bathtub
The bathtub is overflowing
How much of your assets are invested in stock? Many of you might have invested after the subsidies of COVID-19. And, you probably haven’t had a major crush that will be recorded in history. Financial markets, like nature, are a constant cycle. One can define a cycle as the repetition of events as time goes by. The difference between the seasons and markets is that whereas seasons cannot be delayed or accelerated by human effort, financial cycles can be elongated or shortened.
Because markets are created by man, they are, by definition, under human control. The prime cause behind these oscillations is liquidity. And while the U.S. Federal Reserve (also known as the Fed) manages liquidity at the macro level, even the Fed’s power has its boundaries. While it can slow or speed such processes, it cannot prevent cycles from playing out altogether. And that is the reason why we have to keep in mind the variable while we invest our money in the financial market.
A useful analogy that fits is a bathtub. The faucet represents the Fed, water is liquidity, and the drain represents external shocks or reversals in investor confidence. As liquidity flows in, the water level rises. When it’s ready to spill over, the Fed closes the faucet to stem the inflow. But sure enough, pressure builds until water seeps out through the drain.
This tug of war—supplying liquidity, withholding it, and ultimately allowing some of it to drain off—is the financial cycle. And history shows that every cycle has its moments when the plug is pulled: the Great Depression of 1929, the Nifty Fifty blowup of 1973, the 1987 crash, the Dot-Com bust of 2000, the Subprime Mortgage Crisis of 2007, the Global Financial Crisis of 2008, and the COVID-19 shock. All were preceded by warning signs, and all ended with liquidity being sucked out of the system.
In spite of these lessons, investors continue to act as if markets are insulated from history. The truth is that markets, like the human body, show symptoms before breakdown. Just as fever is a sign of illness, speculative excess is a sign of fragility. When investment becomes speculation, the market starts to send out signals of distress—even when investors do not want to hear it.
The most vocal signals today are from artificial intelligence and semiconductors. These sectors are today’s undisputed market leaders, but valuations suggest an unsustainable concentration of capital. In spite of unprecedented liquidity support, the numbers are telling us that the bathtub is nearly full. The so-called “Magnificent Seven” stocks that have powered the market since 2023 are already beginning to crack. Nvidia, the hub of the AI business, today trades at a price-to-earnings multiple of around 70, with a market capitalization equal to 3.6% of global GDP—larger than that of France’s, the UK’s, or Germany’s percentage of GDP alone.
The analogy to the Dot-Com era must not be disregarded. Cisco was also believed to be indispensable during the days of the internet boom, and its stock surged nearly 98,000% to its peak. Nvidia’s rise has been even more steep, at over 461,000%—almost five times Cisco’s gain. However, unlike the hype cycle of the early 2000s, Nvidia’s fundamentals no longer support its valuation: quarterly revenue growth has decelerated from a peak of 203% to a decline of 15%. These evidences bring worry when price outpaces earnings to such an extent; history shows the cycle eventually reverses.
Macroeconomic indicators confirm this weakness. Polling numbers show that nearly 30% of Americans now expect fewer jobs six months hence. Historically, when pessimism about jobs rises above this threshold, recessions have followed. The official unemployment rate remains near 4%, a level the Fed views as “full employment,” but cracks are developing. Softening labor markets curtail consumer spending, which has a direct impact on corporate profitability. The PCE index—a key gauge of household expenditure—has fallen into negative territory for the first time since 2020, pointing to flagging demand at the heart of the economy.
To add to the risks, the dollar’s global dominance is fading at the same time that U.S. equities represent more than 75% of the world’s stock market capitalization. If confidence in U.S. corporate earnings stumbles, the effect will be felt globally. The U.S. Dollar Index has already fallen nearly 11% in the first half of 2025—the worst downturn since 1973. A weak dollar undermines the perception of American corporate stability and boosts the risk of capital flight.
The warning signals are not only at the data points. Wall Street legends are sounding alarms. Louis-Vincent Gave of Gavekal Research has argued that the AI bubble poses a bigger threat than tariffs. Howard Marks of Oaktree Capital has drawn explicit comparisons to the late 1990s, saying the current environment reminds him of the Dot-Com bubble. Ray Dalio of Bridgewater Associates has warned that the dollar is weakening even as equities remain overvalued.
Most prominently, Warren Buffett’s Berkshire Hathaway is holding a record $375 billion of cash, representing 30% of its assets under management—the largest proportion in company history. The Buffett Indicator, also known as the measure of U.S. market capitalization as a percent of GDP, currently sits above 200%, meaning the stock market is valued at more than twice the size of the U.S. economy. This ratio is higher than it was during the peak of the Dot-Com bubble, a danger signal even seasoned investors are not eager to ignore. Not only because of the Wall Street magnates’ cautions, but you also have to refer to them while you invest.
In conclusion, the financial market has a cyclical nature in the world. History repeatedly proves the claim. Today’s AI-driven boom is represented by extreme valuations, the weakening of the dollar, and cautious signals from renowned investors. Eventually, those who are going to survive through the recession are going to be the people who are awake, meaning they do not follow herd mentality, but instead have their own standards and keep to their own unique values in investing.
By: Yire Jeong
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