Original Title: Hitting escape velocity in the Great Melt-up
Original Author: GRAHAM STEPHAN
Original Translation: Peggy
Editor's Note: This article starts with a post that went viral on Reddit and was later deleted, discussing an increasingly tempting judgment in the current U.S. stock market: Given the high level of U.S. debt, ongoing fiscal deficits, and continuously diluted currency purchasing power, has the stock market entered a new state of "cannot truly decline"?
The logic of the Reddit post is simple: The U.S. debt has become too large, and the government can ultimately only dilute the debt through printing money and inflation; as the currency depreciates, dollar-denominated stocks and hard assets will also rise accordingly. Therefore, stocks are no longer just risk assets but seem like a refuge against currency depreciation.
The author places this assertion within the framework of "Melt-up," which refers to a late-stage acceleration in asset prices driven by liquidity, momentum, and FOMO, detached from fundamentals. Historical moments like the dot-com bubble and the Japanese asset bubble have experienced similar instances: new technologies or real growth initially provide a narrative foundation, followed by leverage and sentiment taking over the market, leading investors to believe that old valuation rules have become invalid.
The key reminder of the article is that a high-debt world does favor assets over cash, but this does not mean stocks are "mathematically incapable of declining." Inflation can push up the nominal prices of assets, but it may not lead to real wealth growth; long-term highs in the stock market do not prevent 30%, 40%, or even deeper pullbacks along the way. Historically, in extreme inflation cases like Germany, Zimbabwe, and Venezuela, rising stock markets did not equate to actual wealth increases for investors who were often forced to sell before prices rebounded to pay for living expenses.
The author's final judgment is not extreme: the U.S. is more likely to experience not debt defaults or hyperinflation but a prolonged period of financial repression—where inflation slightly exceeds interest rates, debt is gradually diluted, cash purchasing power is continuously eroded, nominal asset prices continue to rise, but real returns may be lower than the levels investors have grown accustomed to over the past decade.
For today's investors attracted by AI, U.S. tech stocks, and the narrative of "every dip will be rescued," this article is not focused on whether to be bullish on U.S. stocks, but on how to avoid betting the entire financial future on a story that is too smooth in its rise. Assets may rise, but this does not imply that risks have vanished; the market may be rescued, but it does not mean everyone will make it to the next new high.
The following is the original text:
This may sound crazy, but what if I told you that mathematically speaking, the stock market may never decline again?
Last week, a post on Reddit suddenly went viral, presenting a rather convincing argument. Although the post was deleted after gaining popularity, its main idea is this: "Stocks can only go up" is no longer just a meme but a law. Like gravity, except in the opposite direction, and the subject is money.
The U.S. currently has a debt of $40 trillion. Our interest expenses will soon exceed GDP. This means that the only way for the government to pay interest is to print enough money.
This will lead to hyperinflation. But if you own stocks in Palantir or Tesla, what does it matter? These stocks will inflate proportionally. In other words, from now on, stocks are mathematically impossible to decline. Once they start to drop, the entire world economy will collapse.
This is why you see any "crash" being quickly corrected within half a trading day. The stock market, in a literal sense, can no longer decline. This is not a last hurrah before death but a new market rule.
This viewpoint is not appearing for the first time, but this time the economic environment is worthy of serious consideration. So we need to clarify: what is actually happening now, why the government is forced to continue printing money at unimaginable scales, and what consequences will follow if this theory proves accurate.
Because if this theory is correct, we may witness the largest wealth transfer in history. If it is wrong, then it will be a harvesting.
Before formally starting, if this is your first time reading my article, welcome to join over 40,000 subscribers to understand the market ahead of time. You will receive an email every week, completely free.
Melt-up
The saying "stocks can only go up" is based on a theory called "The Great Melt-up."
The logic of this theory is: each bull market continuously rises until it enters a frenzy stage. Prices are no longer driven by fundamentals like earnings and cash flow but are almost entirely driven by momentum. At this stage, you will feel that everyone around you is getting rich, and you are the only one being left behind.
This belief is simple: prices will continue to rise because they have been rising so far.
This phenomenon is not as rare as you might imagine. In a "melt-up" phase, returns can be extremely exaggerated until it suddenly no longer holds true.
For example, during the late 1990s dot-com bubble. From 1995 to March 2000, the Nasdaq rose by 400%, with nearly 90% of that increase occurring in the last year alone. At that time, many companies with no revenue, no profits, and even no real products could achieve valuations in the hundreds of millions.
In December 1999, the CAPE ratio reached as high as 44, the highest level in 140 years. Investors believed that the internet had changed the rules of market operation. "AI will change everything." Does that sound familiar?
Subsequently, the Nasdaq experienced a 78% crash over the next two and a half years, taking more than a decade to return to its peak.
Looking at Japan, between 1975 and 1989, the Japanese stock market rose by 900%. At its peak, the PE ratio of the Japanese stock market reached as high as 60 times. Tokyo land prices became absurdly high: the value of the land where the Imperial Palace is located was even considered to exceed the value of all land in California.
This is obviously absurd, but no one wanted to be the first to exit and miss the subsequent rise. When Japan started raising interest rates, the entire economic system collapsed, and the stock market fell by 60% in less than two years. It took the Japanese economy 34 years to finally return to the highs of that year.
However, this does not mean that every rise is a melt-up.
In the early stages of every melt-up, it is usually driven by certain real factors: new technologies, real economic growth, or different policy environments. But when FOMO and leverage begin to enter the market, valuations are continuously pushed up, and everyone begins to believe that good days will never end.
The Melt-up Theory on Reddit
The core of this theory on Reddit is debt.
If the U.S. government has a debt of $40 trillion, meanwhile generating a $2 trillion deficit every year, how can the U.S. escape this debt without destroying the economy?
The simplest path is to dilute the debt through inflation. The purchasing power of the dollar declines until this $39 trillion debt becomes less burdensome in real terms. This method is called "financial repression," as it will erode the wealth created by ordinary people. The U.S. government employed similar tactics after World War II.
However, when a government allows its currency to depreciate, everything priced in this currency will also rise: stocks and hard assets will appear more valuable on paper. The problem is that these assets appreciating on paper does not equate to real wealth increase because the dollar itself has become worthless.
Therefore, when Goldman Sachs recently raised its year-end target for the S&P 500 index to 8,000 points, even if this prediction comes true, it may not be a simple positive outcome.
Another potential alternative to unlimited rises is a genuine market crash. However, no one would be crazy enough to actively choose this path.
Crash Testing
Some claims in that Reddit post need to be closely examined.
The government can also borrow money by selling Treasury bonds to investors, pension funds, other governments, and institutions. Of course, this model cannot continue indefinitely.
Stocks can rise during inflation, but this does not automatically mean you become richer. If your portfolio goes up by 10%, but everything you buy also costs 10% more, then you have not actually gained anything.
Exit Strategy
History tells us that the most likely scenario is: the U.S. will neither default on its debt nor encounter unprecedented hyperinflation, nor will it engage in endless money printing due to Treasury issues, pushing the stock market into infinite melt-up.
The more realistic outcome is a long and slow period of financial repression: inflation slightly above interest rates, making debt easier to manage while the dollar’s purchasing power gradually declines compared to the past.
The cost is that savers will be quietly squeezed. Cash loses value, prices continue to rise, nominal asset prices soar in dollars, but the real returns after adjusting for inflation may be far lower than what investors have been accustomed to over the past decade.
For the stock market, prices are still likely to continue rising long-term, as nominal asset prices usually increase when the dollar’s purchasing power declines.
But long-term rises in the stock market do not mean it won’t crash along the way. The market could still drop 30%, 40%, or even 60% from its current position. But it may also reach new highs afterward.
These two seemingly contradictory facts can hold true simultaneously at different times: the market is expensive, and a single event could trigger a 20% sell-off. Nothing is without risk. But on the other hand, high debt does not necessarily imply high inflation, nor does it mean the stock market will be persistently uplifted. Most importantly, you should not base your entire financial future on the hope that "the next rescue will definitely happen."
In my view, the Reddit post was correct in direction but misunderstood the path to the result.
In a high-debt world, governments do have a strong incentive to let inflation bear the main burden. Over a sufficiently long time frame, this typically favors assets over cash. But this does not mean that "stocks are mathematically incapable of declining." This is a dangerous assumption.
This assumption can cause people to rush into every market frenzy, believing it’s their last chance to get rich. They will buy in at extreme valuations, with no margin of safety, no diversification, and no plan to deal with what the market has repeatedly done—decline.
I am not predicting a crash here. Many very smart people believe the market can continue to rise.
However, historically, those who end up truly winning during inflation are usually not the ones who have bet their entire position on the most expensive, highest-multiple stocks. The winners are often those who hold a set of productive assets: stocks, real estate, some cash, perhaps gold and short-term bonds, and who are not forced to sell when the market turns sour.
In a high-debt world, stocks may outperform cash in the long run. But this may also mean that your portfolio has nearly no real growth for 10, 15, or even 20 years after adjusting for inflation.
Therefore, rather than relying on your willpower to endure decades of stagnation, it would be better to establish a system that allows you not to treat "hope" as an investment strategy.
In summary, the answer is not to panic, nor is it to sell everything. But the answer is also not to fully bet everything, using leverage, and assuming every dip will be rescued.
This is a very emotional time, and you might be tempted to place all your chips on the so-called "once-in-a-lifetime opportunity." But risk is always two-sided.
I believe that for most people, a better choice is to maintain diversified positions, not overly concentrated in the most expensive companies. Retain enough cash so that you will never be forced to sell at the worst times.
Most importantly, please do not base your entire financial future on a viral Reddit post.
Stick to your regular investment plan and maintain a diversified portfolio. If you find this article helpful, feel free to like, share, or pass it on to someone you don't want to see left behind by the market.
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