The Roaring '20s

What’s Driving This Exuberance

Insanity? Extreme optimism? A cabal of shadowy forces? The US Leading Economic Index is well below the lowest it hit during the COVID pandemic and is continuing a downward trend. Oil prices remain significantly elevated compared to their pre-war prices as Brent Crude still sits above $100 / barrel. The Fed has held rates steady and signaled they are unlikely to make any cuts in the foreseeable future, when at the start of the year the market was supposedly pricing in at least 2-3 rate cuts. The Buffett Indicator (one of my favorite metrics) is currently over 200% signaling that we are in a market that is significantly overvalued.

The current reasoning the big Wall Street analysts and prognosticators are giving is that it’s because companies continue to crush earnings and there’s no slow down of that in sight. There’s something to that line of reasoning. We’re seeing insane numbers coming in from the big tech companies, in terms of revenue, profits and what they’re spending on AI. It does seem like the AI gravy train is storming down the tracks and there’s no let up in sight. Every week there are new models dropping with increasingly powerful capabilities, there are new start-ups showing up on the scene promising to disrupt every sector of the economy while garnering eye-popping valuations on nothing more than a dream, and there’s even talk of a nearly $2 trillion IPO coming up.

It’s a roaring party out there! Why shouldn’t markets be at all time highs! With AI we’re almost certainly going to continue this trend and pricing that in now is the only rational thing to do. Maybe we should start calling this time period the roaring 20s!

While big tech is popping champagne and smelling their own farts about how great of a future they’re building, in the background they are shedding thousands of jobs to keep those good times rolling. The public backlash to data center construction is rising and the US debt is continuing its march to 200% of GDP with no political will or impetus to stop it. The circular deals between these very same companies continue, growing ever larger all while investors continue to cheer them on.

And the logic that we’re at all time high because earnings reports continue to be stellar is so flawed it’s laughable. Earnings reports look backwards. They capture how things went. And sure, sometimes companies will give guidance out into the future that can be a spark for optimism and continued investment but fewer and fewer companies are doing that and the ones that are, are typically only providing it for the next quarter or two.

The Future That’s Coming

We’ve seen this happen before. The market becomes so exuberant that it acts irrationally to everything that’s going on in reality. People start to believe that there really is no stopping this market and that they would be foolish to miss out on all the growth that’s going to happen so they continue to pile in. We’ve been trained to do this from the recovery after the 2008 financial crisis, to the V-shaped COVID market, to the 2025 TACO trade after the tariff liberation day sell-offs.

I highly encourage reading this New York Times article that was written in 2021 and ask yourself how things have played out since then and how they compare to the trends in the 1920s. How often do you find yourself thinking “Wow, that’s eerily similar”?

History Doesn’t Repeat Itself, but It Often Rhymes

Mark Twain

I’m not saying things are going to go exactly how they did back then and that we’re going to have a 1929-esque meltdown in the not-so-distant future. We have built some better guardrails on the whole system and have a lot more tools, technology, and policies in place that can help to mitigate a complete collapse. But what I am saying is that we are in the middle of the party, the music is bumping, the drinks are flowing, but the world outside that party is very murky and things aren’t trending in a good direction. Eventually the music will stop, the party will end, and everyone will need to go outside and take a look at what they were ignoring while they were having their good time.

Rapid Fire Observations

Some quick top level thoughts on other topics:

• Claude Mythos: Lots of talk recently about Anthropic’s Mythos model and how it’s a game changer in terms of capabilities. I don’t doubt the claims that are being made about its abilities. I am glad that Anthropic is being somewhat cautious about releasing this model and giving some companies the opportunity to harden their cybersecurity defenses with it. But I’m not convinced that this model will be the reckoning that some are worried about. First, I expect this model will be extremely costly to use and that will limit the amount of organizations, nations, etc. that will be able to use it. That limit will make it easier to monitor its usage and spot bad actors and help to prevent major fallout. Second, I’m not fully convinced the model will even see the light of day. If Anthropic is as compute constrained as they claim to be why would they utilize their capacity to host a model that is more a liability to them than a revenue and profit generator? I’m not going to sweat this one yet.
• AI’s Leading Regulator is…the Pope?: File this under the amusing but also scary when you think about it bucket. There’s been a few reports recently that the Vatican has been moving quickly to put in place guidelines and rules to prepare the Catholic Church for the AI era. It makes sense that the Catholic Church would want to get ahead of AI and what they are calling a “crisis of truth” especially given their mission. It’s hard to imagine building faith in what a spiritual leader is preaching if one were to find out that it was actually a robot that was coming up with their teachings. Pretty dystopian actually if you think about it. It’s a sad state of affairs however when one of the most ancient organizations on the planet, one that is notorious for being extremely slow on everything, is acting faster than most governments across the world.
• Kevin Warsh’s Fed: Kevin Warsh, Trump’s nominee to be the next Fed Chairman when JPow’s tenure ends in May, had his confirmation hearing this past week. It’s looking very likely that he is going to be confirmed so what can we look forward to during his tenure? One of the most consequential things that came out of his hearing was his thinking and approach to the way the Fed communicates. He believes that the Fed communicates too much, and that it should avoid providing forward guidance (aka the dot-plot) as he believes that hems the Fed into future actions. Not sure I agree with him on that one, but he also did say he believed the way the Fed calculated core PCE needs changing, which I do agree with. But I don’t agree with the way he wants to change it. He wants to strip out “price shocks” to try and get to a core underlying inflation rate which to me is just academic nonsense. Inflation is what the actual consumer or business faces when they have to pay for it, regardless of if it’s a “shock” or a long term underlying trend. His approach will most likely understate inflation so that he can use it as a justification to lower interest rates to appease the president which will do nothing to actually curb the inflation that the average person sees, further resulting in a divide between Main Street and Wall Street.

The Last Word

We’re living in interesting times indeed. Most indicators seem to be showing that things are dark and stormy but the stock market is all sunshine and rainbows. There’s so many adages for this type of situation it’s nauseating but the one that holds the most weight in my opinion is:

Markets can remain irrational longer than you can remain solvent.

John Maynard Keynes

Things are glaringly irrational in my opinion, but it’s a fool’s errand to try and guess when that irrationality is going to end and sanity will come back and take hold. It’s likely it won’t be for some time. Large economic changes, much like geological changes like those that produce volcanoes, take a long time to show up in ways we can observe. But when they do, much like those volcanoes, they often erupt with extreme consequences.