By Jason Zweig, The Wall Street Journal, 6/11/2025
Fellow investors,
The American satirist Ambrose Bierce, in his classic book “The Devil’s Financial Dictionary,” coined a word I’ve always liked: incompossible. Bierce defined it as “unable to exist if something else exists,” adding that “two things are incompossible when the world of being has scope enough for one of them, but not enough for both.”
In the short run, nothing is impossible in markets, but in the long run I think these two things are incompossible:
The U.S. stock market is less than 2% below its all-time high, and the yield on the 10-year Treasury is lower than it was at the start of 2025.
They’re both possible for now, but they’re incompossible for long. Either the economic outlook has to brighten, thereby justifying the high valuations of stocks and bonds, or stocks and bonds have to come down until their prices reflect the diminishing opportunities for global growth and low inflation. In the long run, we can have one or the other, but we can’t have both… [end quote]
I said almost exactly the same thing (with charts to prove it) a couple of days ago.
I’d say what is crux would be the answer to the question “when”.
The first half of the incompossibles actually has two parts. The part about the budget deficit is a long/far horizon question and the answer depends upon GDP growth. The part about trade policy is shorter term, but also note that it contains the word “may”. As for short term, it should be remembered that trade tariffs were quite high during the 1920s (which roared on for quite a few years).
Yes, countries had relatively high tariffs in the years preceding the Smoot-Hawley Tariff Act of 1930. In fact, the Smoot-Hawley Act is known for further increasing tariffs, building upon an already existing system of protectionist measures.
Even before these specific acts, the United States had a history of using tariffs to protect domestic industries, and they had been a significant source of government revenue for decades.
In essence, the Smoot-Hawley Act didn’t introduce tariffs; rather, it intensified an existing policy of protectionism that was already in place.
If economic outlook brightens (all else equal), then G goes up and debt to GDP decreases.
If stock and bond (asset) valuations decline, then R goes up and debt to GDP increases.
Note that G is a real rate and R is a nominal rate.
The question I’ve been wondering, is there a mechanism that can act so the formula above, and debt to gdp ratio, just doesn’t matter?
Suppose this scenario for the US.
G is about at its max, 2-3%.
Most of the production in G flows to the upper classes.
Because most of G goes to upper classes, several things happen: The other classes have little extra to spend, so inflation stays low, the upper classes have way more money than they spend, so they have a lot of savings, which goes into demand for assets and keeps asset valuations high (and interest rates low-ish).
Most of the flows from R (interest on bonds) and D (deficit spending) flow to the upper classes (D flows via G), which just gets recycled into assets (because most is saved, not spent).
It feels like this is the world we have been in at least since 2008-2009.
Can it just continue?
It feels like it could.
That doesn’t mean something couldn’t come along and break it.
What is that thing or things that breaks it?
Maybe if interest on debt becomes too large relative to the total government budget. This would act to reduce G, as more of government spending would just go to interest payments, R, which maybe would force austerity.
I have no idea, and there could be a contradiction or three in what is written above.