Regulatory Monstrosity

Now cometh AI, adding to the too-much-info problem. Already, it generates news and reports that fill our in-boxes and waste our time. And an Israeli company just announced that it can twist and turn (distort) the news in real time.

Which leaves, at least for now, AI and the Mag 7 in an old-fashioned financial bubble. Stock prices are far higher than actual sales and profits can account for. So one way or another price and value will have to come back together. While it is not impossible that some breakthrough will lead to a big burst of productivity gains and growth, it is more likely that stock prices will fall.

Cash, mostly invested in short-term Treasury bills, will earn over 4% per year, still higher than inflation.

And with market valuations well over the “Buffett indicator” for greed, measuring a stock market valued at 207.4% of GDP, a record high, the market is ripe for a strong pullback.

As we noted yesterday, big names are pulling the fire alarm:

Ray Dalio warns of an “economic heart attack.”

Michael Burry placed a $98 million short bet on Nvidia.

Jeremy Grantham expects a 50% collapse.

They’re not warning about recessions. They’re warning about systemic failure.

Jim Rickards called it “the avalanche theory.” When the snowpack is unstable, the snowflake doesn’t matter. The market doesn’t need a reason to fall—just a trigger.

Are we there yet?

Distress in one area of financial markets spread to other seemingly unrelated areas of financial markets. In fact, the mathematics of financial contagion are exactly like the mathematics of disease or virus contagion. That’s why they call it contagion. One resembles the other in terms of how it’s spread.

What are examples of the complexity?

One of my favorites is what I call the avalanche and the snowflake. It’s a metaphor for the way the science actually works but I should be clear, they’re not just metaphors. The science, the mathematics and the dynamics are actually the same as those that exist in financial markets.

Imagine you’re on a mountainside. You can see a snowpack building up on the ridgeline while it continues snowing. You can tell just by looking at the scene that there’s danger of an avalanche.

You see a snowflake fall from the sky onto the snowpack.

It disturbs a few other snowflakes that lay there. Then the snow starts to spread… then it starts to slide… then it gains momentum until, finally, it comes loose and the whole mountain comes down and buries the village.

Some people refer to these snowflakes as “black swans,” because they are unexpected and come by surprise. But they’re actually not a surprise if you understand the system’s dynamics and can estimate the system scale.