Will the future be another 'lost decade' for the US stock market? 1、 Review: The 'Lost Decade' of the 1970s From 1968 to 1982, the US S&P 500 index had almost no nominal growth; If inflation is taken into account, investors' actual losses can reach up to 60%. This period is referred to as the 'Lost Decade' by the US market. Over the past decade, the price to earnings ratio (PE) of the S&P 500 has been declining from approximately 19 times to a minimum of 7 times. In other words, the market downturn mainly comes from the contraction of valuations. The core driving force behind the valuation contraction is the sustained increase in the federal funds rate, which skyrocketed from around 4% in 1968 to 20% in 1981. High interest rates mean higher discount rates, which means that the multiple (PE) that investors are willing to pay for future profits will decrease. This is the fundamental logic of Investment 101. Why must interest rates be raised? The answer is to suppress the continuously soaring inflation. The root cause of inflation lies in the return of the value of the US dollar after being overvalued for a long time. In 1971, the Nixon administration announced the decoupling of the US dollar from gold and the collapse of the Bretton Woods system. The reason is that the United States has a fiscal deficit and currency surplus due to the Vietnam War and "Great Society" welfare spending, and the issuance of the US dollar has far exceeded the support of gold reserves. Countries began to panic and sell US dollars and exchange them for gold, resulting in a "double loss" of gold and US dollars. The rapid depreciation of the US dollar after its detachment has led to an increase in the prices of imported goods, resulting in input inflation. This series of reactions ultimately led to the Federal Reserve having to violently raise interest rates to curb inflation, thereby lowering asset valuations. Therefore, this' lost decade 'is essentially a process of credit reassessment after the structural overvaluation of the US dollar. 2、 Is the US dollar overvalued today? Today's US dollar, although no longer anchored to gold, is even more difficult to detect whether it is overvalued than it was back then. At that time, it was only necessary to observe the ratio of gold reserves to currency issuance to determine whether the US dollar was overdrawn. But nowadays, the US dollar is a fully trusted currency, and its overvaluation must be judged comprehensively based on structural confidence, capital structure, and global usage preferences. Reuters' analysis article in April 2025 pointed out that the real effective exchange rate (REER) of the US dollar against a basket of major currencies is currently overvalued by about 19%, which is close to the high point of the Internet foam before the Plaza Accord in 1985 and in 2000. But what's even more dangerous today is: The net holdings of US assets by foreign investors have reached about 80% of US GDP, much higher than in 1985 and 2000. This means that once the US dollar experiences structural depreciation, the resulting capital shock and financial repricing will far exceed any historical event. In addition, the gap between the nominal GDP share of the United States globally (about 26%) and the PPP GDP share (about 15.5%) continues to widen. By 2024, this proportion will reach 1.68 times, the highest in history. This gap indicates: The global capital's preference for US assets and the financial inflows brought about by the "dollar pricing power" are systematically pushing the US dollar into an overvalued range. 3、 What triggers the revaluation of the US dollar and capital reversal? If in the past 30 years, the United States has been able to "expand its currency without fear of inflation" for a long time, partly due to globalization lowering commodity prices and input costs; So today's trend of "anti globalization" - including supply chain relocation, geopolitical fragmentation, technological blockades, and tightening immigration - is driving up prices of goods and services. Especially in the Trump era and its continued political logic, the United States is taking the initiative to "dismantle" its own global free order, including withdrawal from the TPP, sanctions against many countries, tax protection, and restrictions on immigration. This policy path may activate a potential negative flywheel: 🔁 Negative cycle of USD asset inflation: one ️⃣ Rising inflation in the United States → cost push, pressure on corporate profits two ️⃣ Overestimation and decline in stock market → Davis double-click triggers valuation correction three ️⃣ Foreign capital withdrawal → US dollar depreciation, financial market volatility four ️⃣ Input based inflation reflux → Import becoming more expensive, pushing up inflation again If the flywheel is activated, the US dollar credit, US stock valuation, and global capital allocation will all face structural reassessment. This is not only a financial event, but may also constitute a framework similar to the "institutional stagflation" of the 1970s. 4、 Is the risk already present? Since April 2025, there have been signs of localized market reactions: US stocks, US bonds, and the US dollar have all fallen, while gold and European stock markets have strengthened, indicating that some funds have begun to "withdraw from the United States" and seek alternative anchors. Although short-term market sentiment is still fluctuating, from a medium-term perspective, this may be an early signal of a loosening of the 'dollar belief system'. 🔚 Conclusion: Today's US dollar is not anchored to gold, but to something even more fragile - the overall trust of the world in the US system, economy, finances, and financial system. When trust begins to waver, value will be reevaluated. At that time, we may look back on today again, just like when we looked back at Nixon's decoupling in 1971, and realize: "That year, history quietly turned 😂）