The bond market may hold the power to dethrone kings, but its timing is impossible to predict. Finance runs on Newton’s logic until Darwin interrupts.

Global debt has soared to $325 trillion, with the U.S. government alone accounting for $36 trillion. Have you ever wondered why the debt-to-GDP ratio keeps rising?

Because no one truly repays debt — they roll it over. When a government borrows for two years, it operates on the assumption that when the loan matures, lenders will renew it.

But the availability of new debt depends entirely on the lender's sentiment on the day of renewal. And those sentiments are shaped by herd mentality, not rational calculation.

When the borrower’s thinking misaligns with the lender’s feelings, all hell can break loose. The borrower defaults, and the financial system stutters, triggering a domino effect.

We can model future thinking, such as cash flows, ROI, and ROE, using machines. We cannot model future feelings such as fear, confidence, or panic. These remain stubbornly unpredictable.

“Thinking” belongs to Newton.
“Feeling” belongs to Darwin.

Financial markets are Darwinian in the short term, swayed by sentiment and stories, and Newtonian in the long term, underpinned by the quality of earnings, cash flows, and returns.

So, how do you prepare to survive the Darwinian mood swings?

Minimal debt. A diversified, liquid asset base.

Japan is home to over 140 businesses that are at least 500 years old. Some have operated continuously for more than a millennium.

These ultra-durable enterprises, known as "Shinise", tend to share a common characteristic: they hold a large liquid asset base, such as cash, and no debt.

Debt itself isn't inherently evil.

As debt increases, your ability to withstand negative events beyond your control diminishes proportionally. Debt amplifies both gains and losses, but only losses can destroy you.

To maximize longevity and returns, you must operate in both artistic and scientific modes.

Views are personal and should not be considered investment advice.

Credit: President Woodrow Wilson for the "Newtonian and Darwinian framework" and Morgan Housel for the Japanese "Shinise" enterprises.

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