“Continued inflation must finally end in the crack-up boom, the complete breakdown of the currency system.”
— Ludwig von Mises, Human Action
July 28, 2025 — Early in the twentieth century, Albert Einstein upset the world with his theory of relativity.
All of a sudden, there were no fixed positions; everything seemed unhinged . . . loose.
It’s all relative, people said. Nothing was absolutely this or that, right or wrong, here nor there.
And then Heisenberg’s indeterminacy principle came along, and even Einstein had had enough.
Not only are there no absolutes, said Heisenberg, but you could not know it even if there were.
Everything is in motion, he pointed out; you can figure out where an object is, or its speed, but not both. And the process of trying to figure it out cannot help but change the readings!
“God does not play dice,” Einstein protested.
After Einstein and Heisenberg, the world had begun to look like a giant game of craps. A gamble, you throw the dice and hope for the best. What else can you do?
The idea of an uncertain, unknowable universe did not please Einstein; he spent the rest of his life trying to prove it was not so.
But Einstein and Heisenberg proved the latter’s point. Trying to describe the world, they changed it. “A kind of madness gained hold . . . ” wrote Stefan Zweig of Germany in the 1930s.
The whole nation seemed to come unhinged by the realization that nothing was quite what they thought it was.
Today, we hear the rattle of dice everywhere. People blow the dice for another throw. What are the odds of this . . . or that . . . they wonder.
The odds of a huge meteorite destroying lower Manhattan, we assume, are fairly low — as remote as the odds of Osama bin Laden winning a Nobel Peace Prize.
Anything can happen, yes, but some things are more likely than others. As Heisenberg warns us, however, as soon as we try to figure these things out, we distort the odds.
That is the strange perversity of the marketplace. As people come to believe that something will happen, the odds of making any money at it go down. Herein lies the difference between hard science and a more human science of exchange.
When people realize that a market event is forthcoming, likely as not, it has probably already happened.
As people come to believe they can get rich by buying stocks, for example, they disturb the universe — they buy stocks and run up prices. Then, the higher the stock prices go, the more people believe in them, and prices go still higher.
At some point, because this cannot go on forever, stocks eventually reach their peaks — at almost precisely the point when people are most sure they can get rich by buying them.
This point was reached in the United States somewhere between fall 1999 and March 2000.
A kind of madness had taken hold. Almost all market forecasters were wrong over the next 3 years; they overwhelmingly thought stocks would go up, not down — especially in 2002, as stocks “almost never go down 3 years in a row.”
Abby Cohen, Ed Yardeni, Louis Rukeyser, James Glassman, Jeremy Siegel, Peter Lynch — all the big names from the 1990s — still believed that stocks would go up, if not last year or this year, certainly the next.
They seemed completely unaware that their own bullishness had tilted the odds against them. Talking up the bull market year after they had helped convince Mom and Pop that stocks for the long run were an almost foolproof investment.
Now, the fools were having their way.
Markets, meanwhile, have a malevolent streak.
They get together and cause storms precisely when they will do the most damage — just take a look at the housing market.
The crash of the Nasdaq, for example, was caused by the people who bid up prices in the years preceding.
In the 5 years ahead of the 2000 crash, prices rose six times.
Had buyers not been so bullish, sellers would not have had so much to sell. In the event, prices fell in half . . . and then in half again.
The crash did not just happen; it happened because of the bubble in tech shares. A bubble is a natural market phenomenon. But bubbles are created by man; all bubbles are destroyed by men too.
Regards,
Addison Wiggin
Grey Swan Investment Fraternity
P.S., Today’s essay is an excerpt from the third post-pandemic edition of Financial Reckoning: Memes, Manias, Booms & Busts, Investing in the 21st Century.
As the AI boom takes shape, we’re reminded of the late 1990s crack-up boom, which is repeating today, once again fueled by easy money, a compelling tech story, and otherwise “rational” investors being instantly rewarded for buying the most speculative tech stocks.
Sub out the dotcom names with AI, and the parallels are even closer.
Today’s valuations are beyond those of the dotcom era. Yet it may still continue.
However, any Grey Swan event could derail the AI story – and with it, end the stock market’s renewed interest in partying like it’s 1999.
More on the crack-up boom theme tomorrow…
