The word arrived near the end of a quarterly letter, set in capital letters, as though the author expected readers to skim the pages before it and wanted one token to survive the skimming. Elliott Investment Management had spent those pages cataloguing excess. Then it supplied a name for the mood it expects next.
The $80 billion activist fund told investors in its October letter that the current market resembles the Roaring Twenties that preceded the Great Depression, according to a report in The Wall Street Journal. Three conditions, it argued, have stacked on top of one another: a debt-fueled appetite for risk, infatuation with new technology, and a loosening of investment discipline.
“Almost all the alarms that precede a major bear market are ringing,” the letter said, according to the newspaper. The list behind that sentence is specific rather than atmospheric. Elliott cited an expanding federal deficit, inflation that has resisted the Federal Reserve’s campaign against it, and strains inside private credit portfolios that have grown faster than the machinery for valuing what sits inside them.
It also pointed at artificial intelligence, where model developers and the companies that supply them now invest in one another, where capital spending is increasingly financed with borrowed money, and where an organized backlash against the technology is beginning to take shape. None of those conditions is unusual on its own; the letter’s claim is that they are arriving together.
The firm’s shorthand for the resulting psychology is FOGO, for fear of getting obliterated. The letter argues that sentiment can rotate from fear of missing out to fear of being wiped out on the strength of one or two variables, and that investors who assume the turn will announce itself in advance are misreading how the previous several cycles ended.
Holding that view has a price. Elliott’s third-quarter return was roughly flat, and its gain for the first nine months of the year was under 2%, against a total return of about 13% for the S&P 500 over the same stretch, according to the letter.
Others see a similar shape in prices. Jonathan Krinsky, chief technical strategist at BTIG, noted that the Nasdaq 100 has fallen about 9% from its peak and that the Philadelphia Semiconductor Index has dropped below its 200-day moving average. A further decline, he said, could take the index into the 365 to 400 range. High-yield bond spreads average 340 basis points, the widest of the year, a sign that creditors are repricing risk ahead of equity investors.
Private credit is where the argument gets hardest to test. Loans made by funds rather than banks are marked by the managers who made them, at intervals, using models those managers control. When the underlying companies stumble, the adjustment arrives late. Interest can be paid in kind rather than in cash, which keeps a strained loan looking current on the statement an investor reads at quarter end.
The artificial intelligence section of the letter is, underneath the language about mania, an argument about accounting. If a chipmaker invests in a model developer that commits to buying its chips, and a cloud provider finances a customer’s compute contract, the revenue is real but the loop that produces it is narrow. Depreciation schedules set today on equipment that may be obsolete in three years decide what the reported profit of that loop looks like tomorrow.
Elliott’s record gives the caution weight. Founded by Paul Singer, the firm built its reputation on campaigns against sovereign debtors and on boardroom fights at industrial and software companies, and it publishes warnings of this kind rarely. A fund of its size cannot exit in a week, which makes the timing of a public letter as much a statement about its own book as about the market’s future.
The bull case is not frivolous. Earnings have kept growing, the advance in the major indexes has been broad, and the economy has absorbed higher interest rates without the recession that many forecasters treated as inevitable. Both readings can hold for a while, and the interval is where complacency gets set.
A defensive book in this market does not look dramatic. It looks like shorter duration in credit, a larger cash balance, options that pay in a selloff, and a shorter list of holdings that need a strong economy to keep working. The cost is paid in relative return every quarter the market rises, which is why few large managers hold the posture for long.
What the letter does not offer is a date. It describes a distribution of outcomes that has shifted rather than an event on a calendar, and it assigns the trigger to things that cannot be observed ahead of time: a credit fund that cannot meet redemptions, a refinancing that fails, one large borrower that stops paying.
For a manager who reports every quarter, being early and being wrong look identical for a while. That is why the argument is being made in prose rather than in public positioning. The claim is narrower than a sell signal: the cost of insuring against a bad outcome is now lower than the cost of being surprised by one, and the gap between those two numbers is where a portfolio gets built.
