Posted:June 18, 2026
Categories: Bear Markets, Central Bank, Federal Reserve, Fiat Currency, Inflation, S&P 500, US Dollar
New York. The financial capital of the world. For one night, it was the basketball capital, too. Last Saturday night, the Big Apple was flipped upside down, as the New York Knicks finished off the San Antonio Spurs to clinch their first NBA championship since 1973. Taking a peek at the odds for the 2027 NBA champion on Polymarket,1 they are still fourth behind the Celtics, Spurs, and Thunder.
In a sports tournament, sometimes it’s not the best, most talented team that wins. There is a saying in sports, “you just play the team in front of you.” Had the Knicks played the Oklahoma City Thunder, the outcome might have been different. But the Knicks didn’t. They played the team in front of them. For the first time in 53 years, the New York Knicks are NBA champions.
This got me thinking about how this idea translates to investing in today’s markets. You invest in the markets in front of you. Are they different from 53 years ago when the Knicks won? Absolutely. The key for investors is to understand and accept this reality. What’s changed is not just market mechanics, but who’s actually playing the game.
Economic Statecraft
In Part 1, I argued that the four structural forces driving the Sovereign Put are: the institutionalized Fed Put, capital markets displacing traditional banking, a debt load exceeding $100 trillion, and the government’s reliance on capital gains tax revenue. Together, these forces have engineered a floor beneath the U.S. stock market. Bear markets that once lasted years now last months.
What do all four of these structural forces have in common? The government. And the government’s interest in the stock market does not stop at its own borders. The same state that will not allow the S&P 500 to crash at home is now using it, along with the powerful U.S. dollar and the broader architecture of global capital, as instruments abroad. In today’s market, it is impossible to ignore the state’s hand as it props up valuations and key companies, and actively directs where capital flows and which industries survive.
This is a regime change. The Rules-Based Order, established at Bretton Woods in 1944, promised a borderless world of free trade, multilateral institutions, and markets insulated from politics. That order, turbocharged for decades by globalization, is falling apart. In its place is a zero-sum era of economic statecraft, in which the front lines of great-power conflict have moved from military battlefields to capital markets and corporate boardrooms.2
Governments have abandoned laissez-faire ideals to resurrect aggressive industrial policy, deploying state subsidies, sovereign-backed leveraged funds, and targeted export bans on critical technologies such as semiconductors to secure national interests.3 Stock prices, once a referendum on individual company performance, increasingly reflect which side of this new geopolitical divide a company, sector, or nation sits on.
The borderless international market has devolved into a fractured geopolitical chessboard. Fiat currencies, supply chains, equity markets, and industrial capacity are no longer merely economic assets. They are the primary strategic weapons of national survival.4
Asian Influence: Japan and China
Post-WWII, Japan pioneered the modern blueprint for state-directed capitalism, using powerful bureaucracies like the Ministry of International Trade and Industry (MITI) and a captive central bank to allocate credit, protect domestic cartels, and ruthlessly dominate global export markets while sheltering under the American security umbrella.5
In 1978, China, under the leadership of Deng Xiaoping, later adopted this East Asian model of high savings and export-led growth, but supercharged it into an apparatus of weaponized interdependence. Unconstrained by U.S. alliances, the Chinese Communist Party deploys aggressive state subsidies, sovereign-backed leveraged funds, and strategic initiatives such as the Belt and Road to dominate global supply chains, monopolize critical rare earth minerals, and bend the global economy to its geopolitical will.6
Recognizing the failures of the Rules-Based Order and the hollowing out of its own industrial base, the United States is now abandoning decades of free-market orthodoxy to embrace the same playbook. On the industrial side, the CHIPS Act’s direct subsidies to semiconductor manufacturers, the federal government’s equity stake in Intel, and tariff policy used explicitly as a strategy rather than enforcement mirror the MITI model directly. On the monetary side, a regulatory push to channel global dollar demand through U.S.-issued stablecoins extends the same logic to the currency itself: secure the asset that secures everything else.
And now, the two most important finance roles are occupied by former market gurus, Treasury Secretary Scott Bessent and Federal Reserve Chairman Kevin Warsh. Bessent, a former hedge fund manager, worked alongside legendary investor Stanley Druckenmiller to famously break the Bank of England in 1992. Warsh also worked alongside Druckenmiller to shape investment strategy after stepping down from the Fed Board of Governors in 2011. Both now guide the strategic path of the United States’ economic statecraft. So what does this mean for your money? Before we get to the playbook, we need to confront one uncomfortable reality of the Sovereign Put.
Inflationary Regime
Drawdowns are getting shallower. Recoveries are getting faster. Some of that reflects genuine strength, such as a resilient economy, a structural global bid for dollars, and world-class companies. But as Part 1 argued, the deeper reason is structural: the government has little room left to let markets fall.
Constant, ever-increasing bailouts come at a cost. Nothing in life is free. Increasingly, that cost is paid in the currency. Every bailout, liquidity injection, and emergency rate cut adds another layer of monetary expansion that, in practice, is rarely fully withdrawn. Look no further than the chart below of inflation since 1995.
Figure 1: Inflation (CPI), 1995-2026
Source: Federal Reserve Bank of St. Louis7
A debt-based monetary system tends to require rising inflation and monetary growth to keep functioning. The system survives, but the dollar quietly, systematically pays the price. This can be seen in the following chart, which shows the purchasing power of $100 from 1944 to today. A dollar in 2026 buys only 5% as much as it did in 1944.
Figure 2: Buying Power of $100, 1944-2026
Source: Alioth Finance8
These are the markets in front of investors now, not the ones from 1995, or even five years ago. The 60% stocks, 40% bonds tradition is no longer the bellwether it once was. What follows is a playbook built for this regime.
The Investor Playbook: Stocks
The natural conclusion is to own stocks. Equities remain the cornerstone of any long-term portfolio. The companies most insulated by this regime are the ones that liquidity props up when markets get stretched. These stocks are reinforced by economic statecraft. Investors can also benefit from owning high-quality, resilient businesses that can survive rocky markets.
International exposure is worth considering, too, especially in emerging market value/dividend-paying stocks. U.S. market valuations have become stretched. High-quality companies exist all over the world. A blend of passive and active management gets the job done. Passive strategies capture market share at low cost. Active management or stock selection allows you to capture themes and dislocated companies.
Equities can be a viable inflation hedge, but only up to a certain threshold; historical data show that when inflation exceeds 3%, valuation multiples (P/E ratios) begin to contract.9 This is where the liquidity can take over, and the Sovereign Put enters. Overvalued, strategically important companies receive the liquidity. Therefore, watch your equity allocation and rebalance when markets are stretched. If markets pull back, that may create a short-lived opportunity for investors to buy the dips.
The Investor Playbook: Bonds
The traditional 40% allocation is flawed because long-term sovereign bonds carry a significant risk of real loss of purchasing power. In my view, governments aren’t likely to pay positive real interest rates on their massive debt loads, and are likely to use inflation to implicitly default on bondholders.
Investors should consider minimizing exposure to long-term bonds, which may be subject to inflation risk. The traditional bond allocation should be radically restructured toward the short- to intermediate-term portions of the yield curve. Short-term bills and high-quality corporate and municipal debt are good areas to invest. For the right investor, portions of bond allocations could also be replaced entirely by hard assets, such as gold.
The Investor Playbook: Gold
As governments continuously expand the money supply to manage large sovereign debt levels, fiat currencies suffer structural debasement. Historically, gold has served as a safe haven because it carries no counterparty risk and cannot be printed or defaulted on.
Gold should no longer be viewed as a fringe commodity, but as a solid benchmark for measuring wealth. While stocks or real estate may hit all-time highs in nominal dollar terms, they often stagnate or experience severe drawdowns when priced in gold.
Gold’s case is not that stocks are a bad investment. It is that gold has historically been underowned. According to Incrementum AG’s 2026 In Gold We Trust report, the S&P 500/gold ratio, a measure of how many ounces of gold it takes to buy the index, sits at 1.56 today, still well above the 125-year median of 0.70. Stocks have earned their place in this portfolio. Gold’s case is that it has lagged behind that success for a generation, and that gap creates the opportunity.
Figure 3: S&P 500/Gold Ratio, 01/2000 - 04/2026
Source: LSEG, Incrementum AG10
The Investor Playbook: Cash
Far from being a drag on returns, cash serves a vital strategic purpose by providing necessary ballast and optionality in a fragile system. Holding an elevated cash or short-term bill position protects against a short, sharp drop in markets. It ensures investors have the liquidity to buy distressed, high-quality assets at steep discounts during a panic. Furthermore, short-term U.S. Treasuries offer a respectable yield without exposing the investor to the severe duration risk of long-term bonds.
Conclusion
The Sovereign Put was never a free lunch. History reminds us about what happens when a state’s obligations exceed its genuine economic resources. Whether it was a Roman emperor mixing copper into silver to pay his legions, or a modern central bank executing trillions in quantitative easing to fund peacetime deficits, the playbook is identical: the losses are socialized through currency debasement, and the cost is borne by every citizen holding that currency. The U.S. dollar’s reserve currency status means this process plays out more slowly and with more room for error than it would for any other nation. This is a massive geopolitical and strategic advantage. However, it’s not a permanent escape from inflation.
The new regime is fiscal dominance, economic statecraft, and structural inflation, all reinforcing one another. Holding assets that survive and thrive within it matters now more than ever. The 60/40 portfolio was built for a world in which bonds protected capital, and the government’s interests were aligned with price stability. For now, that world is gone.
But unlike Roman citizens, who had no recourse against their emperor, Americans retain real options. Open capital markets, deep liquidity, and inexpensive access to the best companies in the world remain genuine structural advantages. The investors who recognize this shift early, who own equities in the companies built to benefit from this regime, who hold gold as a genuine hedge rather than a speculative trade, who restructure fixed income to survive inflation rather than be consumed by it, will be best positioned to come out ahead. Position accordingly.
References
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