Everybody Loves a Ponzi
‘Perhaps there is still time to defeat history.’
-Daniel Oliver
Mr. Oliver appears to be an unrepentant optimist. An un-jaded Democrat. Someone savoring either his initial ballot or a second marriage.
The history he mentions is the one familiar to us all. It’s the saga of economic expansions and collapses…of mighty civilizations undone by the ‘fatal conceit’ of their rulers.
Every bubble eventually bursts.
Every paper currency loses value.
Every empire experiences decline and collapse.
This cycle is repeatable, somewhat foreseeable, and can be analyzed for investment purposes. However, the exact sequence of future events — shaped by chance, ideas, culture, and technology — remains fundamentally unknowable.
Consider: who predicted that a Serbian anarchist setting off a chain reaction would lead to the deadliest conflict in human history…a war where the planet’s most advanced nations fought with relentless ferocity for four years?
In the aftermath, England and France were financially drained. The Austro-Hungarian Empire ceased to exist. Germany’s House of Hohenzollern was toppled. Meanwhile, in Russia, the Tsar and his family were executed, ushering in communism.
Yet, human behavior — the sturm and drang of emotions, the cyclical dance of greed and fear, the arc of life itself from hopeful starts to unavoidable decline — marked by folly, envy, combativeness, innovation, angels, and devils — leaves traces known as ‘history.’ If possible, follow them.
The challenge with history is its unforgiving nature. Like double-entry accounting, every gain is matched by a loss. Every rise is linked to a fall. One cannot exist without the other.
Still, let’s remain open-minded. Today’s most pressing concern for investors is the AI bubble. Moneywise:
With U.S. stocks powering higher, enthusiasm is running hot. But billionaire hedge fund manager Paul Tudor Jones says today’s environment is giving him flashbacks to the dot-com boom — and not in a warm, fuzzy and nostalgic way.
The pattern in history is clear.
As more capital is ‘invested’, prices climb. Investors reap gains, encouraging ‘momentum’ investors to join, pushing returns higher. The Nasdaq has climbed 28% so far this year. Borrowing at 5%, you effectively earn 23% on money you didn’t save or earn.
Everyone adores a classic Ponzi! As more funds flood in, excitement intensifies. The ‘investment’ looks more lucrative, more alluring, and seems less risky (everyone’s doing it!).
Currently, the CAPE ratio (cyclically adjusted price earnings) has reached heights seen only once before — in 1999. What happens next? Regarding a Ponzi scheme that never collapses, history offers no example.
Busts trail behind bubbles…like alimony payments behind a runaway husband. The only exceptions are theoretical. Output could catch up. Then, there may be no need for a correction to return to a more normal price/earnings ratio.
But it never occurs. Not during the roaring ‘20s, with cars and electrical devices; nor the ‘60s with the Nifty Fifty market giants; nor the ‘90s dot-com frenzy. Successes existed each time, yet none sufficient to prevent broad market declines.
And now, can AI generate enough returns so the markets ‘defeat history’ by avoiding a fall? ChatGPT estimates AI investment at roughly $1.5 trillion. Palantir, employing AI for surveillance, trades at over 100 times sales and 400 times earnings. At such valuations, it’s not an investment but pure speculation—betting others will pay even more.
To be a sound investment at a reasonable price, Palantir would need to boost earnings by 30-fold to reach a ‘sustainable’ P/E ratio. Check historical data extensively; no major company has ever achieved such growth.
Small startups may see impressive growth in profits, sales, and stock price, but not a company valued near half a trillion dollars. Even Apple, one of history’s most successful firms, expanded sales “only” four times in the last 15 years.
History suggests normalcy is more likely restored by a sharp price drop rather than extraordinary earnings growth.
Defeat history? Don’t bet on it.
Editor’s note: read more from Bill and his team at Bonner Private Research.
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