When the Crisis Grows Bigger Than the Fed
There comes a point when a financial crisis is bigger than the Fed itself. The bailout stops working because it has already been priced in, and the situation is genuinely out of control. I think we are at that point now, and it is one more reason to own gold. Everyone is holding their breath, walking on eggshells, and pretending nothing is wrong. The problem is serious and real.
A reasonable question is whether excessive Fed and government intervention in the economy and financial markets will actually worsen the crisis ahead. My answer is that the biggest financial threat may be the false belief that central banks can always restore confidence. Every major crisis since the 1970s has required increasingly aggressive intervention, and that pattern has bred a dangerous dependence on institutional rescues. Markets have quietly learned to expect bailouts, which makes the whole system more fragile. Confidence itself has become the asset at risk.
A Forty-Year Ladder of Escalating Rescues
The history is a straight line of bigger and bigger interventions. In 1974 there was the failure of Bankhaus Herstatt in Germany. In the early 1980s came the Argentina, Brazil, and Chile defaults, the so-called ABC banking crisis and insolvent banking. In 1987 the Dow fell 22% in a single day, not over a month or a year, but in one day. Scaled to today's index level, that would be the equivalent of roughly 15,000 points in one day. Then the 1994 tequila crisis, the 1998 Long-Term Capital Management and Russia crisis, and the 2008 financial crisis.
One lesson from 2008 stands out. Policymakers had visible warning signs before Lehman Brothers failed, yet political messaging took priority over preparing the public for escalating risk. The dominoes were clearly falling. After the U.S. government bailed out Fannie Mae and Freddie Mac in late August, some people concluded the crisis was over. It was not over. Lehman was obviously the next one to fall, and the honest move would have been to warn the public and get ready rather than declare victory. That disconnect between what insiders privately expect and what the public is told repeatedly leaves ordinary investors exposed. The right instinct is to watch what officials do, not what they say.
Even after Lehman, Morgan Stanley and Goldman Sachs were only days away from failing. The Fed turned them into bank holding companies in less than 48 hours. That kind of approval normally takes about two years when regulators dislike what an applicant is trying to do and simply drag their feet. This was two days, a wave of the magic wand, and then the bailout followed.
Silicon Valley Bank and the Weekend That Rewrote the Playbook
The most recent example is Silicon Valley Bank in 2023. On a Friday night the FDIC issued a press release saying the bank was being taken over and that only insured deposits would be paid, meaning $250,000 per person, with married couples able to hold multiple accounts. Anyone with a larger deposit would get a certificate and an eventual answer on what it was worth. The plan was the standard one: look at the assets, identify the bad ones, run a fire sale, and pay depositors on a pro rata basis later.
Weekend policy changes rarely happen unless officials fear Monday could become uncontrollable. Over that weekend the billionaire crybabies came out in force. Bill Ackman was one of them, and there were others, banging on the White House door with the argument that Silicon Valley would collapse, that startups with $3 million sitting in the bank as working capital could not pay rent and would have to lay people off. That argument conveniently ignores that 95% of these firms fail anyway, with or without a financial crisis. The threat was blunt: shut down Silicon Valley and all these startups unless you do something.
So they did something. On Sunday night, before the market opened, the FDIC reversed itself and declared all deposits insured in unlimited amounts. The Federal Reserve then addressed the other banks. Many of them held Treasury securities, in some cases upwards of a trillion dollars or 900 billion in assets, bought earlier at yields to maturity of roughly 1.5 to 2%. Because interest rates had risen, those securities were worth about 70 cents on the dollar. Rates go up, prices go down. That simple. The Fed told the banks to send in their Treasuries and it would give them par: 100 cents on the dollar as a one-year loan at low interest, to be repaid a year later, with no need to worry in the meantime.
In one weekend the Fed effectively guaranteed every Treasury security in the banking system at par value even though they were worth 70 cents on the dollar, and the FDIC guaranteed every bank deposit in the country regardless of the $250,000 limit. Some crypto exchanges had multi-billion dollar accounts at Silicon Valley Bank, and Cisco, which is not a crypto exchange, held that kind of amount as well.
That raises the uncomfortable question. Once you have guaranteed every Treasury security a bank owns and every deposit in the country, what else do you have? The guarantees cannot get any bigger. So what happens when the next crisis hits, and what rabbits can possibly be pulled out of the hat then? A single weekend reversed what regulators had publicly declared just days earlier, and that timing tells you these emergency decisions are driven by contagion fear rather than consistent principle. Once authorities abandon their own limits under pressure, markets begin assuming future rescues are guaranteed. Each bailout has been bigger than the one before, over 40 or 45 years, and every expanded rescue reduces future policy flexibility while increasing moral hazard across the system.
Why the Next Crisis Could Be Worse Than 2008
Then the natural question: what does the coming crisis mean for both Wall Street and Main Street, is it something like 2008, worse, which asset categories suffer most, and where does opportunity appear in the aftermath?
My view is that it could be worse. 2008 turned into a global financial crisis, but it started in one place, the subprime mortgage market. There were about a trillion dollars of subprime and so-called Alt-A mortgages. Many people said losses might be 20%, only 200 billion, no big deal. What they ignored was the roughly 5 trillion of derivatives piled on top of that one trillion of junk mortgages. Leverage, not the original asset, is what dragged AIG Financial Products, Goldman, and others into deep trouble.
This time the stress is showing up in multiple dimensions at once. There is a global dollar shortage, which sounds impossible given all the Fed money printing. The explanation is that the printing is sterilized. The Fed prints money by buying Treasury securities: Goldman and Morgan Stanley deliver Treasuries to the Fed, and the Fed hands them cash conjured out of thin air. That is money printing. But the banks then hand that cash straight back to the Fed as excess reserves. All that happens is the Fed's balance sheet inflates on both sides. No money is created that does anything for the economy. It is not stimulus, and calling it stimulus is nonsense. Measured by M1 and M2, there is a severe dollar shortage. That connects to selling gold for dollars in order to buy oil when a country is short of both oil and dollars.
The Private Credit Time Bomb
On top of that is a huge crisis in private credit. Private credit is old wine in new bottles, just the junk bond market wearing different clothes. Instead of the junk bonds and Michael Milken and Rodeo Drive of the 1980s, there are now funds that make loans to junk credits. There have already been some big bankruptcies, including in subprime auto loans, but it does not stop there. There are massive loan portfolios, a hundred billion dollars and more, extended to hyperscalers and AI data center builders, and all of it is starting to collapse. Some borrowers have gone bankrupt, but the distress stays hidden because it is boxed inside the fund.
Here is how the concealment works. Investors gave notice to the fund managers, the biggest names in the industry, KKR, BlackRock, Blackstone, Apollo, and others, asking for their money back. The managers put up gates and say no. In a private offering document, the first pages describe what the fund does, how much money it will make, the notice period, and how you get your money back. Somewhere around page 50, in fine print, it says that in the event of market distress or disorderly markets, in the manager's sole discretion, the fund reserves the right not to give you your money back. People gloss over that line, but it is there, and that is exactly what is being used now.
So an investor asks for, say, 500 million back, and the manager offers 5%, roughly 2.5 million, while keeping the other 497.5 million and promising to get back to you. That does not mean the asset side is fine. The assets are collapsing, but nobody wants to mark them to market, because once one holder marks the position down, the accountants turn to everyone else holding the same thing and demand they mark it down too. Gated withdrawals are usually the first warning, and the fund's real value can implode long before insolvency becomes public. A portfolio can look stable simply because its losses are unpriced rather than resolved.
Several Bubbles at Once
Right now everyone is holding their breath and pretending nothing is wrong, and there is a serious problem underneath. Then add the wars and escalation on top: the price of oil, the Persian Gulf, Ukraine, private credit, the dollar shortage, overleverage, and an AI bubble. I am not against AI, and I have written a book about it, but I see four or five different stress points or bubbles all at the same time, not just one. Any single one could cause a crisis. Combine them and you are talking about the mother of all financial crises.
How to Build a Portfolio Now
Given all of that, the question becomes how to construct a portfolio in this environment, whether to sit heavy in cash ahead of a broad drawdown, and where value still exists.
I would hold 10% in gold. Not 50%, but 10% is a nice slice. I would hold 30% in cash, which is a big allocation. People object that cash yields little. The yield is actually higher than it used to be, but that is not the real point. Cash carries embedded optionality: it is effectively an at-the-money call on every asset class in the world. When things collapse, the person holding cash can go shopping for bargains instead of being the distressed seller dumping assets. Cash also protects against deflation, which should not be ruled out even in a conversation dominated by inflation. It is a robust asset that buys you flexibility.
I like real estate, though not downtown commercial real estate. Farms, income-producing real estate, and residential real estate should do well. Treasury notes are attractive because I expect interest rates to come down a lot. They may rise a little first, but there is no need to pick the exact top. Depending on your appetite for volatility, buy 10-year, 5-year, or 2-year notes. When rates fall to the 1% to 2% level, which I expect, you get very nice capital gains, and the notes are safe and liquid, assuming you are not Russia.
On stocks, I would lighten up without getting out completely. I would get out of AI, hyperscalers, software, and anything else tied to the bubble. The sectors I favor are defense, healthcare, energy such as Chevron and Exxon Mobil, natural resources, mining and minerals, and agriculture. The best-performing asset after a crash is often the one that gave you the ability to buy rather than chase returns, and patience becomes its own advantage.
Demographics Drive the Durable Winners
Healthcare deserves special attention. Look at the employment statistics, which break job gains and losses down by category, and healthcare is always number one for job gains. Technology ranks up there, along with manufacturing and various service occupations, but healthcare stays on top, and demographics are a big reason. The oldest baby boomers are turning 80 this year. Around 80 million baby boomers are moving into their 70s and 80s, and with that come Alzheimer's, Parkinson's, dementia, heart attacks, and more. The care providers, often in their 30s and 40s, are in enormous demand, and the talented ones can get jobs in a heartbeat.
The strongest long-term investments tend to come from demographics rather than the latest technology narrative. Healthcare, energy, agriculture, and natural resources rest on structural demand that persists regardless of speculative cycles or market enthusiasm. Durable, unavoidable real-world needs frequently outperform exciting stories over time.
