Mag Seven Goes Bafooey

One of the most puzzling features of the 21st century is the almost total failure of its new technology… along with astonishing prices for the companies that produce it. Last year, the Visual Capitalist reported that the Magnificent Seven were worth nearly $16 trillion:

Since 2012, the first year all seven companies were public, the Magnificent Seven has grown 13.5 times larger. Nvidia has seen the highest relative growth, with its market cap jumping 360 times larger over the same time frame. Nvidia’s size is especially impressive when you compare its market cap to other chipmakers.

There is only so much ‘value’ or real wealth available in the world – cars, art, wool socks, beef ravioli. A man with a stock worth $100 has a claim on one hundred dollars’ worth of it. If his stock goes to $1,000…he can claim 10 times as much.

The Ford Motor company was valuable from the beginning — there were thousands of Ford trucks and autos to prove it. The company rose in value as its own output increased the nation’s real wealth. .

But what about those Magnificent Seven tech stocks? They are now worth $13 trillion more than in 2012. Where’s the beef?

The industrial age made us all much better off. No question about it.

The common chainsaw provides the easiest demonstration. It is a simple machine, little changed in the last half a century. We had one in the 1960s, which was already at least ten years old. It was big, heavy and noisy… but it did the job. Today, they are lighter and more reliable.

A small internal combustion engine takes gasoline (usually mixed with oil… in 2-stroke engines) and cranks a shaft that turns a sharpened chain. With it, in one day you can cut as much firewood as would have taken weeks or even months before.

The amount of fuel used is trivial. The pile of wood is impressive.

Firewood is a real thing… with real value… it warms our houses, greatly improving the quality of life. The chainsaw’s value can be measured by the cords of wood it cuts. More firewood = more value.

Almost everything that now creates our quality of life — automobiles, houses, food, clothing — relies on Industrial Age innovations.

Each one took a combination of labor (including the invention… design… and development… as well as actual manufacturing) and capital. It took a lot of money to build the factories… and the power grid, delivery systems, railroads and highways that brought the chainsaws into the local hardware stores. Even the movies we watch on our computer screens still require huge amounts of real things — fuel, time, props, transportation, lodging — to make.

And for each of these things, there is output to justify the capital value. More cars. More pants. More films.

Then came the Internet… and the communications revolution, largely built out in the 1990s. Widely discussed was the promise that ubiquitous information would reduce the need for capital. Rather than trial and error… hit or miss… entrepreneurs would have the world’s knowledge at their fingertips and could avoid dead ends and mistakes.

Capitalists would no longer need to take the risk of financing new projects, since the risk would be largely eliminated by knowledge. Growth rates would pick up. And the knowledge peddlers would be the new store of value.

That didn’t happen. Growth rates slowed. Most of the dot.coms disappeared. It turned out, they weren’t really offering ‘knowledge,’ but just information, and much of it was false, misleading, or unnecessary. In other words, it was a waste of time – squandering our most precious asset.

The dot.coms blew up 25 years ago. How much of the new tech, developed since then is a genuine improvement? How much is just nuisance?

Checking in to our nifty ‘health portal’ at Johns Hopkins hospital, for example, we were told that our password was incorrect. Then giving our name and birthday, the machine told us that our information was ‘invalid,’ as if it knew when we were born better than we did. But try to get a straight answer from an AI-enhanced communications system!

Our home heating system wouldn’t work. The Industrial Age part was still functioning — plenty of fuel… plenty of spark. But the ‘electronics’ had gone bafooey. Same thing happened with one of our trucks. Engine, no problem. But an electronic control had tripped, immobilizing the truck until a technician finally figured out the problem.

Today, if you have a flat tire, can AI fix it? Not as far as we know. The most obvious and helpful new developments to come out of the Information Age are the many short videos that show you how to do non-electronic things, such as change a tire. They also make it easy to ‘find a garage near you’ and make a restaurant reservation for the evening.

And so, on this cold, wintry day, warmed by the wood burning in our own fireplace, we pace the hardwood floor and fake Aubusson rug. We lean back in our plastic office chair… we tap our fingers on the mahogany desk… take a sip of hot tea from a ceramic cup, stare at the plaster molding around the ceiling…

And wonder — are the techs really worth as much as they think they are?

Where is that $13 trillion pile of wood?

Stay tuned…

Regards,

Bill Bonner

Since 2012, the first year all seven companies were public, the Magnificent Seven has grown 13.5 times larger. Nvidia has seen the highest relative growth, with its market cap jumping 360 times larger over the same time frame. Nvidia’s size is especially impressive when you compare its market cap to other chipmakers.

But what about those Magnificent Seven tech stocks? They are now worth $13 trillion more than in 2012. Where’s the beef?

The industrial age made us all much better off. No question about it.

The amount of fuel used is trivial. The pile of wood is impressive.

Firewood is a real thing… with real value… it warms our houses, greatly improving the quality of life. The chainsaw’s value can be measured by the cords of wood it cuts. More firewood = more value.

Almost everything that now creates our quality of life — automobiles, houses, food, clothing — relies on Industrial Age innovations.

And for each of these things, there is output to justify the capital value. More cars. More pants. More films.

The dot.coms blew up 25 years ago. How much of the new tech, developed since then is a genuine improvement? How much is just nuisance?

And wonder — are the techs really worth as much as they think they are?

Where is that $13 trillion pile of wood?

Stay tuned…

Regards,

Bill Bonner

Relative to GDP, the net international investment claim on the U.S. economy was 20% in 2003. It had swollen to 65% by 2023. Practically every type of American company, bond, or real estate asset now has some degree of foreign ownership.

But it’s even worse than that. As the federal deficit has pumped up the GDP figures, and made a larger share of the economy dependent on government spending, the quality and sustainability of GDP have deteriorated. So, foreigners, to the extent they are paying attention, are accumulating claims on an economy that has been eroded by inefficient, government-directed spending and “investments.” Why should foreign creditors maintain confidence in the integrity of these paper claims? Only to the extent that their economies are even worse off. And in the case of China, that’s probably true.

As global government interest expense climbed, gold quietly followed it higher. The IIF estimates that interest costs on government debt now run at nearly $4.9 trillion annually. Over the same span, gold prices have tracked that burden almost one-for-one.

Silver has recently gone along for the ride, with even more enthusiasm.

Since early 2023, Japan’s 10-year government bond yield has risen roughly 150 basis points, touching levels not seen since the 1990s.

Over that same period, gold prices have surged about 135%, while silver is up roughly 175%. Zoom out two years, and the divergence becomes starker still: gold up 114%, silver up 178%, while the S&P 500 gained 44%.

According to the American Association of Individual Investors, the average retail investor has about a 70% allocation to stocks. That’s well over the traditional 60/40 split between stocks and bonds. Even a 60/40 allocation ignores real estate, gold, collectibles, and private assets.

A pullback in the 10% range – which is likely in any given year – will prompt investors to scream as if it’s the end of the world.

Our “panic now, avoid the rush” strategy is simple.

Take tech profits off the table, raise some cash, and focus on industry-leading companies that pay dividends. Roll those dividends up and use compounding to your overall portfolio’s advantage.

In a healthy economy, production and consumption communicate constantly. If a company builds something useful, customers respond by buying it. If they overbuild, inventories pile up and prices fall, sending a signal to slow down.

AI infrastructure, by contrast, is being built largely on faith. Companies are scaling up compute power without clear signs of sustainable demand. Unlike oil and gas, where prices adjust second-by-second, AI companies operate in a fog. They release tools, collect usage stats, and hope that paid conversions will follow.

But hope is not a business model.