When the Model Stops Tracking Reality

There is a particular kind of unease that has crept into a lot of conversations over the past few years. The official numbers say one thing — GDP is growing, the stock market is near records, the unemployment rate is low — but a great many people, including people who have done everything "right," report that life feels harder than it used to. Groceries cost more. Insurance costs more. The kids can't afford a house. The 401(k) statement looks fine, but the monthly budget doesn't.

That gap — between the model the institutions use to describe the economy and the lived experience of ordinary households — is worth taking seriously, especially if you are retired or close to it. Not because every gloomy forecast turns out to be right. They don't. But because the gap itself is now a market variable. Public mood shapes politics, politics shapes policy, and policy shapes the rules under which your portfolio operates for the rest of your life.

A recent essay by analyst Charles Hugh Smith, Chaos Unleashed: When "Irrational" Makes Perfect Sense, frames this gap in a way I found worth working through. You don't have to share his conclusions — and I don't share all of them — to find the underlying observation useful.

The "model versus reality" problem

Smith's central point is straightforward. Societies operate on shared models — stories about how things work and what's fair. When the model stops tracking what people actually experience, the model doesn't quietly update. People do. And the way they update is not always orderly.

He borrows a framework from Tim Morgan of Surplus Energy Economics: the five emotional stages that Elisabeth Kübler-Ross famously described for grief — denial, anger, bargaining, depression, and acceptance — can also describe how a society processes the slow loss of something it valued. In this case, the thing being lost is the post-war assumption that each generation will be better off than the last.

That is a strong sentence, and reasonable people will disagree about how far along that arc we actually are. But the underlying observation — that institutional trust in this country has been falling for decades, across party lines, across age groups, and across income brackets — is not really in dispute. The polling on confidence in Congress, the media, the courts, large corporations, and the medical system has been heading the same direction for a long time.

The thing people are actually angry about

Smith identifies two slow-moving forces that, together, explain a lot of the public mood:

First, the purchasing power of wages has been eroding. What we call "inflation" or "the rising cost of living" is, from a household's perspective, a steady decline in what an hour of work will buy. This is not new and it is not contested; it is visible in housing affordability data, in food and insurance costs relative to median income, and in the share of household budgets now going to non-discretionary spending.

Second, asset ownership has become the dividing line. Households that already owned stocks and homes in the early 2010s have done extraordinarily well. Households that didn't have largely been left behind, and increasingly so. This is sometimes described approvingly as "the wealth effect" and sometimes critically as "asset inflation." Either way, the mechanism is the same: when capital appreciates faster than wages, owners pull away from non-owners.

This is where Smith's framing becomes useful even if you don't accept his sharper conclusions. If a large share of the country feels the system has stopped being fair, that feeling does not stay private. It eventually shows up in voting, in policy, and in the rules.

The five stages, applied to an economy

Here is the Kübler-Ross / Morgan / Smith progression, restated for our purposes — not as prophecy, but as a useful map of where collective sentiment can travel and what it tends to produce at each stop.

Where are we on that map? I won't pretend to know. Honest people disagree, and the answer probably differs by region and by demographic. What seems clear is that we are no longer firmly in the first box.

The investment implication is narrower than it sounds

It is tempting, reading material like Smith's, to draw large conclusions: sell everything, hold gold, move to a cabin. That is almost always the wrong response, and not because the underlying concerns are baseless. It is the wrong response because none of us knows the timing, none of us knows which path the country actually takes, and dramatic portfolio bets premised on a specific macro story have a long history of being early, wrong, or both.

What this kind of analysis is useful for is sharpening a few questions that retirees and pre-retirees should be asking their advisors regardless of who occupies the White House or which way the market moved last quarter:

Is my income plan resilient to a long stretch of disappointing real returns? Smith's argument, stripped of its more dramatic edges, is essentially that the conditions which produced 1982–2021 — falling rates, rising globalization, expanding margins, expanding multiples — may not repeat. A retirement plan that quietly assumes they will is exposed in ways the brochure does not show.

Am I overexposed to the same assets that have benefited most from the last cycle? If the political response to inequality eventually includes higher taxes on capital, narrower buybacks, or tighter limits on concentration, the assets that benefited most from the old rules are also the ones most exposed to the new ones. Concentration risk in a single employer's stock — a recurring issue among utility retirees with long-tenured holdings — is the version of this risk closest to home.

How much of my plan depends on the next several years being calm? Sequence-of-returns risk is not theoretical. A retiree who absorbs a meaningful drawdown in years one through five, while drawing income, is in a very different place than one who absorbs the same drawdown ten years in. The behavioral framework Smith describes — denial giving way to anger giving way to whatever comes next — is one of many reasons the early-retirement years deserve more cushion than the later ones.

A measured note to close on

Smith ends his essay with a Keynes line, slightly modified: rage-fueled chaos, like irrational markets, can persist longer than we can imagine. He is making a point about urgency. I would make a different one.

The honest version of the story is that the United States has been through several stretches that looked, at the time, like the model was breaking irretrievably — the 1930s, the late 1960s and 1970s, the 2008 crisis. It came out of each of them, changed but intact. There is no law of nature that says it must do so again, but there is also no law of nature that says it cannot. Predictions of imminent collapse have been a remarkably bad business over the last hundred years, and so have portfolios built on them.

The job of a retirement plan is not to be right about the macro story. It is to keep the people who depend on it whole across a range of macro stories, including ones the brochures don't dwell on. That means understanding where you are concentrated, where your real (after-inflation, after-tax) return assumptions are coming from, what your income looks like if the next decade does not resemble the last one, and how much of your plan quietly depends on the model continuing to track reality the way it used to.

Those are useful questions in any environment. They are particularly useful in one where a growing share of the country is, in its own way, beginning to ask them too.

Source: Charles Hugh Smith, "Chaos Unleashed: When 'Irrational' Makes Perfect Sense," OfTwoMinds, May 2026. The framing and stages summarized here are Smith's (drawing in turn on Tim Morgan and Elisabeth Kübler-Ross); the investment commentary is ours.