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A System, Not a Mountain

Writer's picture: Marcus NikosMarcus Nikos



Whether the tariffs will generate enough revenue to pay the interest on our debt, Medicare, Medicaid, Social Security, and the kind of muscular nationalism Trump wants is unknownWhether the tariffs will generate enough revenue to pay the interest on our debt, Medicare, Medicaid, Social Security, and the kind of muscular nationalism Trump wants is unknown.

What if I told you something happened this week that made Nvidia’s chips irrelevant to the growth of AI? But at the same time, AI itself now might have hundreds of more ‘use cases’ than it did at the start of the week. The technology would be powerful, deflationary (for all white collar work) and everywhere.

But the profits from the hardware might vanish in the blink of an eye?

That would be a big claim. And the fact that the breakthrough (reinforcement learning) came from a Chinese company that was working on something else completely different–and not the new Stargate/Death Star project announced in the White house earlier his week–was even more shocking. It’s one of several important dots to connect this week.

Trying to cover AI this week is like trying to eat a herd of elephants, but while they’re running at full speed across the Serengeti, which is full of landmines. They’re running on the road to somewhere. But it’s not clear where…Mordor, Oz, serfdom, or Rome. Let’s begin with markets and the big picture.




The chart above is a log-scale chart of the S&P 500 going back to the end of the 19th century and the beginning of the 20th century. It’s log scale because, as opposed to linear, it smooths things out over the long-term and gives you the idea of the trend. The trend is obvious. In the 20th century–and for the first quarter of the 21st century–American stocks have gone up (when denominated in US dollars, not gold).

If your long run is long enough, you can survive almost any draw-down by not selling. If you’re unlucky, and you’re set to retire (or ARE retired) during one of those ‘dead zone decades’ when stocks go nowhere in real terms (after falling 80% from highs), no long run is long enough to make up for The Big Loss.

The dead decades tend to begin when valuations are at their peak. That’s the top part of the chart. It’s an index of all the valuation metrics we’ve been banging on about for months now (price-to-sales, price-to-book, mcap to GDP, CAPE etc.)

Notice anything?...

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