banks continue to stockpile gold as they rotate out of other reserve assets (the dollar and the euro) and into a hard currency (gold) that can’t be printed or sanctioned.
From a fiscal perspective, government budget deficits are coming too fast for the market to absorb without the central bank’s money printing, also known as debt monetization (discussed earlier). In the US in particular, there is still a strong demand for US dollars worldwide. However, the US cannot afford positive real interest rates without a debt spiral, eventually forcing the Fed to cap yields. In this scenario, gold wins in both inflation (as a hedge) and deflation (because the response is printing money/more currency debasement).
I’ve discussed at length in this article how credit creation has and will continue to impact financial markets and the real economy. Gold is perhaps the most sensitive asset to credit creation as it has no counterparty risk and cannot be printed. Therefore, it reacts to money printing, credit creation, and debt monetization by rising in price as the purchasing power and credibility of the fiat currency decline.
While I like gold as a portfolio diversifier, it can generate massive returns quickly, as was the case in 2025 (+67%). This is a reason to be cautious in the short term, as the market is somewhat “frothy.” A sideways consolidation would not be surprising. However, I see many of these trends mentioned above continuing over the long run as I remain bullish on gold, driven by a structural shift in the global monetary system, sovereign debt monetization, central bank demand, and aggressive buying by China and other Eastern countries.
Conclusion
We are living through an extraordinary period in financial markets. Never before has the entire global economy experienced this level of credit creation in unison. Investors must tread carefully as they navigate an inflationary boom marked by high government debt and deficit spending. Further, the global order is shifting from multilateral cooperation toward unilateralism and a “Clash of Empires” between the US and China. This transition is further complicated by the sources/entities that require credit creation, redirecting liquidity from financial markets into the real economy. While good for the economy, moving credit creation away from financial assets risks increased volatility in traditional assets, even as nominal growth could support a “Roaring 2020s” scenario.
Markets are difficult to time, but the current environment demands a balance between capitalizing on monetary inflation and protecting against wealth bubbles and potential deflationary forces. By maintaining a diversified portfolio that accounts for shifting global liquidity flows, investors can position themselves to weather potential storms while capturing real returns over the long run.
References
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Unless otherwise specifically cited, opinions expressed herein are solely those of Genesis Wealth Planning, LLC. The material presented is believed to be from reliable sources, and our firm makes no representations regarding other parties’ informational accuracy or completeness. Written content is for information purposes only. Past performance is no guarantee of future results. Diversification does not assure profit or protect against a loss in a declining market. While we have gathered this information from sources believed to be reliable, we cannot guarantee the accuracy of the information provided. The views, opinions, and forecasts expressed in this commentary are as of the date indicated, are subject to change at any time, are not a guarantee of future results, do not represent or offer any particular security, strategy, or investment, and should not be considered investment advice. Investors should carefully consider the investment objectives, risks, and expenses of a mutual fund or exchange-traded fund before investing. Furthermore, the investor should independently assess the legal, regulatory, tax, credit, and accounting and determine, together with their professional advisers, if any of the investments mentioned herein are suitable to their personal goals. All indexes are unmanaged, and an individual cannot invest directly in an index. Index returns do not reflect fees or expenses. Please contact us to receive a copy of Genesis Wealth Planning ADV Part II, which contains additional disclosures, proxy voting policies, and privacy policy. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and is federally registered in the U.S., which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.
Asset Allocation Quilt Sources: Bloomberg, Kwanti, MSCI, Russell. Large Cap: S&P 500 Index TR, Small Cap: Russell 2000 Index TR, World Equity: MSCI All Country World Index TR, International Developed: MSCI EAFE Index TR, Emerging Markets: MSCI Emerging Markets Index TR, Bonds: Bloomberg US Aggregate Bond Index, Cash: US Treasury Bill 90 Days Rate, Gold: Gold Spot, Commodities: Bloomberg Commodity Index. All data represent returns for the stated period. Unlike the results in an actual performance record, these results do not represent actual trading. Additionally, since these trades have not been executed, these results may have under- or overcompensated for the impact, if any, of certain market factors, such as a lack of liquidity. In general, simulated or hypothetical trading programs are also subject to the fact that they are designed with the benefit of hindsight. No representation is made that any account will likely achieve profits or losses similar to those shown.
