In 2006, the fall before Dr. Kurt Richebacher died, we had lunch on the beach in Cannes. The Mediterranean glittered under polite sunlight. The waiters moved with the confidence that, in France, their chosen métier is more than a job; it’s a profession. And lunch, a civic institution.
Kurt wore sunglasses so he could survey the beachgoers at his leisure.
At the time, we didn’t know the good doctor was ill. He had walked with a cane for years. But his mind was sharp. We’d rented a villa in nearby Golfe-Juan for several months. We were helping him research and write what he had proposed to be the first critique of the Federal Reserve under its new chairman, Ben Bernanke.
Markets don’t usually ring a bell before the final sprint higher. They become increasingly detached from fundamentals as liquidity overwhelms caution. If that process continues through the back half of 2026, we could see one of those rare periods where almost everything goes up… until it doesn’t. (Source: Shutterstock)
Dr. Richebacher’s obsession at the time was America’s tendency to mistake financial inflation for prosperity. He had watched the same movie for decades: credit expands, asset prices rise, Wall Street declares a new era, economists explain why old limits no longer apply, and investors discover too late that paper wealth can be as perishable as fish in August.
While reviewing our forecasts for mid-year 2026, we went down the rabbit hole to imagine what he’d say today.
Dr. Richebacher would recognize the 2026 market. He might approve of calling it the crack-up boom in the waiting room, but he would likely say the phrase remains too polite. Because one sees the reef, names the reef, but then hesitates to say decades of policy vandalism helped steer the ship there.
A crack-up boom, in the strict Austrian sense, is not merely a market where stocks rise while money is loose. Ludwig von Mises used the idea to describe the final chaotic phase of a currency regime, when people lose faith in paper money and rush to exchange it for anything real before purchasing power disappears.
Richebacher would insist on the distinction. Asset inflation among speculators is Wall Street’s oldest malady, while monetary panic among citizens is the terminal fever; the first can make investors foolish, while the second makes money itself suspect.
The latter – suspicious money – is what we’ve been observing since pandemic-era deficit spending and complicit Fed policy-led accommodation, all while blaming data, instead of judgment. Or a pathetic, dysfunctional Congress.
🧊 The Bear Market Beneath
Today’s headline indexes still flatter the owner because capitalization-weighted markets give the largest companies enormous influence. When the giants hold up, the Nasdaq Composite and the S&P 500 can stand tall while smaller stocks lie on the floor, wondering whether anyone has the decency to dim the lights.
Under the surface, the damage is not subtle.
Roughly 45% to 50% of Nasdaq-listed stocks are already in bear markets, down 20% or more from their 52-week highs, while another 35% to 40% are in technical corrections, down between 10% and 19.9% from their highs.
Every day, another headline proclaims that “tech is soaring.” What they really mean is Big Tech is soaring. Strip out the mega-caps, and the sector suddenly looks a lot less invincible. Most of the gains are still coming from a handful of companies worth more than the GDP of many countries. (Source: Bloomberg)
That means roughly 80% to 90% of Nasdaq stocks are at least 10% off recent peaks, even while the broad index remains supported by the biggest names. The S&P 500 looks healthier by comparison, with roughly 20% to 25% of its components in bear markets and another 30% to 35% in correction.
Richebacher distrusted index-level prosperity because indexes mask the underlying reality. A narrow market is the classic late-bubble condition, where liquidity crowds into the sacred names while the rest of the list quietly expires.
He made a similar argument during the dot-com era.
In January 2001, he asked whether America’s boom rested on real technological transformation or on “the most reckless money and credit creation” generating a maladjusted bubble economy.
That analogy fits the AI market uncomfortably well.
If most Nasdaq names are well below their highs while the index remains levitated by the giants, the useful question is not whether the tape looks strong from a distance; the useful questions are where broad profit growth is appearing, where self-financing investment is taking place and where productive capital formation exists outside the favored monopolies.
🧮 The Crack-Up Litmus Test
A classic crack-up boom would look different.
If investors were genuinely fleeing the dollar and rushing into equities as a broad refuge from currency debasement, money would not concentrate only in a handful of cash-rich mega-cap companies. It would spread across mediocre businesses, capital-intensive businesses, small businesses, cyclical businesses and speculative businesses because the point would no longer be to find the best business.
The point would be to escape money itself.
That is not what the present breadth data show. Investors are still punishing weaker balance sheets, fragile business models, speculative growth stories and companies dependent on future financing, while rewarding a narrower group of dominant firms with cash, earnings, market power and exposure to the AI buildout.
Richebacher would probably reframe the question this way: Is this the beginning of a crack-up boom or merely another asset inflation built on credit, leverage and speculative narrative, still vulnerable to debt deflation?
That distinction matters. A crack-up boom rewards real assets when money dies. A debt deflation destroys speculative assets when credit dies. Two vastly different outcomes.
🏦 The Fed Trap and the Credit Question
A true crack-up boom would require a much larger monetary break.
The Federal Reserve’s balance sheet remains around $6.7 trillion, down from its $9 trillion peak but still far above pre-crisis norms. M2 money supply stands near a record $23.05 trillion and continues to grow at roughly 5.5% year over year, indicating how much monetary residue remains from prior rescue operations without signaling the public has begun to flee money.
The Fed’s balance sheet would need to shift from a tool of temporary stabilization into a mechanism for permanent government survival. That would happen if Treasury issuance became too large for private and foreign buyers to absorb at reasonable yields, forcing the Fed to step in as buyer of last resort.
Every time the Fed hints at discipline, its balance sheet quietly starts creeping higher again. The Fed wants investors to believe it can keep inflation under control while quietly supporting markets whenever things get uncomfortable. That may be possible, but history suggests you can only thread that needle for so long before one side of the trade wins. (Source: Bloomberg)
In that environment, the Fed’s balance sheet could move back through its old $9 trillion peak and toward $15 trillion or $20 trillion if open-ended quantitative easing became the only way to finance deficits and prevent rates from breaking the government’s interest expense. M2 would also need to accelerate far beyond today’s roughly 5.5% growth rate, especially if monetary expansion were paired with fiscal programs that put new money directly into consumer bank accounts.
Dr. Richebacher would accept those monetary markers, but he would keep dragging the conversation back to credit quality. The decisive question is not only how much money exists, but what kind of credit has been created, who received it, and whether the borrowed funds financed productive income or merely inflated claims on existing assets.
In 2007, leaning on Hyman Minsky’s distinction, he emphasized the danger of collateral-value lending over cash-flow lending. When bankers lend against expected asset prices rather than actual cash flows, the financial structure becomes fragile because credit no longer rests on income; it rests on the assumption that someone else will later accept a higher valuation.
That ghost haunts the current market. Corporate refinancing walls, private credit opacity, commercial real estate losses, Treasury interest expense, household delinquencies, speculative-grade spreads, bank balance-sheet exposure, foreign appetite for U.S. debt and AI capex financing all belong in the same anatomy lesson.
🏃 Money Velocity Rises Violently
A crack-up boom begins when the general public recognizes the monetary trap.
Inflation rises, the Fed tries to tighten, higher rates threaten banks and government finance, and the Fed then cuts rates or restarts QE despite persistent inflation because insolvency becomes the more immediate threat. At that moment, the public begins to understand that the currency is being sacrificed to preserve the financial structure built on top of it.
In normal conditions, money supply can grow while velocity falls. People save, banks hold reserves, businesses delay investment, and households leave cash in checking accounts, savings accounts, money-market funds or Treasury bills because they still believe cash will hold enough value to be worth holding.
During a crack-up boom, that belief breaks. Money velocity rises violently because nobody wants to hold the currency any longer than necessary; workers spend wages quickly, businesses shorten payment terms, lenders demand inflation protection, households buy goods before prices rise again, and institutions shift from cash balances into hard assets, scarce assets and anything that cannot be printed by a committee with fluorescent lighting and a dual mandate.
Gold, real estate, bitcoin and equities would not behave the same way for the same reasons. Gold remains the cleanest monetary refuge, real estate offers physical utility under government scrutiny, bitcoin can fall with risk assets before repricing as a scarce digital currency, and equities remain dependent on functioning markets, accounting, supply chains, legal systems, financing channels and consumer purchasing power.
🤖 AI and the Capital-Formation Test
The good doctor would not dismiss AI because it is a new technology.
He was not anti-technology. He was anti-delusion.
His critique of the 1990s tech boom was not that technology lacked importance, but that the wealth appeared mainly in stock valuations while broad real capital formation and durable profit generation lagged the story.
That is the test AI must pass.
The essential question is not whether AI is powerful. The essential question is who earns the return on the enormous capital being sunk into chips, data centers, power, software and model training.
Are AI revenues growing faster than depreciation, energy costs and capital spending? Are customers earning measurable productivity gains, or merely experimenting under executive peer pressure? Is AI capex funded from retained earnings, or from inflated equity valuations and cheap credit? Are we building productive capital, or stranded capital with better branding?
The mega-cap technology companies are the financial expression of the next industrial platform, with data centers, chips, cloud infrastructure, energy demand, software models and military applications all sitting inside the story.
Investors are willing to pay for a narrow group of companies they see as essential to the next economy, even as smaller technology names fall into bear markets around them.
As he’d done throughout the late 1990s and early 2000s, Richebacher might have called our AI boom a magnificent machine for capital consumption… until proven otherwise.
The proof will not come from product demos or another executive saying “agentic” while a slide deck glows behind him; it will come from cash flow, retained earnings, productivity, margins and investment that finances itself.
🧭 The Second-Half Crack-Up Watch
The crack-up boom thesis remains a Grey Swan because the macro conditions that could activate it are visible.
The public debt burden is visible. The large money supply is visible. The Fed’s enlarged balance sheet is visible. The political pressure to avoid recession is visible. The temptation to use monetary policy to support government finances is evident. The preference for asset inflation over austerity has been visible for a generation.
The market action, however, still shows selectivity rather than monetary panic.
The second half of 2026 should be watched through market breadth, monetary credibility and credit quality.
A failed Treasury auction, a sudden spike in yields, renewed stress in banks, emergency QE despite sticky inflation, a sharp acceleration in M2, a visible jump in money velocity, widening speculative-grade spreads, foreign selling of dollar claims or obvious strain in private credit would change the character of the market.
Hard assets deserve the same attention.
Gold rising because central banks diversify reserves is one thing, while gold rising as bond yields rise, the dollar weakens, M2 accelerates and the Fed expands its balance sheet is another; bitcoin rallying because risk appetite returns is one thing, while bitcoin rallying as confidence in fiat policy deteriorates is another.
🧨 Where We Are Now
The 2026 market has not yet behaved like a classic crack-up boom.
It has behaved like a concentrated AI-led market with substantial hidden damage, a large monetary overhang, a stretched fiscal position and a public still willing to hold dollars, Treasuries, cash balances and money-market funds. Investors are not indiscriminately buying productive assets to flee the currency; they are crowding into the companies they believe can survive, dominate or profit from the next platform shift.
That still leaves plenty of risk.
If the mega-caps stumble, the index loses its disguise. If the Fed is forced to protect the Treasury market while inflation remains uncomfortable, the monetary conversation changes. If AI returns disappoint, capital spending becomes harder to defend. If credit tightens, private valuations become harder to carry.
The market is not yet the crack-up boom.
The market is the waiting room.
~ Addison
P.S. We were never able to finish the manuscript for the Bernanke Fed critique. It’s a shame. His archives remain a stellar critique on the flow of money, speculation, credit and debt amid tech booms… and busts… of our current global financial landscape.
He might even agree with Kevin Warsh today. If credit tightens, AI returns disappoint, or foreign capital demands higher compensation for financing U.S. deficits, the market’s narrow magnificence becomes a trapdoor.
