The Puck Newsletter
December 2025
 
The Slow Unraveling: Why 2026 Will Require Discipline, Not Drama
 

The economy doesn’t break all at once. It weakens as fields do when they’ve been over-tilled: slowly, predictably, and according to laws older than any central bank. For more than a decade, we pulled record harvests from financial soil—zero rates, stimulus injections, meme bubbles, AI manias, tariff cycles, and an everything-bubble in assets. The law of the farm still governs everything: you cannot harvest indefinitely without restoring the field. If 2024–2025 were years of forced yield, then 2026 is shaping up to be the year where the soil pushes back.

This isn’t a doom call. It’s a discipline call. What follows is a framework for how the next 18–24 months are likely to unfold—through liquidity, credit, tariffs, AI, household behavior, and policy. None of these forces alone cause a downturn. But together, they create a world where the best outcome is a slow, grinding reset instead of another sugar high.

Liquidity Is Draining from the Edges First
Stress almost never starts at the center. It shows up at the edges first, in the parts of the system that are easiest to lever and hardest to see. In this cycle, those edges are crypto, margin leverage, and non-bank credit.

Bitcoin’s slide from its highs has already erased hundreds of billions in paper wealth and, more importantly, collateral value. Ten years ago that would have been a sideshow. Today it is embedded in the plumbing. Hedge funds post Bitcoin as collateral against derivatives exposure. Family offices pledge it to access private-credit structures. Some non-bank lenders quietly treat it as part of the cushion behind their book.

When that collateral falls 25–30% in a matter of weeks, no one needs to panic for conditions to tighten. Risk desks don’t argue with charts—they cut lines. Financing haircuts go up. Appetite for new deals silently shrinks. The overall Fed funds rate and the 10-year Treasury yield may barely budge, but the effective risk rate for marginal borrowers and speculative positions moves higher. That is invisible tightening.

The Wealth Effect Is Reverse-Engineering the Cycle
Bitcoin’s decline has now erased between $800 billion and $1 trillion in market value from its October peak. Instead of speculation returning to planet earth, it’s collateral evaporation inside hedge funds, family offices, and non‑bank lenders who increasingly leaned on crypto as part of their capital stack.

But crypto isn’t the only asset deflating. According to Zillow’s most recent national dataset, 53% of U.S. homes have declined in value over the past year, with the average drawdown running about 9–10%. Housing — the largest store of household wealth in the country, estimated around $55 trillion — is now participating in the correction. When the primary asset on household balance sheets softens, the wealth effect turns negative. Families feel poorer, borrowing power shrinks, consumption pulls back, and HELOC-driven liquidity dries up.

This matters because it broadens the correction from speculative assets into the mainstream economy. The everything‑bubble isn’t deflating at the edges anymore; it’s migrating into the center of household wealth.

The Commercial Real Estate Wall Is a Calendar Problem, Not a Mood
Debt by itself doesn’t cause recessions. Maturity walls do. The U.S. commercial real estate market sits on a mountain of loans that were underwritten in a different world—when offices were full, money was cheap, and cap rates were compressed to the floor.

Across banks, insurers, CMBS, and private lenders, there are trillions of dollars of CRE loans outstanding. A large chunk of that comes due in 2025–2027, with 2026 as the peak. Office values in many coastal metros are still 25–30% below 2019 levels. Refinance coupons have jumped from 3–4% money to 6–8% money. Banks are under pressure from regulators and investors to de-risk, not extend.

Extend-and-pretend bought time in 2023–2024. It did not fix the math. If the underlying building is worth less and the new interest cost is higher, the missing piece is equity—equity owners don’t have and are increasingly unwilling to put in. Even if the Fed eventually stands up a facility to ease CRE stress at the bank level, it cannot transform Class-B office space in a half-empty downtown into a 2019 pro forma. This is structural, not just cyclical.

Margin Debt: The Quiet Accelerant
While crypto and CRE get headlines, the old-fashioned accelerant in public markets is margin debt. Every cycle re-learns the same lesson: it’s not just what you own, it’s how you financed it.

Reported U.S. margin leverage is now sitting near all-time highs. That leverage rests on top of a market where a narrow group of mega-cap tech and AI names dominate index performance and flows. When those names rise, margin unlocks more buying power, which flows back into the same crowded names and strategies. When they fall, margin calls show up precisely when investors most want to hold, not sell.

Layer on the current market structure—options market-making, volatility-targeting funds, systematic trend strategies, and passive flows—and the picture is of a system that functions smoothly so long as prices go roughly sideways or up. A modest, sustained 10–15% drawdown in the broad indexes is not just a price event; it is a deleveraging event. The selling is not discretionary, it is forced.

That is why margin data matter less as a prediction tool than as a vulnerability map. High margin debt tells you the firewood is stacked. It doesn’t tell you when the match gets lit.

Tariffs and the Slow Squeeze on Households
While Wall Street stares at the Fed, Main Street is paying tariffs. Over the last several years, tariff policy has quietly reversed a multi-decade trend toward lower effective trade barriers. Across both parties and multiple administrations, tariffs have become a favorite tool—part industrial policy, part geopolitics, and part domestic signaling.

In practice, tariffs function as a stealth consumption tax. U.S. households pay more for imported goods and for U.S. products that rely on imported components. Small and mid-sized businesses see margins squeezed. Some pass those costs through. Others absorb them and reduce hiring or investment. Either way, the result is less free cash flow in the system.

The typical household doesn’t track tariff lines. They simply know that the cost of groceries, appliances, travel, and basic services has drifted higher faster than their sense of security. Survey work shows something we haven’t seen in a while: people delaying or canceling major purchases in spite of low unemployment. When you layer tariffs onto already elevated living costs and higher interest expenses on revolving credit, the slow squeeze starts to look a lot less slow.

AI: Real Engine, Real Constraints
AI remains the most powerful and most hyped growth engine of this cycle. It is also heavily constrained—by power, hardware, and people.

On the power side, data centers already consume a meaningful share of U.S. electricity demand, and credible projections point toward a dramatic increase as AI workloads scale. Utilities and regulators are scrambling to upgrade transmission and generation capacity. In some regions, local grids have effectively become the gating factor for new AI buildout.

On the hardware side, the cutting edge of compute remains expensive and, at times, bottlenecked. Top-end GPUs cost tens of thousands of dollars per unit. Supply has improved from the 2023 crunch, but it is not remotely in a commodity state. That keeps barriers to entry high and concentrates AI capability in the hands of a relatively small group of major platforms and well-capitalized users.

Then there is the human side. There are millions of open AI-related roles globally and only a fraction of that number of genuinely qualified practitioners. The result is a world in which large companies can afford to hire and train, while smaller firms struggle to translate AI stories into AI productivity.

So yes, AI has lifted capex and earnings and inspired a new wave of optimism. But it sits on top of grid bottlenecks, expensive hardware, and a structural talent shortage. That makes it a powerful growth engine—but not yet a stable foundation for the entire economy.
Households Are Quietly Rotating to SafetyThere is no public panic. There is private repositioning. One of the clearest tells is in cash and cash-like assets. Money-market funds have taken in trillions of dollars since rates lifted off zero. Households that spent a decade earning nothing on savings can suddenly get a real yield in short-term instruments.

Fed flow-of-funds data show households holding record levels of money-market balances, alongside laddered Treasuries and insured CDs. Incrementally, some 401(k) participants and wealth-management clients have been shifting one or two percentage points of allocation from equities to short-duration fixed income. Those changes sound small on paper. At the system level, they translate into hundreds of billions of dollars gradually leaving risk assets.

This is not fear. It is fatigue. After a decade-plus of central-bank put psychology, meme-stock spikes, and AI manias, many households are content to take 4–5% in a money fund and sleep at night. That is a different emotional regime than 2019 or 2021. When enough people quietly rotate that direction, the bid under the market looks the same—until it doesn’t.

The Fed and Congress Still Have Tools, Just Not Magic
Both the Federal Reserve and Congress still have tools. What they lack is the ability to repeal basic arithmetic.

Globally, total debt is now well north of three times world GDP. In the United States, federal debt held by the public is hovering around 100% of GDP and climbing. Net interest costs on that debt are competing with defense and entitlement spending for pride of place in the budget line-up.

In that context, the Fed can absolutely cut rates if the economy slows. It can introduce targeted facilities to backstop specific markets. In extremis, it can expand its balance sheet again to contain a crisis. Those actions can and will smooth the path of adjustment. They can change the angle of descent.

What they cannot do is permanently reflate asset values that were dependent on free money or transform bad collateral into good. Similarly, fiscal policy can still deliver targeted relief and investment incentives, but each new round of deficit spending adds to a debt trajectory that is already steep.

The era of costless rescue—where every wobble could be met with rate cuts and stimulus without obvious side effects—is over. Policy still matters. It just operates under tighter constraints.

Why 2026 Is the Convergence Point
None of these forces—crypto deflation, CRE maturities, margin leverage, tariffs, AI bottlenecks, household rotation, and policy constraints—cause a downturn by themselves. They matter because they converge on the calendar.

2026 is the first year where all of the following line up:
• A meaningful liquidity drain from speculative assets and non-bank credit.
• A peak in commercial real estate and private-credit maturities.
• A consumer that has been absorbing higher prices, higher interest costs, and tariff-like taxes for years.
• A public market that remains expensive by historical measures and heavily concentrated in a few stories.
• A policy toolkit that still works, but with narrower room for error.

That is why the most realistic base case for 2026 is not an Armageddon collapse or a soft-landing fairy tale. It is a forced fallow year: a period in which the system has to rest, deleverage, and rebuild. Some assets and strategies that depended on constant multiple expansion and cheap funding will not survive in their current form. Others—those with real cash flows, modest leverage, and genuine productivity gains—will come through stronger.

In other words, the law of the farm comes back into view. You don’t get to harvest forever without reinvesting in the soil. For fifteen years, we treated monetary and fiscal policy as a way to cheat that law. 2026 is the year where we are likely to be reminded that the law still holds.
The next 18 months are a window, not a verdict. For investors, that means reducing dependence on leverage and short-dated funding, owning assets with real cash flows, and stress-testing portfolios against higher real yields and lower multiples. For businesses, it means terming out debt, cleaning up capital structures, and investing in AI where it actually improves productivity instead of just decorating a pitch deck.

For policymakers, it means treating tariffs and deficits as trade-offs, not free lunches, and using what’s left of this cycle to rebuild the field instead of trying to squeeze one more bumper crop out of exhausted soil.

Cycles don’t end in slogans. They end in math. The math of 2026 is already visible. The only real question is whether we use this window to restore the field—or wait and let the field make the decision for us.

 

In this episode of The Puck, Jim talks with Francis Fukuyama — author of The End of History and the Last Man — about the fragility of liberal democracy in an age of rising authoritarianism and deepening polarization. They discuss political decay in the U.S., geopolitical threats from Russia and China, and the outsized influence of social media. Fukuyama also shares a practical vision for rebuilding effective governance through an “abundance agenda” that cuts through gridlock and proves democracy can still deliver.

WE CAN ALWAYS DO MORE

 

This month The Puck is highlighting Carnegie Endowment for International Peace.

In 1910, the Carnegie Endowment for International Peace was founded as a new institution that would promote international cooperation by advancing knowledge and building relationships around the world.

Since then, the Carnegie Endowment has empowered generations of world-class policy experts producing research and actionable ideas to help address the world’s most challenging problems.

Carnegie Endowment for International Peace, is a 501 (c) (3) organization, and donations are tax-deductible.