How to Invest in The Debasement Era

Macro strategist Vincent Delaward breaks down the 'debasement era,' arguing that fiscal dominance has killed recessions and peaked US market dominance, forcing a radical rethink of investment portfolios beyond just crypto.

The Mindset of Institutional "Slow Money"

• Vincent Delaward, a macro strategist for StoneX Group who advises large pension funds and sovereign wealth funds, explains that the primary driver for these institutions is not maximizing returns but avoiding career risk. Their decisions are governed by two principles: not getting fired and not angering their regulators. This creates significant institutional inertia and explains why they are often slow to adapt to new market regimes.
• Delaward notes that for the past 15 years, the only winning strategy for these funds has been to be overweight in US assets, particularly the Mag 7 stocks.
• The central question now plaguing these managers is what to do with this massive US allocation, as signs emerge that this long-term trend may be reversing.
• Delaward emphasizes the human element in capital markets: "At the end of the day, decisions about capital market allocation... are made by people who don't want to get fired."

The 15-Year Super Cycle of US Capital Markets

• The discussion details the historic outperformance of US markets since the 2008 financial crisis. From 2008 onwards, a strategy of being long the MSCI US index and short the rest of the world would have returned approximately 8% annually with minimal volatility. This dominance has pushed the US share of global equity market capitalization to nearly 70%, a disproportionately high figure given the US represents about 5% of the global population and 20% of GDP.
• Delaward identifies several key drivers for this super cycle:
• Technological Dominance: The rise of the iPhone and the app-based ecosystem created the Mag 7 (a term for the seven largest US tech stocks: Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla), a growth sector with no parallel outside of China.
• The Shale Revolution: The US transformed from a major net energy importer to the world's largest energy producer, drastically improving its trade balance and lowering domestic energy costs.
• Aggressive Fiscal and Monetary Policy: The US demonstrated a greater willingness to run large deficits and pursue expansionary policies compared to regions like Europe, directly boosting corporate profits.
• Unique Market Structure: The US stock market functions as the nation's primary retirement savings vehicle through 401(k)s, creating a constant, systematic inflow of capital (around 1% of GDP per month) into equities, much of it through passive, valuation-agnostic index funds.

Has America Peaked?

• Delaward argues that the US market's dominance has likely peaked, citing extreme concentration and reliance on foreign capital. He points to the Norwegian sovereign wealth fund, the world's largest investor, whose holdings in just the seven Mag 7 stocks exceed 100% of Norway's GDP. Similarly, the Swiss central bank has become one of the largest holders of US tech stocks to manage the strength of the Swiss franc.
• This cycle of international outperformance followed by US outperformance is historical, with major shifts occurring every 10-15 years. The 1970s favored international markets, followed by a US-led cycle in the dot-com era, and then an emerging markets boom in the 2000s.
• Delaward believes the peak occurred in early 2024, before the reality of Trump's tariff policies signaled a more aggressive, nationalistic stance, spooking foreign investors.
• He warns that the selling from slow-moving foreign pension funds is "99% ahead of us," as they have not yet acted on their concerns about US political and fiscal risks.

The AI Bubble vs. Long-Term Productivity

• The conversation addresses whether the current AI boom, which is fueling the Mag 7, is a sustainable driver of growth or a short-term bubble. Delaward suggests it is both. In the short term, the massive capital expenditure from a handful of hyperscalers is unsustainable and reminiscent of past infrastructure booms like railways and telecom, which were followed by an "air pocket."
• However, he remains optimistic about long-term productivity, noting that US real GDP growth has averaged a strong 3% since 2020, suggesting a potential reset to a higher trend.
• The key risk for investors is valuation. Delaward draws a parallel to the dot-com bubble: "In 1999, people who were really smart could see that e-commerce was going to take over the world... except the stock price went down by 85% along the way."

The Inflationista Thesis: Why Persistent Inflation is Here to Stay

• Delaward, a self-proclaimed "inflationista," argues that the era of low inflation is over. He believes the Federal Reserve's 2% target is dead, pointing to the fact that the Fed is cutting rates while core inflation remains at 3%. This signals that 3% is the new effective floor for inflation.
• He views inflation not as a simple metric but as a "symphony"—a broad societal mindset shaped by politics, geopolitics, and generational dynamics.
• The policy response to COVID, not the virus itself, revealed this new inflationary mindset and a commitment to permanent stimulus.
• For investors, this means traditional inflation hedges and strategies need re-evaluation. Delaward suggests that inflation break-evens (the market's expectation for future inflation derived from bond yields) are a "boring, steady way" to capitalize on this trend.

Fiscal Dominance: The End of Central Bank Independence

• The root cause of this new inflationary regime is fiscal dominance, a scenario where government spending and debt needs dictate monetary policy. Delaward asserts that the long-held idea of central bank independence was always a "lie" and that its primary historical role has been to finance the government.
• In a monetary dominance regime, the central bank's actions (e.g., raising rates) force the government to cut spending.
• In today's fiscal dominance regime, the opposite is true: despite the Fed raising rates from 0% to 5.25%, government spending has accelerated, forcing the central bank to accommodate the Treasury's needs.
• President Trump's open pressuring of Fed Chair Jerome Powell is the most explicit manifestation of this shift, making it clear that fiscal priorities now set the agenda for monetary policy.

Why Recessions Are Dead

• Delaward makes the provocative claim that traditional, deep recessions like the one in 2009 are a thing of the past. He argues that structural changes in the economy and hyperactive policymaking have made the system more resilient to severe downturns.
• An Intangible Economy: The modern economy is dominated by intangible assets. Unlike physical assets (factories, railways), intangible assets don't require massive capital and inventory cycles, which historically drove economic busts.
• Structural Buffers: A huge portion of the US population (government workers, healthcare sector, retirees) has income streams that are not tied to the economic cycle, providing a stable floor for demand.
• Hyperactive Policy: Policymakers are now primed to intervene at the slightest sign of a slowdown. As Delaward puts it, "The Fed cuts just because inflation might slow below the 2% target in 12 months based on some number that they made up."
• The economic cycle now moves from inflationary boom to stagflation, skipping the "deflationary bust" phase. This implies that hedging against a deep downturn with assets like long-duration bonds is a less effective strategy.

Constructing the Debasement-Resistant Portfolio

• For investors navigating this era of fiscal dominance and persistent inflation, Delaward proposes a portfolio that diverges significantly from both traditional 60/40 models and crypto-maximalist approaches.
• Hold Cash: While cash will lose purchasing power to inflation, it offers zero correlation and, more importantly, optionality to buy other assets at cheaper prices during inevitable market dips.
• Overweight International Equities: The 70% US share of global markets is unsustainable. The most compelling opportunities for the next decade will be abroad, particularly in markets with cheap valuations and currencies poised to benefit from a weaker dollar.
• He favors China, where profit margins have room to expand after a period of intense, government-directed competition, and Brazil, where extremely high real interest rates are set to normalize, unlocking corporate profitability.
• Maintain Equity Exposure (but be tactical): Stocks perform well in an environment of high government spending and suppressed interest rates. He anticipates a 10-15% correction in the fall, which would present a buying opportunity.
• Hard Assets like Gold: Gold remains a core holding in a debasement portfolio. It benefits from strong, persistent buying from central banks (like China, Poland, and Turkey) who are diversifying away from the US dollar.

Conclusion

• Fiscal dominance is creating a new investment regime of persistent inflation where US market supremacy is ending. Investors must look beyond US equities and traditional hedges, prioritizing international diversification, cash optionality, and hard assets to navigate the debasement era.