Terror at the Edge of the Abyss
$850 for a week in paradise... 'Flying' 50 feet above the sand... Killers at the edge of blackness... Investors are swimming toward the unknown... We've been lucky – so far... The skill nobody has anymore...
East Beach will kill you if you're not careful...
San Salvador is an undeveloped Bahamian "out island," far from the tourist centers in New Providence (Nassau) and Grand Bahama (Freeport).
The island sits atop a 15,000-foot undersea mountain and today has just 1,200 permanent residents.
In early 1980, I was an 18-year-old freshman at Maryland's Towson University when I saw a flyer on campus about a Biology Club trip to the Bahamas. I took a job selling tickets to the Baltimore County policeman's ball and raised the $850 I'd need for the trip.
Divers and snorkelers who visit San Salvador and swim past East Beach's coral reefs often feel what they call underwater vertigo. And unlike its land-based counterpart, it's an exhilarating pleasure.
On a bright, clear day, the white, pure calcium-carbonate sand reflects the sun brilliantly... and the water is so clear that it disappears below you. Swimming across the surface, you feel weightless. It's like you're suspended in midair, flying lazily along 50 feet above a desert.
When my school group visited East Beach, three of us broke away. We swam past the reefs and were soon flying over this flat shelf of white sand. Within minutes, we were perhaps 50 yards from the edge of the shelf. Beyond it, the sunlight was consumed by a black abyss nearly 3 miles deep.
I stopped swimming, feeling like I'd gone far enough. Another friend stopped a few feet ahead of me. Our companion kept going. As he swam toward the edge of the shelf, he descended 10 to 12 feet below the surface.
He stopped suddenly, assumed a defensive posture with his legs in front of him, and started pushing himself slowly backward with his arms. I looked past him down toward the edge of the undersea cliff and saw why...
He'd come upon two agitated-looking reef sharks...
The sharks weren't coming our way, but I didn't care. I started backing up, too. And once my friends caught up with me, we all turned around and swam straight back to shore.
We laughed about it later, but the teachers leading our group weren't thrilled with our shenanigans and warned us not to stray off again.
It was good advice. Sure enough, a day or two later, while swimming through an inland creek, we came upon a barracuda 5 or 6 feet long. The teachers were swimming out front and slowly turned us all around.
Another danger at East Beach was the rip currents...
We visited on a calm day. But when the surf gets rougher, crashing waves relentlessly dump tons of water into the shallows between the reefs and the shore. The excess water forces itself back out through narrow gaps in the reefs, causing high-velocity rip currents, like high-pressure pipes moving water as fast as 8 feet per second.
They can easily grab someone swimming close to shore and pull them out past the reefs.
From there, on a rough day, the currents can take over and push you into the open ocean. You could easily be lost forever.
As I prepared to dive in at East Beach, nobody told me anything about sharks, rip tides, or ocean currents...
It's thanks to my ignorance that the experience was so exhilarating as I "flew" through the water over the pristine white sand below. It was also ignorance that led to the sharks.
I'd never had either experience and couldn't have anticipated having either one, since I didn't know anything about the place before I arrived.
What's more, my whole psyche simply had never been tuned to assessing such risks at all. The environment was too alien to my peaceful 18-year-old existence.
Now, the worst injury anybody suffered during the whole trip had nothing to do with the water or anything in it. As we rode back from the beach in the back of an open truck, a low-hanging palm leaf smacked a girl alongside the head at 40 mph.
Palm leaves to the head aren't something to think about when you drive around Baltimore. This girl never considered it as a possibility... like my innocence right before I flew through 50 feet of water, then stared at the sharks over the black abyss at East Beach.
We headed confidently into the unknown, with no thought that it might involve imminent danger to life and limb.
My mind was focused on massive sea cucumbers, fish of every shape and size, myriad undersea plant life, a cave filled with weird little sea critters, a small cay covered with iguanas, and many more dazzling sights that I no longer remember.
Every day brought a new discovery. It was mostly the safe sort of fun that's perfect for a curious 18-year-old college kid with more nerve than brains.
I left a familiar past behind me, romped carelessly through the present, and swam straight into a future I couldn't see until it was right in front of me.
Today, investors are also complacently moving toward a potentially dangerous unknown...
Like my easy life in Greater Baltimore, the market we've left behind has treated many people very well.
Since I visited San Salvador in 1980, the S&P 500 Index has risen more than 70-fold... from around 100 to its June 2 high of more than 7,600. Yes, the past 46 years were punctuated with notable bear markets in 2000 to 2002, 2007 to 2009, and 2022... but stocks soared to new heights after each one.
And with the S&P 500 within 2% of making a new high, it feels like we're still there.
In the decades before I landed on San Salvador, the inflation-ravaged market ratcheted sideways for a decade and a half, with a short few months of new highs in late 1972 to early 1973. It wouldn't do so again until November 1982.
Today, we have no cultural memory of the pre-San Salvador market. Even if you're old enough to have owned stocks back then, it's probably not on your mind today.
All investors know is that the market has been an incredible 70-plus-bagger over nearly five decades... And every time it falls, no matter how far it falls, you can't go wrong by just buying more, because eventually it'll make new highs again.
That bullish action is a universally shared myth embedded deep in our bones. We're all bullish all the time, whether we know it or not. How could it be otherwise? The market just goes up all the time, roughly a half-century of price data proves it, and everybody knows it.
The reality of danger is too foreign and unfamiliar for most folks to acknowledge.
The market's peaceful time is already in the past...
After decades of falling interest rates, the 10-year Treasury yield bottomed out at less than 0.5% in March 2020. Just three years after that, it had risen as past 5% in October 2023. It's about 4.7% today.
The consumer price index ("CPI") rose from 0.1% in May 2020 to as high as 9.1% in March 2022 – its highest level since about 18 months after I got back from San Salvador.
The average national 30-year fixed mortgage rate rose from as low as 2.7% in February 2021 to as high as 8% in October 2023. It's still prohibitively high for many would-be homebuyers today, at 6.8%.
You see? Things are already quite different than what came before.
The market keeps making new highs despite inflation, higher interest rates, the Iran war, and higher oil prices... When the market shrugs off these risks, it fuels continued complacency.
We're having a great time, trundling along a palm tree-lined road in an open truck at 40 mph, blissfully unaware of even the possibility of a sharp whack on the side of the head.
The idea that the situation is even riskier and that we're swimming into a shark-infested black abyss 15,000 feet straight down... well, now I just sound silly. Yet it's a more apt metaphor than just about anybody today realizes.
At least that's how the S&P 500's exorbitant valuation amid the frenzied AI build-out today feels to me. We're in the water with a headful of everything familiar and nothing relevant, swimming straight at the vast, inky black unknown.
Like I was at East Beach, we've been lucky so far...
The market has delivered one long, calm day for nearly 50 years. All you had to do was keep buying. We even managed to avoid the sharks that showed up as the economy stared into the black abyss in 2008.
I understand it was hard for some folks to keep buying through bear markets, but that's the point. We see the past clearly, and it bolsters our resolve.
Unfortunately, it likely won't resemble the future.
Investing is harder than sizing up the currents at East Beach. If you exit rough market days and re-enter calm ones, you'll buy high, sell low, and slowly bleed to death in open water.
Worse still, I can tell you all the stories I want to about big risks in the market and historically similar conditions that led to big losses. But you'll never feel them as if they're there in the water with you.
I can tell you the abyss and the sharks are just ahead, but if you don't see them, your heart won't beat faster and you'll see no reason to worry.
It doesn't take a genius to look at the S&P 500 trading near dot-com-peak valuations and figure that the next several years likely won't resemble the past several.
It's much harder to feel that insight deep in your bones, the way you'd feel it if you could see the sharks darting back and forth in front of you.
That's the skill nobody is talking about right now, probably because nobody has it anymore.
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In today's mailbag, feedback on new Federal Reserve Chair Kevin Warsh and his "confusing" second press conference as central bank head, which we wrote about yesterday... plus a check-in from a new reader... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Having received a check for $400,000 just before his confirmation as Fed Chair from an unknown he will not disclose, Warsh is already wobbling. How can any of us expect any honesty and integrity from the face of an organization none of us really need or want. If anything, confusion is the least of our concerns." – Subscriber Thomas G.
Corey McLaughlin comment: Point taken, but just let me clarify the detail: I think what you're referring to is the $100 million "check," as Sen. Elizabeth Warren put it while asking Warsh questions during a hearing earlier this month.
What she meant was Warsh selling or divesting more than $100 million of private investments just days before his confirmation as Fed chair to comply with government ethics laws.
When questioned by Warren, Warsh didn't explicitly say who wrote the "check." But the private funds in question were previously linked to Stanley Druckenmiller's Duquesne Fund. So to some extent, this was just political theater, but yes, we note your point.
We do like Druckenmiller's ideas and public analysis of macroeconomic issues and have quoted some in these pages over the years. But the concept of conflicts of interest for the new Fed chair – and the central bank in general – doesn't pass us by, either.
"I'm real new to this just tryna to sit and learn cause I don't understand all of this." – Subscriber Donna W.
McLaughlin comment: Welcome. I also used to say "just tryna" a lot when I was starting out in this business. Any questions, let us know.
Good investing,
Dan Ferris
Medford, Oregon
July 31, 2026