Is Your Debt a Trap or a Secret Superpower? Understanding Leverage in an Inflationary World

Talking about debt used to feel a little taboo, especially when it came to personal finance. Now, it seems like everyone is talking about using leverage as a strategy for personal investment, not just for big businesses. The big question we face is: when does borrowing money become a strategic move, and when is it a recipe for disaster? Here's the thing: whether debt is good or bad hinges almost entirely on the economic environment we are currently navigating .

Let’s break down the relationship between debt and inflation, because it’s a crucial concept to grasp. When we experience inflation, asset prices—the stuff you buy, like houses—go up, but the value of the currency itself goes down . What's interesting is that this devaluation of currency actually reduces the real burden of your fixed debt. Think about it: if you took out a $100,000 loan, and over ten years, inflation causes the value of a dollar to drop significantly, the real cost of paying back that $100,000 has essentially melted away . I've found that this is why people who bought homes two decades ago with sizable loans often feel less burdened today; a loan that felt massive 20 years ago now seems manageable given today’s elevated asset prices .

This leads us to a crucial caution: debt is a lot like fire. It can be incredibly useful and necessary—you need it to cook, but it can also burn down the house . For seasoned investors who can control the risk, using manageable levels of debt for necessary long-term purchases, like a primary residence, can be a sound strategy to mitigate the long-term impact of inflation . However, if asset values drop—a deflationary environment—the opposite happens, and the real burden of that fixed $100,000 loan shoots up, making panic sales at the bottom (selling low) much more likely for those who borrowed heavily . The surprising insight here is that when asset prices fall, the value of the currency rises, effectively making your debt feel heavier, which is why beginners should be extremely cautious about using borrowed money during market exuberance .

In an Inflationary Environment, Which Investments Win (and Which Are Left Behind)?

If we look at high inflation environments, especially during periods of stagnant growth—a condition we often refer to as "stagflation"—traditional investments like stocks and bonds tend to struggle. We need to look back at the 1970s in the U.S. to see a real-world example of this economic conundrum, fueled by events like the Oil Shock . In that scenario, while inflation soared, corporate profits were squeezed because even though revenues might have slightly increased, the cost of doing business (expenses) rose even faster, leading to lower margins and ultimately, weaker stock market performance . On the bond side, interest rates had to be aggressively hiked to combat the rising consumer prices, which in turn causes bond prices to fall, leaving investors in both major asset classes in a bind .

So, if traditional assets struggled, where did investors find refuge? The clear winners in the 1970s were tangible assets, particularly commodities and precious metals . Think about it: regardless of economic slowdowns, people still need to eat, and industries still require raw materials like copper, wheat, and, crucially, oil . The price of crude oil, for example, skyrocketed from about $3 per barrel in the early 1970s to $44 by 1979 . Even more astonishingly, gold prices, which were around $50 per ounce, climbed dramatically, eventually hitting $700, representing a twenty-fold increase—outperforming even oil .

From my experience advising clients, this is where the concept of the “alternative asset” comes into play. While stocks and bonds are the "main dishes" of any portfolio, assets like gold, silver, and commodities act as "side dishes" or insurance against scenarios where inflation runs rampant and growth stalls . The key takeaway, however, is that while these assets offer crucial diversification, they shouldn't become the entire focus. I always recommend placing just one or two “fish traps” (diversified alternative investments) in these areas, rather than trying to move your entire boat there, which ensures you capture those occasional large gains without overcommitting .

You Just Got Lucky—Now What? The Secret to Turning Fortune into Foundation

It’s happened to friends, colleagues, and maybe even you: a completely accidental win in the market. You threw a small amount of money at a stock or ETF based on a friend’s tip, and suddenly you’re up 50% or 100% . When this happens, people generally split into two camps: the aggressive ones who instantly believe they are market geniuses ("I must be a prodigy!") and start pouring every dime and borrowed dollar into the market, and the bewildered ones who nervously wonder what to do with this newfound, unexpected cash .

Here’s the counterintuitive advice for the lucky winners: view this windfall not as validation of your genius, but as an excellent, tax-free way to acquire seed money . When the market is booming, like during the early stages of a great rally, everything seems to go up. This environment can trick a beginner into believing they possess a "beast's heart" for investing, only to be caught off guard when the market inevitably changes its color and direction . The most surprising fact here is that this initial, easy success often leads to the worst long-term outcomes because it encourages two major, dangerous behaviors: concentration (putting all eggs in one basket) and aggressive use of leverage (borrowing) .

Instead of immediately betting bigger, let’s pivot and focus on studying. The goal now is to treat this seed money as capital that needs intelligent management, which requires a strategic shift from speculative gambling to disciplined investing . For instance, think back to the pandemic boom: everyone piled into certain tech and semiconductor stocks (the "untact" sector), which soared between 2020 and 2021 . But then, by 2022, the market "color" changed—the supply became saturated, and many latecomers who had leveraged up saw massive losses. The ultimate takeaway is that market conditions are never permanent. Use your luck as a foundation, not as permission to double down on risk, and always maintain flexibility to adapt to changing market environments .

Why Does U.S. Economic Growth Feel Like Our Global Thermostat?

Have you ever noticed how the U.S. economy moves, and soon after, everyone else seems to catch a cold? It’s often said that when America sneezes, other nations get pneumonia . And while that might sound dramatic, the data often confirms that when the U.S. market goes up by 10, we might follow with 7; but when they drop by 7, we sometimes crash by 20 . The key to understanding this discrepancy lies in how different national economies generate their growth, specifically by looking at their respective GDP components .

The U.S. economy, unlike many others, is overwhelmingly driven by internal consumption. Spending by U.S. consumers accounts for a staggering 70% of its GDP growth . This consumption base makes the U.S. economy incredibly stable; even during the Global Financial Crisis, U.S. growth only contracted by about 1% . What’s interesting is that consumer spending rarely plummets dramatically year-over-year, which provides a resilient floor for the entire economy . In contrast, many Asian economies, including ours, are primarily driven by exports . This reliance means our economic health is directly tied to the demand—the consumption—of foreign buyers, particularly the U.S. consumer .

This structural difference explains why we watch U.S. employment figures and interest rate decisions so closely—U.S. consumer health dictates our export performance . The surprise insight here relates to currency: due to our deep export ties, our economy’s fate is closely linked to the exchange rate. When the U.S. consumer stumbles, our growth variability is far greater than theirs, which is one reason global investors view U.S. assets as inherently more stable and, frankly, more attractive . This dependence has only increased lately; we've seen a shift where dependence on China (which kept us steady when the U.S. slowed in the past) has waned, while our trade surplus with the U.S. has significantly grown, effectively heightening our sensitivity to American economic movements .

The Everything Rally: Is Simultaneous Growth in Stocks, Bonds, and Gold Sustainable?

We’ve established that in normal times, different assets serve different roles: gold and safe-haven bonds often rise when the economy looks weak, and stocks rise when the economy looks strong. But right now, we’re seeing a global "Everything Rally"—stocks are up, commodities are up, and even gold is climbing high . So, what’s causing this unusual phenomenon where assets that are usually negatively correlated are all surging?

Here’s the simple explanation: too much money chasing too few assets—or, as I like to call it, the "flooding the landscape" effect . When central banks pump immense liquidity into the system (like the quantitative easing during COVID-19) and governments engage in stimulus, the capital has to go somewhere . When investors get overly optimistic about future growth (fueled by things like the AI revolution) and monetary conditions are easing (lower interest rates), a mentality takes hold that "cash is trash," and money rushes into anything that promises a return—be it equities, real estate, or precious metals . This rush is often magnified by the use of leverage—borrowed money—which pours even more fuel onto the fire, leading to every "puddle" on the economic landscape being completely submerged .

But we must remember that nothing lasts forever. When the tide eventually goes out, or the excess liquidity is drained, the most vulnerable assets are those that were inflated by the most speculative capital, especially those purchased with massive debt. These leveraged positions will suffer the biggest, most volatile drops—a sudden "gush" out of the pool—when the market inevitably corrects . For example, during a period of short-term gold price excitement, if too many people pile in using debt, any brief correction can cause a massive sell-off as they rush to liquidate to cover margin calls . From my experience, the biggest risk isn't that you miss out on the rally; it’s being caught in the crush when everyone tries to rush out of the same crowded exit door at the same time—like trying to go to Everland on Children's Day . This is why disciplined, long-term portfolio diversification must remain your guiding star, rather than succumbing to the temptation of speculative leverage during periods of extreme market optimism.