Trump, Markets and The Greatest Crash in U.S. History, with Andrew Ross Sorkin (Part Two)

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• The current massive investment in large language model AI technology mirrors historical speculative manias, where companies bet on a single technology (like BetaMax) that could be leapfrogged by emerging alternatives (like neurosymbolic AI).  Copied to clipboard!
• Unlike the immediate backlash after 2008, the public reaction to the 1929 crash initially involved self-blame rather than finger-pointing at Wall Street, a dynamic that only shifted significantly once unemployment reached extreme levels.  Copied to clipboard!
• The current trend toward protectionism via tariffs is seen as a difficult-to-reverse political reality, despite historical evidence from the 1930s showing that such measures contributed to economic depression and nationalism.  Copied to clipboard!

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AI Bubble Speculation

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(00:03:37)

• Key Takeaway: Silicon Valley AI build-out spending is unsustainable unless AI dominates all jobs, and betting on a single technology like large language models risks obsolescence.
• Summary: Tech leaders are spending hundreds of billions on AI build-out, believing they will be the sole winner while others crash. They are primarily betting on large language models using transformer technology. This mirrors historical speculative errors, such as betting on BetaMax when VHS ultimately prevailed, as newer AI types like neurosymbolic AI could emerge.

Historical Market Mania Analogies

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(00:04:37)

• Key Takeaway: Past technological manias, like the internet or railroads, resulted in market crashes, but the underlying infrastructure and innovation often survived and thrived.
• Summary: The speaker compares the current situation to RCA’s long-term survival despite the 1929 crash and the subsequent internet bubble, where infrastructure remained valuable post-crash. The railroad analogy suggests that while investors lose money in a mania pop, the physical infrastructure remains for future use.

1929 Figure Comparisons

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(00:05:34)

• Key Takeaway: Charles Mitchell, a famous financier of the 1920s, is compared to Michael Milken for revolutionizing credit before facing legal consequences.
• Summary: Charles Mitchell was as famous as Jamie Dimon in his time, but his actions are likened more closely to Michael Milken, who revolutionized high-yield bonds before going to jail. Mitchell was eventually arrested, though the speaker avoids revealing the full outcome to encourage reading the book 1929. Jensen Huang of Nvidia is suggested as a modern parallel to Mitchell due to his optimistic vision-selling.

Post-Crash Populism and WWII

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(00:06:43)

• Key Takeaway: The 1929 crash ultimately seeded populism, protectionism, and nationalism that contributed to the rise of World War II.
• Summary: Economic depression following the 1929 crash created the conditions for political extremism, including protectionism and nationalism, leading toward World War II. This contrasts with the immediate, swift backlash against Wall Street seen after the 2008 crisis.

1929 Public Reaction vs. 2008

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(00:07:26)

• Key Takeaway: In 1929, many investors, like Groucho Marx, blamed themselves for market losses, a stark contrast to the finger-pointing culture following 2008.
• Summary: Groucho Marx lost heavily by investing in stocks like RCA, even questioning their lack of dividends, but initially blamed himself rather than his broker. Meaningful finger-pointing and questions about capitalism in the US only began when unemployment reached 25%.

Winston Churchill’s Market Involvement

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(00:09:08)

• Key Takeaway: Winston Churchill lost money speculating on the US market in the fall of 1929 while touring the country to earn lecture fees.
• Summary: Churchill, needing money, toured the US in late 1929, becoming enamored by wealthy New Yorkers and investing heavily in stocks via E.F. Hutton. He was present on the floor of the NYSE during Black Thursday and lost his fortune, yet his takeaway was that Britain needed more risk-taking.

Faith in Fiat Currency Risk

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(00:11:29)

• Key Takeaway: A significant current risk is the potential loss of faith in the dollar, though limited alternative assets restrict rapid capital flight.
• Summary: While central banks can flood the system with money (as in 2008 and COVID), the real bubble might be faith in the dollar, leading some to invest in crypto and gold. However, the total market cap of gold and Bitcoin remains tiny relative to the dollar, making a quick move out of fiat difficult.

Debt to GDP and Empire

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(00:13:19)

• Key Takeaway: Niall Ferguson’s Law suggests that when a nation’s debt-to-GDP ratio exceeds its defense spending, it signals the end of its empire, a point the US is projected to hit around 2049.
• Summary: The US debt-to-GDP ratio is currently around 100%, with projections reaching 150% or higher. Ferguson Law posits that exceeding defense spending with debt-to-GDP historically marks imperial decline. This debt concern compounds the risks associated with rising protectionism.

Tariffs and Globalization Reversal

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(00:14:09)

• Key Takeaway: The trend toward tariffs and protectionism, learned from the 1930s, is actively re-emerging globally, driven partly by the revenue tariffs generate.
• Summary: The current political climate shows a turn against globalization via tariffs, often framed as a national security strategy, a trend led by the US. Politicians are reluctant to abandon tariffs because they generate significant annual revenue (projected $200-$300 billion in the US).

AI Masking Economic Flatness

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(00:16:35)

• Key Takeaway: Recent US GDP growth may be largely illusory, as removing spending related to data centers and AI infrastructure reveals an economy that is essentially flat.
• Summary: The Trump administration claims economic growth despite tariffs, but this growth is potentially masked by AI spending. A study suggests that without spending on AI data centers, US GDP growth would be only 0.1%, indicating a flat underlying economy.

Audience Poll on Crisis Likelihood

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(00:17:35)

• Key Takeaway: Following the discussion, the audience’s belief in a Great Depression-level crisis within ten years decreased from likely to unlikely (52%).
• Summary: The audience poll showed that 52% now believe a Great Depression-level crisis is unlikely, compared to the initial majority who thought it likely. Both the host and guest initially voted ‘unlikely’ for a Great Depression, though they conceded a significant market crash remains possible.

Lessons from Jesse Livermore

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(00:18:52)

• Key Takeaway: The story of short-seller Jesse Livermore serves as a cautionary tale that success in the markets requires discipline, as he lost fortunes after making them and ultimately committed suicide.
• Summary: Jesse Livermore, a short-seller featured in the book, made fortunes by correctly predicting market movements but lacked discipline. His emotional instability led him to lose everything repeatedly, culminating in his suicide.

Advice for Young Generations

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(00:23:16)

• Key Takeaway: Young people must cultivate extreme flexibility, view careers as a ‘jungle gym’ rather than a ladder, and master AI tools to remain competitive.
• Summary: The advice given to a 20-year-old is to be super flexible, as the traditional career ladder is obsolete, replaced by a ‘jungle gym’ approach. They should also learn coding but not rely on it, as AI may replace coders, and should become ’ninjas’ at using AI to secure future jobs.

Value of Curiosity and AI Use

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(00:24:20)

• Key Takeaway: The most successful people are genuinely the most curious, and young people should use AI constantly to master it, as a human skilled in AI will displace one who is not.
• Summary: Success is linked to continuous curiosity, even among the very successful. The speaker advocates for young people to use AI constantly, arguing that the threat is not AI taking jobs, but rather a human who uses AI well taking another human’s job.

Gold Standard Rejection

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(00:28:24)

• Key Takeaway: The gold standard is considered one of history’s great mistakes because adherence to it prolonged the Great Depression by preventing necessary money supply expansion.
• Summary: The gold standard is viewed as a major historical error; the US government waited too long to abandon it, which prolonged the depression by restricting the ability to flood the system with money. Returning to a gold standard is deemed impractical due to insufficient gold reserves.

Private Equity and Semi-Liquid Funds

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(00:29:14)

• Key Takeaway: The democratization of private equity into semi-liquid funds for retail investors creates risk due to lower disclosures and potential redemption gates.
• Summary: Private equity disclosures are opaque, allowing valuations to be held artificially high, similar to private credit. Efforts to make these assets available to retail investors via ‘semi-liquid funds’ are risky because these funds can impose gates preventing investors from selling if too many try to exit simultaneously.

Art of Storytelling in Finance

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(00:32:02)

• Key Takeaway: Popular financial narratives, like the show Billions, succeed by pitting moral opposites against each other, creating gray characters that fascinate rather than prescribe judgment.
• Summary: The success of financial dramas relies on creating fascinating, morally gray characters, similar to a ‘Trojan horse’ strategy pitting legal figures against hedge fund managers. The goal is to make audiences debate the characters, reflecting the author’s desire for readers to see different movies when the story ends.