Posted:June 4, 2026
Categories: Bear Markets, Federal Reserve, Fiat Currency, S&P 500, Stock Market, Stocks
I began my career managing money between two of the most brutal stock downturns in recent history: the 2000-2002 Dot-Com Crisis and the 2007-2009 Great Financial Crisis (GFC). The Dot-Com Crisis saw the S&P 500 drop by 47% and not fully recover for 4 years. The GFC caused the S&P 500 to drop by 55%, and it did not fully recover for 3 years.
These are some difficult and dreary times to be a stock investor. One needs fortitude, courage, and the guts not to sell, but instead to rebalance/buy stocks at the lows. This is easier said than done. However, “buying the dip” has become much harder in recent years. Before we get any further, let’s define what a drawdown is. A drawdown is a decline in an investment, market, or portfolio from a peak to a trough. Recent drawdowns in the stock market have been shallower and shorter, much shorter. Why? In this article, Part 1 of a two-part series, I’ll examine the data and explain four reasons why markets have behaved this way since the GFC.
I call this dynamic the Sovereign Put, a term borrowed from options trading, where a put is simply protection against a falling market. The government has become that protection.
For the S&P 500, there have been six drawdowns greater than 15% since 2000. The aforementioned Dot-com bust and GFC were the largest and longest. The next four saw drawdowns between 18% and 34% with an average length of about 5 months and a recovery time of 6.5 months. Visually, you can see this in Figures 1 and 2 below, which show the S&P 500 over each respective 10-year period. The red area represents the total drop in the stock market. The green represents the time it took for the market to fully recover.
Figure 1: Dot-Com Crisis
Source: Kwanti1
Figure 2: Powell Pivot
Each drawdown and subsequent bailout by the U.S. Federal Reserve increased government debt. U.S. government debt rose from $5.6 trillion in 2000 to $30 trillion in 2022. In 2000, the U.S. Federal Debt-to-GDP ratio was around 55%. Today, it is over 120%. When debt is this high, the government simply cannot afford to keep interest rates elevated. If rates stay high, interest expense will consume a larger share of the federal budget, risking a debt spiral. The blue bars in Figure 3 show the duration of each crash in months, declining over time. The red line represents rising debt levels.
Figure 3: Crash Duration & Rising Debt
Sources: Kwanti1, TradingView2, Federal Reserve Bank of St. Louis3,4
Similar growth occurred in the money supply, rising from $4.8 trillion to $21.6 trillion. Over the centuries, governments have chosen debt monetization as a sneaky way to service massive debt when economic growth is sluggish. This is outright currency debasement, which allows the government to borrow at low rates and to debase the currency (inflate it away).
Bailouts have gotten bigger and faster, as the government cannot afford to let a drop in the stock market last too long. The Fed used to rescue markets to save the economy, known as the “wealth effect.” Now, the Fed rescues markets to save the government’s balance sheet.
The 2022 U.S. Banking Crisis warrants a brief explanation. Due to the inflationary effects of the COVID stimulus, the Fed’s aggressive rate-hiking cycle, the fastest since the 1980s, created conditions for the downturn and temporarily paralyzed its own rescue mechanism. Raising rates while simultaneously propping up markets is a contradiction the Fed cannot sustain. Once regional banks, like Silicon Valley Bank, began collapsing in 2023, the pivot followed. The Fed will always rescue the banks; it can slow the response, but it can not skip it.
The Acceleration of the “Fed Put” & China’s Influence
The first reason drawdowns have become shallower has its origins in the massive structural shift in global markets in the 1990s toward instantaneous market rescues and the institutionalization of the “Fed Put.” The “Fed Put” is the widespread market belief that the Federal Reserve will always intervene with liquidity to halt market declines.
Even further, China’s integration into the global economy, accelerated by its 1994 currency devaluation and its 2001 entry into the World Trade Organization (WTO), unleashed a massive deflationary shock on the world. Globalization took center stage.
China’s rapid and dramatic rise in economic power flooded the world with cheap manufactured goods and inflicted a massive deflationary shock on the United States. This allowed the United States to “export inflation” through money printing and subsequently “import deflation,” consistently holding down consumer prices. This gave the Federal Reserve the ability to repeatedly lower interest rates and inject liquidity during stock market downturns without incurring the traditional penalty of sparking consumer inflation.
Furthermore, China recycled its vast export earnings into U.S. Treasury bonds, creating what has been called a “Global Savings Glut” that artificially suppressed long-term U.S. interest rates regardless of domestic economic conditions. This combination of suppressed inflation and endless foreign capital allowed the Fed’s market interventions to grow in speed and scale, as shown in the data above. Immediate and swift rescues by central banks are expected and priced into the market.
The Stock Market Is the Economy
The second reason market drawdowns are now so shallow is that central planners can no longer allow the stock market to drop because capital markets have displaced traditional banking as the engine of U.S. economic growth, stemming from both the traditional banking system and the “shadow banking” system. We live in a debt-based monetary system, where newly created money is loaned into existence. Total bank lending in the U.S. economy is roughly $19 trillion5, while the total size of the equity and corporate bond markets is nearly $75 trillion. The latter represents a part of the “shadow banking” system. Over time, the size of the equity and corporate bond markets has grown to dwarf traditional bank lending.
Because major corporations, hedge funds, and other leveraged players now depend on these inflated capital markets to roll over debt and generate shareholder returns, the stock market essentially is the economy; the Federal Reserve is forced to step in almost immediately to prevent corporate debt markets from freezing and triggering mass defaults. In the modern financial regime, a stock market crash is a recession. This was one of the main theses in the 2020 book, The Rise of Carry, where the authors stated:
“Investors, economists, financial commentators in the media, and policy makers continue to think that an economic recession must have purely economic causes or must be caused by
proximate policy or regulatory failures, and they think that financial markets then reflect the recession. We argue that the reality is that the S&P 500 itself has become central to the carry regime in global financial markets; a stock market crash does not signal recession—it is the recession. The cycle of carry bubble and carry crash, and the economic cycle have become the same thing.”6
The Debt Trap Forcing Immediate Intervention
The third reason market drawdowns have become shallower is that the U.S. cannot tolerate a prolonged market correction because the economy is suffocating under a mountain of leverage. Total debt in the United States has surpassed $100 trillion7, much of which is sensitive to floating interest rates and market liquidity. A debt-based monetary system can only exist and survive with rising inflation and monetary growth. The larger the numbers get, the more leveraged the system becomes.
When money is loaned into existence, it creates liability, with interest that must be repaid at some point. The flipside is that this also creates an asset for the lender, as one man’s debt is another man’s asset. In this highly leveraged financial system, a sustained drop in asset prices would destroy the collateral that underpins the credit markets, triggering margin calls and forced liquidations. If the Fed were to step back and allow the market to correct naturally, this forced selling would initiate an uncontrollable, deflationary debt spiral that would bankrupt consumers, corporations, and banks.
The astronomical scale of this debt means policymakers are held hostage by the markets; they are forced to step in almost immediately to rescue plunging stocks, lest a routine correction trigger a second Great Depression.
This is not a prediction of collapse. The dollar’s reserve currency status and the structural global bid for U.S. assets mean this system has more runway than its critics typically allow.
The Government’s Reliance on Asset Bubbles for Tax Receipts
Finally, the fourth reason market drawdowns have become shallower is that the U.S. government has a massive vested interest in keeping stock prices elevated to fund its own deficits. Tax revenues are heavily dependent on capital gains generated by asset price inflation. This revenue comes in the form of interest, dividends, capital gains, and required minimum distributions (RMDs), which have been accelerated by the large number of Baby Boomers now over 70, as they draw down their stock market holdings to fund their expenses. Based on recent Federal Reserve data, Baby Boomers own approximately 54% of the U.S. stock market, equating to more than $25 trillion.8
For example, during the tech boom of the 1990s, surging stock prices caused IRS capital gains tax receipts to more than triple, jumping from $36 billion in 1994 to $127 billion in 2000.9 This windfall from the stock market was a primary driver in creating the rare federal budget surpluses of the late 1990s.
Today, the U.S. national debt is $39 trillion (up from $30 trillion at the time of the 2022 Banking Crisis), and interest payments are $1 trillion, accounting for roughly 14% of the entire federal budget. This doesn’t even include “unfunded liabilities,” such as Social Security and Medicare. To help stabilize these debt burdens without passing highly unpopular tax increases and spending cuts, the Fed can intentionally cut interest rates and pump liquidity into the market to boost stock prices, which automatically raises capital gains tax receipts and increases government revenue.
The market is also underpinned by fiscal dominance, in which a nation’s sovereign debt and government deficits are so large that they dictate and overpower central bank monetary policy. The U.S. government is effectively forced to support the stock market to keep the broader economic system solvent.
In short, letting the stock market drop would not only crush consumer spending but also hollow out the tax base at a time when the Treasury desperately needs revenue to service its historic debt.
Conclusion: Part 1
Four structural forces have engineered a permanent floor beneath the U.S. stock market:
The old bear markets that lasted for years and naturally cleansed the system of excess are, at present, nowhere to be found. In their place is something new: the Sovereign Put. In Part 2, we turn to the other side of the ledger, what the Sovereign Put is actually costing you, and what to do about it.
References
DISCLOSURES & INDEX DESCRIPTIONS
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