The market certainly had thoughts. Within an hour of publication, the Nasdaq doubled its losses, and by the end of the day, the yield on the 10-year Treasury had climbed 15 basis points to close at 5.11%.

A wonderful teacher once told me, “When you’re in a moment, you need to stop and recognize it.” Well, last Wednesday certainly felt like a moment. I’m a perma-pessimist, so I’m primed to see the glass half empty; but even an optimist can’t ignore a rate we haven’t seen since the Bush administration.

Could this be a Babson Break?

You, the savvy financial historian, know all about the market collapse of October 1929. You may be less familiar, however, with the events of a random Thursday one month prior – a slow news day on which the prognostications of Roger Babson precipitated a nearly 3% market drop. “Fair weather cannot always continue,” Babson warned at his National Business Conference. “Sooner or later a crash is coming and it may be terrific.”

To be clear, Babson didn’t break the bull. Stock prices recovered between his comments and the catastrophic events of Black Thursday. But did the market’s immediate reaction to his words portend the perils to come? The doomer of faith says yes.

Indeed, the true believer finds many Babson Breaks throughout history. Moments that precede “The” moments. The discontinuities we identify post-mortem.

Consider, for example, the panic of 1907. You may be familiar with the crisis’s most proximate catalyst, the closure of Knickerbocker Trust on October 22. But you may know little of the rumors linking Knickerbocker’s president, Charles Barney, to a failed attempt to manipulate United Copper stock the preceding week. A failed attempt that led, as reported contemporaneously by The Wall Street Journal, to “wild scenes on the Curb.”

Kneel ye at the altar of Babson.

But here’s the catch. Babson’s prophetic conference? It was his sixteenth. As Andrew Ross Sorkin notes in his tome, 1929, Babson had “been saying much the same thing for more than two years.” A broken clock and all that.

Thus, the inconvenient truth: Financial markets can’t heed my teacher’s counsel. It’s nearly impossible to recognize a Babson Break in the moment without morphing into Chicken Little.

But that doesn’t mean we shouldn’t pay attention.

Last Wednesday’s PMI may be recorded in the annals of history as a nothing burger. Another blip in an otherwise historic bull market.

But if things do shift, perhaps the PMI is the crack in the dam.

Perhaps it’s our Babson Break.

“One auntie … said … ‘You make [a little money] in the stock market, it means you can have a nice meal today.’”

Such was the experience of certain older investors in China’s 2015 bubble, as recounted by William Quinn and John D. Turner in Boom and Bust.

The expansion of “marketability” is a requisite feature of financial mania, according to Quinn and Turner. And that expansion often finds its way to the aforementioned “aunties” – ordinary individuals far removed from the halls of high finance.

All of which raises a question: How are American “aunties” faring in today’s AI-crazed equity markets?

An answer might be found in the Fed’s Distributional Financial Accounts (DFA), from which we can derive and plot the percentage of low-income household net worth that is linked to equities. We can add context by overlaying Robert Shiller’s Cyclically Adjusted Price-to-Earnings (CAPE) ratio.

TL;DR? When the gray line goes up, stocks are more expensive. And when the orange line goes up, the wealth of our lowest-income peers becomes more dependent on the value of those stocks.

In the throes of the dot-com bubble, Shiller’s CAPE peaked at 44.2, a level we’re approaching today. Equity valuations are historically high – not news.

But in 1999, less than 11% of the net worth of our lowest-income households was tied to the stock market. Today? Nearly 20%.

Society’s most vulnerable are more exposed to the stock market than at any point in the DFA’s 37-year history.

There are innumerable reasons you might shrug this off. The democratization of wealth creation is generally good. An elevated CAPE does not a correction force. The trading behavior of America’s lowest-income quintile doesn’t match that of the investors described in Boom and Bust, as far as I know.

All fair. But if we’re destined to fall back to Earth, a reasonable question remains: What will become of our “aunties” on the return trip?

Treasury Secretary Scott Bessent seemingly knows the joke. At the recent G-20 meeting in North Carolina, he gave it a reprise: “The world is awash in debt … and the only way for us to get out of this is to grow our way out of this.”

Bessent’s not alone. As The Economist reports, “Governments look increasingly as if they are betting on economic growth to pay the bills.”

Leverage is, functionally, a ratio. So it’s certainly possible to lower it by juicing the denominator.

Possible – but is it probable? Is it probable when U.S. debt held by the public tops 100% of GDP, with deficits approaching 6%? When real economic growth putters along at an annualized 1.5%?

In How Countries Go Broke, Ray Dalio studied historical sovereign debt crises and found that Bessent’s “happy path” – economic growth – reduced debt-to-GDP by an average of 26 percentage points. That sounds promising … until you read that “unhappy” paths like inflation, money printing, and default reduced leverage by another 53 percentage points.

Unhappy paths beat the happy path by a factor of two.

Even more disheartening? In Dalio’s research, interest on the debt added back a whopping 76 percentage points – nearly three times what economic growth took away.

“Ah, but selection bias!” you counter: Dalio studied cases that ended badly! Fair. We can turn instead to the McKinsey Global Institute, which studied 45 episodes of macroeconomic deleveraging. Its finding?

“…in just three [of 45] cases … were economies able to grow out of debt solely because of rapid economic expansions…”

Those expansions, by the way, were powered by oil booms. Or war.

As a leverage cure-all, growth is appealing. It requires no sacrifice, no difficult decisions, no cuts, no compromises. It’s the most saccharine solution available.

But history suggests it’s rare. It’s the equivalent of making it up in volume.

My favorite features Bert and Ernie in a convertible, the Count trailing overhead. Scribbled in the sky, we find Bert’s assessment of his situation:

“We can’t stop here. This is bat country.”

Bert is borrowing from Hunter S. Thompson’s classic, Fear and Loathing in Las Vegas – perhaps the pinnacle of “gonzo journalism,” a reporting style in which subjectivity and immersion are a feature, not a bug.

Fear and Loathing doesn’t want for memorable lines. My favorite?

“Once you get locked into a serious drug collection, the tendency is to push it as far as you can.”

I recalled my silly t-shirt as I read The Wall Street Journal’s recent coverage of this year’s Korean KOSPI mania, when the country’s benchmark index more than doubled before plunging 40% over the summer. As one investor put it, “My hard rule used to be that when too many people seem to be boasting about their stock gains, we’ve probably hit the peak.

“But FOMO got the better of me.”

A speculative mania obeys Thompson’s Law: buckle up and hang on as long as you can. Even if you have doubts, you know remaining clear-eyed will cost you.

It’s all gonzo: Immersion becomes a feature, not a bug. And self-imposed sobriety costs more than detox.

Back to Fear and Loathing. In the film adaptation, Thompson’s protagonist eventually attempts to park his car – an attempt that ends on a sidewalk. The valet objects, at which point the protagonist earnestly inquires:

“Is this not a reasonable place to park?”

While the KOSPI has recovered nearly a quarter from its July nadir, plenty of investors likely wonder how they’ve ended up on the sidewalk.

It’s gonzo.

The Wall Street Journal and Financial Times recently contributed an epilogue: Citadel, the firm that purchased the bulk of Situational’s distressed portfolio, has liquidated most of what it bought.

And now? Citadel’s equity fund was up 14% in July.

Nostradamus indeed predicted the future – just not his.

It’s cliché to draw parallels to Long-Term Capital Management (LTCM), so I’ll largely refrain. But frequently lost in the narrative of that 1998 collapse is its human element – something Roger Lowenstein captures well in When Genius Failed. When LTCM attempted to clear its short volatility positions mid-crisis, an employee recalled, “‘There were only four or five dealers [of volatility]. And they refused to sell.’”

Elsewhere, Lowenstein drops the rhetorical hammer: “Why this sudden interest, if not to exploit Long-Term’s distress?” It was, all told, part of what an LTCM attorney labeled the “LTCM death trade.”

Lowenstein could have written the same about Situational Awareness, some thirty years on. As the Journal recently reported, “Rival traders said they paid attention to what [Situational] owned, so when those stocks took a dive, they surmised that [Situational] was in trouble.”

As its positions soured, an investor noted, “‘It felt like [Situational] was being hunted.’”

Situational’s Death Trade.

Dramatic? Maybe, maybe not. Recall Citadel, the buyer that negotiated roughly a 10 percent discount from Nostradamus.

In Econ 101, we tend to simplify market mechanics. We liken them to, say, apples sold at the local grocery store. But such a stylized example lacks interpersonal complexity: Tom Thumb cares not, at the margin, how much I have in my checking account when it prices its Honeycrisps.

Consider instead the market for a share of Apple. The counterparty can be everything.

Buyers and sellers often have wildly different strategies, holdings, constraints, liquidity runways, you name it. Those differences can coexist peacefully for years. But when dropped together in the arena, those same differences can become weapons. Tools to exploit distress. To hunt.

Those who boil the capital markets down to pure 1s and 0s do so at their peril. Not because their math doesn’t math, but because they omit the human element. The humanity.

Perhaps the inhumanity.

Incidentally, we ran out of eggs in my house this morning. No plans to remedy that at the moment.

I assume I’m not alone. In large enough numbers, similar responses could drive down consumption, reducing prices as perfectly good inventory is left to spoil in an anxiety-induced limbo.

A silver lining? Perhaps. Egg prices have fallen sharply of late, but if you zoom out to the post-COVID era, they’ve been on an extended upward tear.

Stubborn egg price inflation, coupled with concerns over health effects – this is a song we’ve heard before. I’ll leave it to Robert Samuelson – author of The Great Inflation and Its Aftermath – to explain, citing Joseph Califano:

“‘When egg prices rose in the spring of 1966 and [the agriculture secretary] told [President Lyndon Johnson] that not much could be done, Johnson had the Surgeon General issue alerts as to the hazards of cholesterol in eggs.’”

Clever, I suppose?

Starry-eyed idealists – admittedly, a younger me – often imagine policymaking as a thoughtful undertaking in which the sharpest minds, debating vigorously, deliver serious solutions to our most vexing problems. The Surgeon General using his bully pulpit to battle inflation? That would be silly, outlandish.

But Adult Me? I believe Califano.

I’m not saying the FDA is putting its thumb on the scale to bring down egg prices. This recall is no joke, and we should all proceed with caution. But I still wonder whether one policy objective, however appropriate, has cross-contaminated another.

Whether salmonella has inadvertently become a promo code.

Who knows. My household will certainly avoid omelets for a few more weeks.