If you knew the government would catch you, why not take bigger risks?
For a decade, stock markets have climbed to heights once thought impossible, and a quiet theory has taken hold among traders and economists: that governments have made catastrophic crashes a thing of the past. Known as the 'bliss trade,' this belief rests on the observed willingness of central banks and treasuries to rescue institutions too large to be allowed to fail. Yet history reminds us that the very safety net designed to prevent collapse can, by removing the fear of consequence, sow the conditions for a deeper one.
- The S&P 500 has more than tripled in a decade, and Australian superannuation balances have swelled on the back of a market many now treat as structurally incapable of catastrophic loss.
- Moral hazard has quietly hollowed out market discipline — executives chase outsized risks, IPOs launch at valuations detached from fundamentals, and billions flood into stocks on little more than rumour.
- Index concentration is amplifying the danger: a narrow band of mega-cap companies now commands so much weight that fund managers are compelled to buy them automatically, creating a self-reinforcing loop with no obvious exit.
- Rising US bond yields and constrained government finances are eroding the very fiscal firepower that underpins the bliss trade's central promise.
- Experts warn that if confidence breaks — through a single major index removal, a fiscal shock, or a sudden reversal of sentiment — the same momentum that drove markets up could drive a 40–50% collapse down.
The S&P 500 has crossed 7,600 — more than three times its level a decade ago — and Australian superannuation accounts have risen with it. Beneath the gains, however, a theory has taken hold that unsettles as much as it reassures: that governments and central banks have effectively made stock market crashes obsolete.
Wall Street has given this idea a name — 'bliss,' shorthand for big lasting state support. The logic is grounded in recent history. The crashes of 1929 and 1987 scarred entire economies. Policymakers absorbed that lesson. They will print money, intervene, and rescue institutions too large to be allowed to fail. If that commitment holds, the market becomes something close to a one-way bet.
But the cost of that assurance is moral hazard. When the US government saved major Wall Street banks in 2008 while letting Lehman Brothers collapse, it sent an unmistakable signal: certain institutions would always be caught. The so-called Greenspan put — the Federal Reserve's reputation for cushioning downturns — had already primed traders to take risks they might otherwise have avoided. That recklessness is now visible everywhere: SpaceX launched a record IPO at a price Morningstar values at roughly half; billions poured into semiconductor stocks this week on sentiment alone, with no meaningful fundamental basis.
The structural risks are compounding. US 10-year Treasury yields climbed to 4.6 percent earlier this year, approaching the 5 percent threshold that signals serious danger for equity valuations. Capital is concentrating in a narrow band of mega-cap stocks that dominate major indexes — a self-reinforcing loop that could reverse with devastating speed. Ray Dalio has argued the US government may lack the fiscal capacity to mount another rescue. Gemma Dale of nabtrade puts it plainly: the belief that markets can never suffer a meaningful downturn is itself a source of risk.
The bliss trade may not be wrong. But it has become so widely believed that a single shock — a major company removed from an index, a sudden loss of confidence, a fiscal crisis — could trigger the very spiral it was meant to prevent. Billions could exit as fast as they entered. And many ordinary Australians, through their superannuation, are quietly staking their retirements on the assumption that it won't.
The stock market has been on a remarkable tear. The S&P 500 crossed 7,600 for the first time earlier this year—a staggering climb from 2,100 a decade ago and 4,200 five years before that. Australian superannuation accounts have ridden this wave upward. But beneath the gains lies a question that's begun to preoccupy serious investors and economists: Has government safety net become so reliable that stock markets can no longer truly crash?
Wall Street traders and academics have started calling this phenomenon "bliss"—an acronym for big lasting state support. The theory is straightforward and, on its surface, almost comforting. Governments and central banks have shown they will not tolerate the collapse of major financial institutions. The 1929 crash triggered the Great Depression. The 1987 crash contributed to Australia's 1992 recession. A stock market implosion can be lethal to the broader economy. So policymakers learned their lesson. They will intervene. They will print money. They will bail out the too-big-to-fail. If this logic holds, the stock market becomes something close to a one-way bet—gains on the upside, government rescue on the downside. The risk of a catastrophic 40 to 50 percent crash, the kind last seen during the global financial crisis, would be essentially eliminated.
But this comfort comes with a cost, and it's called moral hazard. The basic principle of investing has always been simple: higher risk demands higher reward. That principle fractured during the 2008 financial crisis when the US government rescued major Wall Street banks through the Troubled Asset Relief Program while allowing Lehman Brothers to fail. The message was clear: some institutions were too big to fail. Gemma Dale, director of nabtrade, observes that this created a perverse incentive structure. "There was the Greenspan put," she said, referring to the former Federal Reserve chair's reputation for supporting markets during downturns. "There was a lot of confidence that monetary policy existed to support any kind of volatility where there was meaningful risk to the downside." For traders and executives, this knowledge was intoxicating. If you knew the government would catch you if you fell, why not take bigger risks?
That recklessness is now visible across the market. SpaceX recently launched as a record-breaking initial public offering at $135 per share, even though analysts argue the company's profit prospects remain distant and Morningstar values it at roughly half that price. Other mega-IPOs are queuing up. Amazon, Meta, Alphabet, and Nvidia continue to expand exponentially, plowing all their cash into future bets rather than current profits. "The question is whether or not they can make it work," Dale said. But for investors, that question seems almost beside the point. This week alone, despite geopolitical tensions and rising US interest rates, billions poured into semiconductor stocks on the flimsiest of news—a "huge swing in sentiment" that had no real fundamental basis. The moral hazard has metastasized. Executives take outsize risks knowing rescue awaits. Investors buy on whispers. The market feeds on itself.
Yet vulnerabilities are beginning to show. The US 10-year Treasury bond yield climbed to 4.6 percent earlier this year, a two-year high. Yields approaching 5 percent are considered alarming because they signal rising default risk and can devastate stock valuations. When Donald Trump announced reciprocal tariffs in April 2025, the bond market, as he put it, got "yippy." More troubling still is the structural concentration of gains. The moral hazard is pushing capital into a narrow band of mega-cap stocks that dominate major indexes. Once these companies are in an index, fund managers automatically buy them. The system feeds on itself in a way that could reverse catastrophically.
Ray Dalio, the billionaire founder of Bridgewater Associates, has argued that the US government is effectively broke—lacking the fiscal firepower to rescue Wall Street if another crisis hits. Dale echoes this concern. "If people start to withdraw at some point, then you get the alternative spiral," she said. "It goes the other way, so this idea that we can never see a meaningful downturn, I think, is risky." The danger is not that the bliss trade is false. The danger is that it has become so widely believed that a shock—a major company removed from an index, a sudden loss of confidence, a fiscal crisis—could trigger the opposite spiral. Billions could flow out as quickly as they flowed in. The market that seemed crash-proof could crash hard. And many of us, through our superannuation, are betting it won't.
Notable Quotes
There was a lot of confidence that monetary policy existed to support any kind of volatility where there was meaningful risk to the downside. And that was a wonderful thing to know as an investor and a trader.— Gemma Dale, director of nabtrade
If people start to withdraw at some point, then you get the alternative spiral. It goes the other way, so this idea that we can never see a meaningful downturn, I think, is risky.— Gemma Dale
The Hearth Conversation Another angle on the story
So the idea is that because governments always bail out big companies, the stock market can't really fall anymore?
That's the theory, yes. It's called the bliss trade. But it's built on a dangerous assumption—that governments will always have the money and the will to rescue failing institutions.
What changed? Why do people believe this now more than, say, twenty years ago?
The 2008 financial crisis. The government rescued the banks. That sent a signal: if you're big enough, you're safe. Executives learned it. Investors learned it. Now everyone takes bigger risks because they think the safety net is guaranteed.
But isn't that a good thing? Fewer crashes, more stability?
On the surface, yes. But it creates moral hazard. If you know you'll be rescued, why be careful? Companies are now launching with no clear path to profit. Investors are buying on rumors. The system is feeding on itself.
What could break it?
A shock that removes several major companies from the market at once. Or a fiscal crisis where the government simply can't afford to rescue anyone. The US bond market is already showing strain. If that breaks, stock valuations could collapse 40 to 50 percent.
And we'd all feel that through our superannuation?
Exactly. We're all riding this wave upward, but the wave is built on the assumption that the government will always catch us. That assumption might not hold.