The Market’s Magical Thinking Problem

Another green week on the markets as the ASX 200 skirts all-time highs.

The indices march higher while bond traders nervously eye ballooning deficits.

It’s a familiar dance — one where equity investors whistle past the graveyard of fiscal reality.

The challenge for you is navigating this disconnect. Why worry about tomorrow’s reckoning when today’s rally beckons?

This chasm between equity euphoria and fiscal reality exemplifies a broader problem: the market’s addiction to magical thinking.

Below, I’ll give you a strategy to navigate this madness…

But before we do that, let’s look at the US’s mounting problems and why they matter.

Return of the Supply-Side Fantasy

Financial elites gathered at the Reagan National Economic Forum last weekend to quietly question the latest incarnation of Reaganomics.

Jamie Dimon warned that excessive government spending will eventually trigger a bond market crisis.

Gary Cohn, architect of the 2017 tax cuts, fretted about a failed Treasury auction. Yet the market grinds higher, seemingly immune to these concerns.

The Trump administration’s economic agenda reads like a greatest hits album of supply-side economics.

What do I mean?

Tax cuts, deregulation, and promised lower domestic spending. All while the military balloons.

The playbook is predictable, as are the outcomes. History doesn’t repeat, but it certainly rhymes.

These policies will inevitably deepen structural deficits that are already running high.

The Congressional Budget Office projects that the latest tax proposals alone would increase deficits by US$3–4 trillion over the next decade.

Meanwhile, increased military spending — particularly on speculative systems — will further strain a stretched budget.

Take the Golden Dome initiative. Loosely promised as a US$175 billion project with scant details. A more realistic Budget Office estimate puts it closer to US$831 billion.

Senator Jack Reed’s assessment was diplomatic but damning: ‘Without a detailed plan and transparent budgeting, this initiative risks becoming a costly endeavor with uncertain outcomes.’

Sound familiar? Reagan’s patriotic Star Wars project was originally billed at an inflation-adjusted US$90 billion.

It ballooned 4,000% before finally being shuttered. We’re witnessing the same pattern of reckless military promises, coupled with spending cut fantasies.

This brings us to the inevitable challenge of magical thinking around DOGE.

The DOGE Delusion

Few would deny that the US budget has spiralled out of control — interest payments have become untenable as the debt-to-GDP ratio rockets above 125%.

Just look at how massive those ‘net interest outlays’ are projected to become:

But DOGE’s trajectory perfectly mirrors Reagan’s Grace Commission: it starts with fanfare and ends with a whimper, failing to cut spending meaningfully.

The failure to address corporate capture of government continues to undermine any serious cutting campaigns, leading instead to further budgetary pork barrelling in the ‘Big Beautiful Bill’.

For DOGE, the promises of US$2 trillion in savings look closer to 4% of that figure as vested interests prevail.

This would not have surprised those watching DOGE closely, but magical groupthink created a story of success that few dared to question.

Now we’re witnessing the implosion of Musk-Trump’s relationship, with serious questions about what was achieved.

The deficit spending marches on.

Historic Echoes

Today’s similarities to the Regan era should not be lost on readers.

Back then, it was promises of tax cuts ‘paying for themselves’ through increased growth.

Yet, federal deficits tripled under Regan.

And now we have Trump… He’s already spent US$250 billion more than the previous administration!

No doubt he’s been hobbled by spiralling interest rates:

But a historical view shows that no significant tax cuts have ever paid for themselves.

To solve these problems, the administration promised even more magical ideas to stimulate growth.

Recently, Trump lieutenants like Bessent and Lutnick have shifted toward a ‘growth defeats the deficit’ narrative.

While plans like removing income tax and replacing it with tariff income, have been described as ‘absurdly off base, since it’s mathematically impossible’.

Or the return of manufacturing jobs to the US at a time when a low-skilled labour force and the inevitable march of automation have long taken their toll.

Finally, tariffs represent the zenith of divine thinking. If Trump thinks he can divorce himself from China overnight, he should consider that nearly 40% of US imports from China are intermediate goods essential to American manufacturing.

And so the party continues… These aren’t isolated incidents. They’re symptoms of a market increasingly divorced from fundamental analysis.

When narratives become more important than numbers, disaster follows.

Debasement is Next

Investors must recognise that governments will continue to outspend and systematically devalue our money.

This week’s agreement between Trump and longtime rival Elizabeth Warren to abolish the federal debt ceiling risks removing the last meaningful constraint on fiscal expansion.

The story is the same in Australia as our deficit deepens. The mathematics here is inescapable.

With interest payments consuming an ever-growing share of federal revenue and political will for meaningful cuts non-existent, monetary debasement becomes the path of least resistance.

Central banks will be pressured to accommodate fiscal recklessness by money printing, effectively taxing savers and fixed-income holders through inflation.

This environment demands defensive positioning. Traditional safe havens like government bonds offer little protection when governments are the source of monetary instability.

That’s why investors need to head back to the ‘classics’.

Gold remains the timeless inflation hedge. Central banks are accumulating gold at the fastest pace in decades.

Even the institutions recognise the currency risks.

Here’s where you can profit from Australia’s deep bench of gold miners.

Gold demand is on track for long-term structural demand. But it’s not just a case of buying the largest gold miners. Many have already reached incredible heights.

As you can see below, the large-cap dominated ASX gold index is already in all-time high territory. But the speculative stocks remain well below.

Editor Callum Newman has identified the next small-cap ASX-listed plays in this sector, including one that could be sitting on the next motherload… A hypergiant that could be holding the next Australian fortune.

Click here to learn how to access Callum’s ASI ‘5-to-buy’ for 2025.

The equity market’s current euphoria, built on fiscal fantasy, cannot last. Bond vigilantes are stirring. Reality has a way of asserting itself.

Markets can remain irrational longer than you can remain solvent. But they can’t remain magical forever.

Regards,

Charlie Ormond,
Editor, Alpha Tech Trader and Altucher’s Early-Stage Crypto Investor