The Edge of Belief: Reflexivity, Record Debt, and the Coming Inflection Point
Why the market rally feels unstoppable—until it doesn’t.
Rallying Against Gravity
The global financial system is staging a remarkable show of strength. Stock indices—from the S&P 500 to Japan’s Nikkei and Germany’s DAX—are hitting new highs or hovering close to them. The Nasdaq, fueled by an AI frenzy and megacap resilience, has defied a high interest rate regime. Equity volatility is near historic lows. Credit spreads are tight. Risk appetite, it seems, is back in full force.
Yet beneath this euphoria lies a dark and widening rift: the world’s total debt has soared to a staggering $315 trillion as of Q1 2025, according to the Institute of International Finance (IIF). That’s equivalent to over 330% of global GDP. Government debt alone accounts for over $90 trillion, with many advanced economies running persistent fiscal deficits even during periods of full employment. Meanwhile, interest payments on sovereign bonds are becoming one of the fastest-growing budgetary items, especially in the U.S., where the annual interest expense has breached $1 trillion.
In a rational world, such a debt overhang would weigh heavily on asset prices, triggering concerns about sustainability, default risk, and long-term stagnation. But we don’t live in that world.
We live in a reflexive system—a world in which perceptions shape reality as much as reality shapes perception.
And no one captured this feedback loop better than George Soros.
Reflexivity in Markets: A Quick Primer
Soros’s reflexivity theory challenges the classical economic assumption that markets are efficient processors of information and always gravitate toward equilibrium. Instead, he argues that in financial markets:
“Participants’ perceptions and actions influence the fundamentals they are supposed to reflect.”
This creates positive feedback loops, where distorted beliefs fuel actions that make those beliefs temporarily true—until the underlying reality breaks down and the feedback loop reverses violently.
In a reflexive market:
Perception creates demand.
Demand drives price.
Price shapes perceived reality.
And the cycle feeds itself—until it breaks.
We’ve seen this in everything from the 1999 tech bubble to the 2008 housing crisis. And we’re seeing it again today, in the most dangerous version yet: a market rally powered by record debt, central bank credibility, and a shared belief that the music will keep playing.
The Current Reflexive Loop: How It Works
1. Central Bank Omnipotence as the Anchor Belief
In the post-GFC world, and even more so after COVID, market participants have been conditioned to believe that central banks will always step in to support asset prices:
Low rates.
Quantitative easing.
Emergency facilities.
This belief in a perpetual “Fed put” became self-reinforcing: as investors grew more confident, they bought risk assets. As assets rose, financial conditions loosened. The economy looked stable, which validated the central banks’ actions, strengthening the belief.
Result: a reflexive boom underpinned not by fundamentals, but by belief in policymakers.
2. Debt = Stimulus, Not Risk
Instead of triggering concern, massive debt accumulation is interpreted as bullish:
Governments issuing debt = more fiscal stimulus.
Companies issuing debt = buybacks and growth.
Consumers leveraging up = higher consumption.
Market participants view debt as a growth engine—ignoring long-term sustainability. The very risks (e.g. crowding out, inflation, debt service costs) are ignored or downplayed, because they haven’t yet materialized.
3. Valuations Detach from Reality
Earnings growth has become secondary to narrative-driven rallies:
“AI will change everything.”
“Soft landing is here.”
“Inflation is falling.”
“Rate cuts are coming.”
These beliefs drive price action, and rising prices validate the beliefs—another reflexive loop. Today’s valuations, particularly in tech, exceed long-term averages even as earnings revisions remain muted and macro risk remains elevated.
The Moment of Truth: How Reflexive Loops Collapse
A reflexive boom is inherently unstable. The longer the feedback loop stretches reality, the more violent the reversal when it breaks. The trick is spotting that break—the inflection point where perception can no longer sustain price.
Here are the six key cracks in the narrative to watch for:
1. Loss of Faith in the Central Bank Put
What to watch:
The Fed refuses to cut even amid market stress.
ECB or BoJ surprise markets with hawkish pivots.
Dovish guidance fails to trigger rallies.
When investors start doubting the Fed’s ability (or willingness) to backstop risk, the entire narrative underpinning asset prices weakens. Reflexivity breaks.
2. Bad News Becomes Bad News Again
In a reflexive rally, weak economic data is bullish—because it implies policy easing. When that reverses, it signals a psychological shift.
What to watch:
Recession signals (e.g. weak payrolls, falling ISM) spark selloffs, not rallies.
Markets stop cheering rate cuts and start fearing why cuts are necessary.
This indicates the market is no longer trading on liquidity flows, but on growth fears. The story has changed.
3. Debt Becomes a Headline Risk
Right now, debt is largely ignored. That changes when:
Bond auctions begin to fail.
Rating agencies downgrade major sovereigns (and markets react).
Interest payments surpass major spending categories.
What to watch:
U.S. 10Y Treasury yield spikes despite falling inflation.
Sudden widening of credit spreads in sovereign or corporate bonds.
Emerging market contagion triggered by dollar strength and debt servicing strain.
4. Currency or Bond Market Cracks
Sovereign debt markets are the bedrock of the global financial system. If the bond market stops buying the story, it’s game over.
What to watch:
Treasury or JGB volatility (MOVE Index spike).
Japanese yen or Chinese yuan instability.
Central banks intervening to stabilize bond markets.
When faith in sovereign credit or currency is lost, the reflexive loop collapses into a credibility crisis.
5. Deterioration Beneath the Surface
Even as indices rise, internals may signal weakening:
What to watch:
Fewer stocks participating in rallies (breadth divergence).
Weak volumes on up days, heavy volume on down days.
Underperformance of small caps, high yield, or cyclicals.
Reflexive rallies often end with narrowing participation and hidden fragility. When the illusion breaks, the fall is swift.
6. Narrative Fatigue or Incoherence
Every bubble ends in narrative exhaustion. When the story stretches too far or becomes contradictory, belief fades.
What to watch:
Analysts claiming “everything is bullish”: AI, China, earnings, rate cuts, soft landing—all at once.
Meme stocks or illiquid assets outperforming high-quality ones.
Consensus reaching extremes: everyone’s bullish.
Reflexivity thrives on belief. When belief becomes absurd, even bulls start to step back.
Reflexivity Is a Double-Edged Sword
We are witnessing the peak of a reflexive boom—where perception, policy, and price feed off each other in a self-reinforcing cycle. Markets have rallied against fundamentals, against gravity, and against historic levels of debt.
But reflexivity cuts both ways. When the dominant narrative falters—whether through central bank missteps, debt market stress, or narrative exhaustion—the same feedback loop that inflated valuations can unwind violently.
George Soros’s warning is not about forecasting the top. It’s about recognizing the dynamics that make markets unstable, and watching for the moment perception turns from support to liability.
“The illusion of stability is often the prelude to crisis.” - Hyman Minsky
Stay alert. Stay skeptical. Watch the tape—not the headlines.
Markets don’t just move on data — they move on perception. If you’re watching other signals or cracks in the narrative that weren’t covered here, drop them in the comments. What do you see as the canary in the coal mine? A shift in credit markets? A subtle change in investor tone?
Let’s crowdsource the signs of the next turning point — and stay ahead of the curve.