It is hard to keep track of significant changes when you are not paying attention, but it can be even harder to keep track when you are wide awake and alert, yet trapped in the illusion of an expired era. Take the real-life example of Hiroo Onoda, a soldier in the Imperial Japanese Army. In December 1944, he was tasked with defending a Philippine island from the Allied invasion and ordered never to surrender. The mission failed, the island fell, and the war officially concluded by August 1945. Yet, Onoda took to the jungles and kept “fighting” a non-existent war until March 1974.
While a few of his comrades who had initially followed him and engaged in guerrilla warfare with locals, defected or died over the years, he went on relentlessly. Throughout those three decades, every effort to communicate that the war was over—via dropping leaflets and sending search parties—was dismissed by him as an enemy hoax. He refused to accept the paradigm of the new world until his original commander (who by the way had surrendered soon after giving orders to Onoda to not surrender) finally tracked him down and ordered him to stand down. His stubbornness to not accept reality or at least be open to the possibility that things could have changed had staggering consequences.
A similar stubbornness could be playing out in stock markets today where one era may have ended and another on course. In an article titled ‘One up on the Great Humiliator’ published in our Big Story section in bl.portfolio edition dated January 4, 2026, we had mentioned in our equities outlook that “As markets enter 2026, it is the most complicated environment in years and investors will have to play it by the ear.”
While optimism amongst markets participants was abounding with lofty year-end Sensex and Nifty targets, we had cautioned against it stating that few factors — tightening global liquidity that was impacting capital flows and valuations were risks to factor in while making investing decisions. We had also mentioned that the AI bubble and worsening geopolitics clouded the outlook further (https://tinyurl.com/greathumiliator). With these factors impacting markets this year, one more challenge has got added – the possibility that the global markets could be witnessing a regime change from easy money to hard/tight money. A world where the cost of capital is determined by market demand and supply, and not by distortions created by global central banks – this probably is the most important message to take away from the bond tantrums playing out in developed countries today.
Consequently, the hangover effects of the era of easy money that was seeded by the central banks in the aftermath of the global financial crisis and subsequently morphed into the most important force driving markets over the previous decade may have ended. Irrespective of whether market participants acknowledge or not, markets will eventually have to adjust. To understand how this regime shift may impact markets, let us first understand how the reverse played out.
When a century-old playbook flipped
It is said that monetary policy impacts the economy with long and variable lags. While this was often said in the context of influencing the level of inflation and economic activity, it has also had its impact on investor sentiment and decisions. For example, for many years after the global central banks embarked on the zero-interest rate regime and quantitative easing, market valuations continued to remain modest. Few years during economic recovery from troughs of global financial crisis the S&P 500 valuations remained modest (refer Phase 1 in charts 1 and 2). Back then, markets were still under the hangover of the era prior to 2007 when the cost of capital was more market-determined and less distorted by central bank actions.
As the phase continued, markets got emboldened to the new era, and probably rightly so. After all, money chases yields all the time except in times of great fear, uncertainty and doubt (FUD). But the central bank backstop laid to rest all the FUD. Equity yields (1/PE) was substantially superior to zero to marginal yield on bonds. However, higher the equities went and the valuations moved up, equity yields still remained superior and attractive versus bond yields (see charts 3 and 4). As years went by, markets and many investors adjusted to the new normal. There were also a few who did not adjust, famous ones amongst them as well.
Take John Hussman, for example. A market veteran with an impeccable ability to pick value stocks and make prescient bubble calls had a challenging time last decade. Just three days before the dotcom bubble peaked on March 10, 2000, he published a note warning that ‘valuations will begin to matter with a vengeance’ and based on his valuation analysis, warned of potential 65-83 per cent decline in technology stocks and he also added ‘If you understand values and market history, you know we’re not joking.’ And so prescient he was that the tech-heavy Nasdaq 100 index fell 83 per cent from its peak during the 2000-02 bear market. Similarly in April 2007, in his investor newsletter at the peak of the housing bubble, he noted, ‘But to rule out a decline of 30-40 per cent on the S&P 500 would be to rule out a move to valuations that have historically been standard, normal, commonplace.” While S&P still managed a 10 per cent gain from its April 2007 levels during the course of the year, it did fall 50 per cent from April 2007 levels to its March 2009 trough.
However, in the era of distorted cost of capital due to central bank interventions, his view in 2014 that the US markets were in a bubble and that it could be worse than 1929, fell flat. Markets continued to compound through the rest of the decade. Years later, in a note titled, ‘Being wrong in an interesting way’ in May 2017, he acknowledged his errors stating – ‘Clearly, our persistent defensiveness in response to overvalued, overbought, over bullish conditions was wrong in the face of zero interest rate policy’ and ‘The lesson was that in the presence of zero interest rates, yield-seeking speculation can persist even in the face of obscene valuations and recklessly overextended conditions’. In May 2024, in another note, he reflected on his past calls gone wrong stating, ‘My openly admitted error in the face of zero interest rate policies was to believe that speculation still had a limit, as it historically had.’ This was in reference to the fact that while history served as an useful tool to make market predictions, in the context of the regime change to the era of zero interest rates and liquidity gush, which had no parallels in history, past data and analysis were insufficient.
Another example is Jeremy Grantham (Co-Founder of global asset management company GMO), a storied value investor with a stellar record for prescient market calls till early last decade. True to his conviction in value investing, he stayed out of irrationally-priced growth stocks during the dotcom bubble. Consequently, in the run-up to the last 15-20 months of the dotcom bubble peak, the asset allocation division of GMO, which he ran, lost half of its investment book as investors lost patience due to his funds’ underperformance and withdrew their capital. Although under tremendous pressure from investors to pivot to buying the dotcom stocks that were in bubble territory, he stayed put. In May 2000, in a debate with dotcom bull Henry Blodget, he made a point that sooner or later, the S&P 500 would decline 50 per cent and the Nasdaq 70 per cent from their highs. He couldn’t have been more right and the breaking of the bubble in 2000 turned out be a great vindication of his value-investing principles.
He, too, has suffered a similar fate as John Hussman when it came to his bubble calls over the last 10 years. Unfortunately, there are more tragic cases like that of Charles de Vaulx. A famed value investor with solid reputation, the asset management firm he co-founded – International Value Advisors had managed around $20 billion in assets at its peak, but the AUM had dwindled to around $2 billion by end-2020/early-2021 as value funds underperformed even more after the giant monetary and fiscal stimulus unleashed in 2020. After liquidating his fund, one April afternoon in 2021 he walked into his 10th floor office in Manhattan and jumped to his death.
Getting outfoxed
Thus, many of the best in class in the investing world got outfoxed in the era of easy money. The market structure changed so much that in recent years, good news on the US economy was greeted with down markets while negative news was greeted with a positive reaction. For example, a weak monthly jobs data in the US (less jobs created), which ideally indicates a weaker economy, would be greeted at market opening with bond yields going down (Fed less likely to raise rates) and stock markets going up (this happened last Friday as well) — implying liquidity and interest rates mattered more for stocks than fundamentals!
Many who understood this early on and pivoted generated great wealth, but for some of those only till the interest rate shock of 2022 when the Fed embarked on its massive rate hike program after nearly 14 years of zero to low interest rate regime. A good example here is Arne Alsin and his fund Worm Capital. An article in the Institutional Investor explains how Arne Alsin pivoted after he realised his value style of investing was not working post 2008. So at some point he “just totally gave up and said, ‘I’m going to do the exact opposite.” He apparently discarded every investment principle he had once held. As mentioned in the article, ‘Alsin switched from being a classic Warren Buffett-style value investor who scoured balance sheets to being one who obsessively embraced the disruptive promises of Silicon Valley and the new economy.’ This enabled him to make early bets in stocks like Amazon in 2012 and Tesla in 2016, and consequently he made exceptional gains, beating his peers. However, things have got volatile for him since 2022.
Since the 2022 interest rate shock, while some of the funds like that of Alsin’s and Cathie Wood’s ARK Capital started facing pressure as growth fads without earnings (barring those in AI) have got crushed, broader markets globally have continued to trend up as the AI theme, stronger economic and earnings growth and passive or price/valuation-insensitive buying have continued to feed the market rally.
As mentioned earlier, interest rates act with long and variable lags not just in the economy but in stock markets and the sentiment surrounding it as well. As it did take three-five years post 2008 for broader markets to appreciate the zero interest rate regime, so too may be the case today. While interest rates started increasing in 2022, and have remained high, global 10-year bond yields today testing two-three-decade-old levels could be signals that the ‘long and variable lag’ effect is in its final phase.
Adapting to the new (old) normal
To the surge of easy money of the previous decade was added the force of fiscal profligacy, from 2020. While the cost of capital has been increasing since 2022, fiscal profligacy continues in many developed economies. Bond yields, today, are giving a push back to such fiscal profligacy.
In this context, investing decisions must include a debate on what is the right valuation to buy a stock when both – interest rates are higher than in the last two decades, and government spending probably gets curbed in reaction to the surging bond yields.
Investors need to be alert to possibly pivoting to the pre-2007 era investing style, if warranted. Investors in India must note that just as a rising tide lifts all boats, this had its impact across global markets including India with foreign flows chasing yields, making the demand-supply dynamics favourable for valuations to expand. Paint, FMCG, Private banks and IT Services stocks reaching obscene valuation levels in 2021 was not just about performance but also the global liquidity regime. The FII’s equity outflows exceeding a staggering ₹4 lakh crore over the last two years clearly indicate that cost of capital and valuation matter more than ever now in the last two decades.
As the new regime evolves, global and domestic capital flows are going to get rewired in ways that are hard to predict. In such an environment, absolute valuation and the margin of safety are factors that will matter more. Mean reversion in valuation, and corporate profit margins too may play out. Valuation averages of the last five years might be less reliable metrics given they played out in an era of higher liquidity and fiscal profligacy. So averages of the last many decades might matter more.
2008-25 was an era where more wealth was made in the stock markets than in the real economy. We are likely now shifting to an era where, for a while, more wealth will be created in the real economy than in stock markets (see charts 5 and 6)– implying valuation compression to levels that is more in sync with cost of capital in the new (old) era. As Milton Friedman said: The stock market and economy are two different things. The adjustment process likely has started. Those sleeping through, risk being the next Hiroo Onoda.
Published on October 3, 2026
