Will the stock market never fall again? The "Great Melt-Up" Trap in an Era of High Debt

Original title: Hitting escape velocity in the Great Melt-up

Original author: GRAHAM STEPHAN

Original translation: Peggy

Editor's Note: This article begins with a Reddit post that went viral and was later deleted, discussing an increasingly tempting thesis in the current US stock market: with high national debt, expanding fiscal deficits, and the continuous dilution of currency purchasing power, has the stock market entered a new state where it "cannot truly fall"?

The logic of the Reddit post is simple: The scale of US debt is already too large, and the government's only ultimate option is to dilute it through money printing and inflation. When the currency depreciates, stocks and hard assets denominated in dollars will also rise accordingly. Therefore, stocks are no longer just risk assets, but rather a haven against currency devaluation.

The author analyzes this claim within the framework of "The Great Melt-up" (a final急速加速上涨 phase driven by liquidity, momentum, and FOMO, detached from fundamentals). Historical examples like the Dot-com bubble and Japan's asset bubble experienced similar moments: first, real growth or new technology provided a narrative foundation, then leverage and sentiment took over the market, leading investors to believe the old valuation rules were obsolete.

The key warning of the article is that a high-debt world is indeed more favorable to assets than cash, but this does not mean that stocks are "mathematically impossible to fall." Inflation can push up the nominal prices of assets without necessarily generating real wealth growth; stocks can hit new highs long-term, but that doesn't prevent 30%, 40%, or even deeper drawdowns along the way. Historically, in extreme inflation cases like Germany, Zimbabwe, and Venezuela, stock market gains did not equate to investors becoming richer; many were forced to sell to cover living costs before asset prices could recover.

The author's final conclusion is not extreme: The US is more likely to experience not a debt default or hyperinflation, but a prolonged period of financial repression— inflation slightly higher than interest rates, debt gradually diluted, cash purchasing power continuously eroded, asset prices nominally rising, but real returns potentially lower than what investors have been accustomed to over the past decade.

For investors currently attracted by the AI narrative, US tech stocks, and the story that "every dip will be rescued," this article doesn't aim to debate whether to be bullish on US stocks. Instead, it asks how to avoid betting your entire financial future on an overly smooth upward story. Assets can rise, but that doesn't mean risk disappears; the market can be rescued, but that doesn't guarantee everyone can hold on until the next new high.

Following is the original text:

This might sound crazy, but what if I told you that mathematically, the stock market might literally never go down again?

Last week, a Reddit post suddenly went viral, presenting a quite compelling argument. Although the post was deleted after gaining traction, its gist was this: "Stocks only go up" is no longer just a meme, but a law. Like gravity, but in reverse, and applied to money.

The US now owes $40 trillion in debt. Our interest payments will soon exceed GDP. This means, just to pay the interest, the government's only way out is to print enough money.

This would lead to hyperinflation. But if you hold Palantir or Tesla stock, what does it matter? Those stocks would inflate proportionally too. This means, from now on, stocks are mathematically impossible to fall. If they did fall, the entire world economy would collapse.

This is why you see any "crash" quickly repaired within half a trading day. The stock market, quite literally, can no longer go down. This isn't a deathbed boast; it's the new market rule.

This isn't the first time such an idea has appeared, but the current economic environment does warrant serious consideration. So, we need to discuss clearly: what is really happening, why the government is now forced to keep printing money on an unimaginable scale, and what the consequences would be if this theory holds true.

Because if this theory is correct, we might witness the largest wealth transfer in history. If it's wrong, it's a sucker's game.

Before we formally begin, if this is your first time reading my article, welcome. Join over 40,000 subscribers who get an early understanding of the market. You'll receive a weekly email, completely free.

The Great Melt-up

The "stocks only go up" thesis is built upon a theory economists call "The Great Melt-up."

The logic of this theory is that every bull market keeps rising until it enters a phase of frenzy. Prices are no longer driven by fundamentals like earnings or cash flow, but almost entirely by momentum. Reaching this stage, you feel like everyone around you is getting rich, and you're 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 think. During the "melt-up" phase, returns can be spectacular, until it suddenly stops being true.

Take the Dot-com bubble of the late 1990s. From 1995 to March 2000, the Nasdaq rose 400%, with nearly 90% of that gain occurring in the final year alone. At the time, companies with no revenue, no profits, and often no real product could command multi-hundred-million-dollar valuations.

In December 1999, the CAPE ratio reached 44, its highest level in 140 years. Investors believed the internet had changed the rules of the market. "AI will change everything." Sound familiar?

Subsequently, the Nasdaq crashed 78% over the next two and a half years, and took over a decade to regain its previous high.

Look at Japan. Between 1975 and 1989, the Japanese stock market rose 900%. At the peak, the P/E ratio of Japanese stocks hit 60 times. Land prices in Tokyo became absurdly expensive: the value of the land beneath the Imperial Palace was supposedly worth more than all the land in California.

This was clearly ridiculous, but no one wanted to be the first to leave and miss out on further gains. When Japan started raising interest rates, the entire economic system collapsed, and the stock market fell 60% in less than two years. It took Japan's economy 34 years to finally return to its peak.

However, this doesn't mean every rally is a melt-up.

Early stages of every melt-up are usually driven by some real factors: new technology, genuine economic growth, or a different policy environment. But when FOMO and leverage enter the market, valuations get stretched, and everyone starts to believe the good times will never end.

So, are we currently in a melt-up? Let's first look at the stock market of 2026.

The Reddit Melt-Up Thesis

The core of this Reddit thesis is debt.

If the US government owes $40 trillion in debt, while running an annual deficit of $2 trillion, how exactly does the US get out from under this debt without destroying the economy?

The simplest path is to dilute the debt through inflation. The dollar's purchasing power declines until that $39 trillion debt becomes effectively less burdensome. This tactic is called "financial repression" because it erodes the wealth created by ordinary people. The US government used a similar approach after World War II.

But when a government devalues its currency, everything priced in that currency rises: stocks, hard assets, they all become more valuable on paper. The problem is, this paper increase doesn't necessarily mean an increase in real wealth, because the dollar itself has become less valuable.

So, when Goldman Sachs recently raised its year-end target for the S&P 500 to 8000, even if that prediction comes true, it might not simply be good news.

The alternative to infinite upside is a real stock market crash. But no one is crazy enough to actively choose that path.

However, the truly unsettling part is these numbers: By almost every major valuation metric, US stocks are not cheap. In fact, the price investors pay for each dollar of earnings is near all-time highs, roughly double the long-term historical average.

The CAPE ratio has only broken 40 twice in history. Once was during the 1999 Dot-com bubble. The other time is now.

That means the current market is not just pricing in a debt-driven melt-up; it's exhibiting a condition seen only once before in 140 years of market history.

So, how do we determine whether the "Great Melt-up theory" holds up or collapses?

The Crash Test

Some claims in that Reddit post need closer examination.

First, that interest payments will soon exceed GDP – this is incorrect.

What exceeds 100% is the debt-to-GDP ratio, not the interest payment-to-GDP ratio. These are two different things. The US has been in similar situations historically and emerged by "printing money," which helped markets recover and continue rising.

Second, that the only way to pay interest is to keep printing money – this is also incorrect.

The government could also borrow by selling Treasury bonds to investors, pension funds, other governments, and institutions. Of course, this model cannot last forever.

Third, that stocks will rise proportionally with hyperinflation – this is also incorrect.

Historical evidence does not support this. Between 1918 and 1922, the German stock market lost 97% of its value before hyperinflation peaked. Many were forced to sell stocks at the bottom just to pay rent and buy food.

In Zimbabwe, stocks did rise 500-fold, but the local currency fell 99.8% against the dollar. Venezuela experienced something similar in 2018.

So, the key takeaway is this: The Great Melt-up is not necessarily great for stock holders.

Stocks can rise during inflation, but this doesn't automatically make you richer. If your portfolio goes up 10%, but everything you buy is also 10% more expensive, you haven't actually gained anything.

So, what should we actually do amidst all this information?

The Exit Plan

History tells us the most likely scenario is: The US will not default on its debt, will not experience unprecedented hyperinflation, nor will it enter an infinite melt-up driven by endless money printing for Treasury obligations.

A more realistic outcome is a long, slow period of financial repression: inflation slightly higher than interest rates, debt becoming more manageable, and the dollar's purchasing power gradually diminishing.

The cost is that savers get quietly squeezed. Cash loses value, prices keep rising, asset prices go up in dollar terms, but real returns after inflation could be significantly lower than what investors became accustomed to over the past decade.

For the stock market, prices will likely continue to rise over the long term because when the dollar's purchasing power declines, the nominal price of assets usually increases.

But the long-term upward trend of the stock market doesn't mean it won't crash along the way. The market could still drop 30%, 40%, or even 60% from current levels. But it could also hit new highs afterward.

These two seemingly contradictory facts can be true simultaneously at different times: The market is expensive, and a single event could trigger a 20% sell-off. Nothing is risk-free. Yet conversely, high debt doesn't necessarily mean high inflation, nor does it guarantee stocks will be continuously pumped up. Most importantly, you shouldn't base your entire financial future on the hope that a "bailout will always come."

In my view, that Reddit post was directionally correct, but it misunderstood the path to the outcome.

In a high-debt world, the government has a strong incentive to let inflation take the brunt of the pressure. Over a sufficiently long time frame, this typically favors assets over cash. But it absolutely does not mean "stocks are mathematically impossible to fall." That is a dangerous assumption.

This assumption leads people to pile into every market frenzy, thinking it's their last chance to get rich. They buy at extreme valuations with no margin of safety, no diversification, and no plan for what the market has consistently done – which is fall.

I'm not here predicting a crash. Many very smart people think the market can keep going up.

But historically, the people who truly win out during inflationary periods are usually not those who went all-in on the most expensive, highest-multiple stocks. The winners are usually those who own a collection of productive assets: stocks, real estate, some cash, perhaps some gold and short-term bonds, and who aren't forced to sell when the market turns bad.

In a high-debt world, stocks may outperform cash over the long run. But this could also mean your portfolio has little to no real growth for 10, 15, or even 20 years after accounting for inflation.

So, instead of relying on your willpower to endure decades of stagnation, build a system that doesn't require "hope" as an investment strategy.

In summary, the answer isn't panic or selling everything. But the answer also isn't going all-in, using leverage, and assuming every dip will be rescued.

This is a very emotional period, and you might be tempted to bet everything on a perceived "once-in-a-lifetime opportunity." But risk always cuts both ways.

I think the better choice for most people is to stay diversified and not be overly concentrated in the most expensive companies. Keep enough cash so you are never forced to sell at the worst possible time.

Most importantly, please don't base your entire financial future on one viral Reddit post.

Stick to your regular investment plan, and stay diversified. If you found this article helpful, feel free to like, share, or pass it on to someone you don't want to see left behind in the market.

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