Skeels Cygan: What goes up must come down…but when?

I have many fond memories of working with clients during the 20-plus years I owned a fee-only financial planning firm.

One very special client was named Jo, and she often said to me, “What goes up must come down.” She always said it with a twinkle in her eye and a chuckle, but we both knew there was an underlying element of truth.

She was incredibly savvy when it came to investing and was far more risk-tolerant than her engineer husband. She died a few years ago at age 97.

“What goes up must come down” sounds like common sense when talking about the stock market, but it is especially pertinent in today’s investing climate. The stock market does not provide any guarantees, and all investors know that occasional downturns are inevitable.

Some downturns are minor and short-lived, like the 34% decline in March 2020 at the beginning of the COVID-19 pandemic. Within three months, the market recovered and continued to climb. Others were major, like the 1929 stock market crash — a decline of 79% that took 25 years to recover. Or the 2008 financial crisis — a 54% decline that took five-and-a-half years to recover.

Many economists and investors are predicting that a major correction is coming. Unfortunately, no one knows for certain if or when it may occur. Concerning economic signs include:

• 1 out of 4 Americans is reportedly living paycheck to paycheck.
• American businesses and consumers are being harmed financially by tariff policies.
• Millions of Americans are at risk of losing their health care subsidies and SNAP benefits. Groceries cost more, and rising numbers of people are relying on food banks.
• Experts are concerned that the favorable stock market performance in 2023-25 has been amplified by large tech firms investing in artificial intelligence.
• The current administration has been relaxing guardrails in the financial and banking industry, so there is less oversight. This is problematic because, as the adage goes, “When the cat’s away, the mice will play.”

All of the above issues are concerning. However, an enormous risk in my view pertains to debt. Journalist and author Andrew Ross Sorkin recently released his book, “1929,” about the stock market crash of 1929. In a New York Times article from October, he stated:

“Every great panic in modern finance has started the same way: too much borrowed money. In 1929, it was margin loans — everyone got swept up in buying equities with borrowed money, and they couldn’t fathom a downturn. In 2008, it was subprime mortgages. Millions of families around the country were underwater on their mortgage payments, and their homes were worth less than what they paid for them.

“In both instances, the banks didn’t have enough money. In the 1930s, some 9,000 banks failed. After the 2008 crisis, the U.S. government saved some of the biggest banks from tipping over, merged others and let roughly 300 fail.”

Below the surface in 2008

If out-of-control debt was a problem in prior financial debacles, how does that pertain to today? First, let’s look at the underlying issues in the 2008 financial crisis. Housing prices declined 33% between 2007 and 2009, causing many homeowners — who had been encouraged to buy larger homes than they could afford — to default on their loans.

Under the surface, the banking and investment industries were fueled by greed. They bundled low-quality, subprime mortgages into “collateralized debt obligations” (CDOs), gave them AA and AAA ratings, and sold them to unsuspecting investors in the U.S. and abroad.

Using excessive debt, they bought and sold more CDOs. When people started defaulting on their mortgages, it became apparent that the subprime mortgages as investments were plummeting in value, and the system collapsed like a house of cards.

It was later reported that Lehman Brothers was leveraged 35-to-1 leading up to the 2008 financial crisis, meaning they were in debt for 35 times the amount of their capital. Other financial firms were reportedly leveraged at roughly 33-to-1.

A New York Times article reported that “under 33-to-1 leverage, a mere 3% decline in asset values wipes out a company.”

What about today?

How does this compare to today? The amount of debt in our economy is not transparent, and it cannot be measured or monitored.

Whereas physical banks were involved in 2008, the majority of today’s commercial loans are made through a “shadow” banking system that involves private credit, asset-backed commercial paper, credit insurance providers, hedge funds and structured investment vehicles.

Companies such as BlackRock, Carlyle Group, Apollo Global Management, and Ares Management Corp. are involved, along with large investment firms such as Morgan Stanley, JPMorgan Chase and Goldman Sachs. Private equity and private credit are trillion-dollar industries, and they are vastly unregulated. The financial industry also includes alternative assets, such as cryptocurrencies, which are also largely unregulated.

The amount of debt being incurred by large tech companies that are investing in AI is alarming. The Wall Street Journal reported in November that Oracle’s debt load now exceeds $100 billion, and OpenAI has forecasted its operating losses will be about $74 billion in 2028.

Furthermore, Microsoft, Alphabet (Google) and Amazon have spent over $600 billion on AI during the past three years, and that figure is expected to be over $1 trillion for the four years ending in December of 2026.

Many are questioning whether the profit derived from AI will justify the high expenses.

Although tech companies were historically flush with cash, the high levels of debt they are incurring — much through the “shadow banking” system mentioned above — are causing them to have weaker cash balances with higher risk.

I wish I could say I trust billionaires to do the right thing, but after studying the 2008 financial crisis extensively, I cannot. The financial and banking industries — including private equity, private credit, and cryptocurrencies — need oversight, and that is sorely lacking.

Will we avoid a major correction? I certainly hope so, but I recommend you prepare for one. It never hurts to be proactive. Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.”