For a place ostensibly filled with the smartest people in the world, Silicon Valley traffics in an enormous amount of bullsh*t. Only Wall Street and K Street give Sand Hill Road a run for its money in the willing suspension of disbelief. Financial bubbles are inflated by hot air and hot money. Two recent news reports illustrate some of the crazier claims on which investors are wagering billions if not trillions of dollars in an age of monetary and intellectual debauchment.
Let’s start with a story about the 24-year-old with no finance experience who blew up his $45 billion technology hedge fund (the fact that he managed a fund that size is laughable enough):
“For the past few years, at happy hours and dinner parties in San Francisco, Leopold Aschenbrenner kept confusing people by sharing his favorite outlandish idea. He wanted to buy galaxies. Some of his friends weren’t always sure what to make of Aschenbrenner’s intergalactic ambitions. He once left the room and they debated whether he was referring to physical galaxies or a type of private plane. No, he assured them when he came back, he meant galaxies His idea was that advances in artificial intelligence would soon unlock resources on a cosmic scale, enabling humans to colonize faraway planets. He planned to save money now so he could spend on galaxies, he told them, and make his mark across the universe. To almost everyone in this world, outside the AI bubble in Silicon Valley, the idea of scooping up property rights outside of Earth might sound improbable. But in Aschenbrenner’s world, that sort of fervent belief was among the reasons the 24-year-old investor was hailed as a visionary.”
Back here on earth, one man’s vision turned out to be another man’s margin call.
Elon Musk set a high bar for these kinds of claims at TSLA and then outdid himself with even more outrageous claims at SPCX. This has worked out pretty well for him despite not coming close to achieving his forecasts (though he has achieved quite a lot). But having normalized undeliverable promises that might have been treated as securities laws violations in a different time, Mr. Musk paved the way for others to make wild prospective claims they want with little consequence (though outright false statements about existing facts are still a no-no as demonstrated by Nikola Corporation). And the world of AI provides a perfect place for that.
Consider what Anthropic plans to tell investors with respect to its upcoming IPO:
“The maker of Claude [Anthropic] is likely to tell investors its potential revenue opportunities are above $30 trillion, topping SpaceX’s $28.5 trillion estimate, according to people familiar with the matter.”
Of course, the “potential” market for many things can be as large as one wants to claim it is. The people making these claims about AI may or may not achieve AGI but hey already cracked the code to human nature by demonstrating that the total addressable market for bullsh*t is infinite.
Mr. Aschenbrenner, of course, won’t be buying any galaxies; his spaceship crashed on take-off. As for Anthropic, its transparent attempt to out-Elon Elon is meaningless (i.e., literally devoid of meaning, as was Elon’s). In earlier periods, securities lawyers never permitted these types of statements in IPO prospectuses (standards started breaking down with the WeWork prospectus that read like the Whole Earth Catalog). But today they include every kind of nonsense in these documents provided their clients pay their egregious fees. And the SEC appears to believe that companies can say whatever they want provided their statements can’t be definitively disproved and are surrounded by language that hedges them into meaninglessness. Regulators believe investors are on their own and perhaps that is how things should be. If you believe Anthropic, however, Mr. Aschenbrenner has a galaxy he would like to sell you.
Interest Rates
I’ve been writing for months about rising global interest rates. Long-term borrowing costs in major economies are hitting multi-decade highs based on inflation fears (exacerbated by higher energy prices from the Iran war), runaway government deficits, and record levels of corporate borrowing driven by the AI buildout. In mid-August, U.S. 30-year Treasury rates hit 5.34%, the highest rate since 2007 after beginning the month under 5%. The U.S. 10-year Treasury yield is ending the month in the mid-4.70s. European rates also rose with the 30-year German Bund yield hitting 3.78%, its highest level since the Eurozone crisis in 2011. French 30-year yields followed to 4.91%, their highest level since 2008. UK 30-year gilts were trading at 5.86%, close to a post-1998 high reached during the Iran war. And most significantly, Japanese 30-year JGBs hit 4.16%, nearing their highest yields ever. All of these countries face rising debt burdens that will force painful political choices and economic strains. Rates are heading higher along with global debt loads and there is little to stop them.
This is a secular, not a cyclical move, as government debts compound. There is no sign of any serious attempts to address record deficits in the U.S. (or anywhere else) where $2 trillion (give or take) is likely the annual deficit floor as the total deficit crosses over $40 trillion. The only solution offered by politicians is more, not less, spending. Real rates are only marginally positive if you accept government inflation statistics (which I don’t). In the real world, where everyone except economists and Wall Street’s sell-side reside, real rates are negative as the prices of virtually all essential goods and services rise at higher rates than reflected in official government statistics (lowered by various statistical adjustments to suppress “official” inflation).
While various reasons are given for rising rates, the most significant factor is the flood of money-printing by governments that is inflating the prices of all financial assets. The prices of publicly traded stocks and bonds are boosted by liquidity poured into passive investing structures that encourage investors to buy groups of stocks or bonds bundled into products that diminish the importance and value of individual securities. The entire financial superstructure – stocks, bonds, commodities, real estate – is bloated in nominal value by the deteriorating value of the fiat currencies in which they are denominated and whose asset values are unsupported by their underlying earnings power. The AI trade is not the only one driven by a circular, Ponzi-like financing scheme; the entire world economy is dependent on such a structure whose basic constituent is debt.
On August 19th, Treasury Secretary Scott Bessent announced that the Treasury Department would double its purchases of long-term government bonds (maturities 10 years and longer) to try to contain the rise in long-term interest rates. This is a version of the Fed’s Operation Twist used in 2011-12 when the Fed purchased $400 billion of bonds maturing in 6-30 years while selling shorter-term bonds to fund the purchases (it first undertook such a program in 1961). It is not quantitative easing because it doesn’t expand the balance sheet. Treasury yields dropped across the curve by up to ten basis points after the announcement but reversed most of those gains withing 24 hours and are now higher than before the announcement. Mr. Bessent’s plan was small in size; it was designed (along with the yen intervention a week earlier) to send a message to the market before the midterm elections. The market’s non-reaction led Treasury to tell CNBC a couple of days later that it was considering using its $950 billion General Account to fund larger bond repurchases. But Secretary Bessent isn’t managing a hedge fund anymore – and if he was, he would be shorting long maturity sovereigns across the board. He was reacting to political pressure to cap interest rates before the mid-term elections. But as much as some claimed the move was a game changer, the market made it clear that Treasury is gonna need a bigger boat. Unfortunately, there is no boat big enough to tame this shark.
Mr. Bessent’s mentor, highly respected investor Stanley Druckenmiller, didn’t mince any words in criticizing this short-term effort to tame long-term rates in an editorial in The Wall Street Journal (“Let the Bond Market Speak,” August 25, 2026):
“Markets aggregate information no committee possesses, and prices are how that information reaches decision makers. The long-term Treasury yield is the most important price in the world. It is also the only fiscal disciplinarian the U.S has left. Neither party will run on entitlement reform. Both have spent the past decade expanding commitments while ignoring arithmetic. Democracies don’t repair their finances because a budget office publishes a table. They repair them only when the cost of inaction becomes visible and immediate, when mortgage rates bite, when auctions fail, when the political price of a rising long bond finally exceeds the political price of touching spending.
“Every basis point of artificial yield suppression is a subsidy to procrastination. Suppressed long rates sugarcoat the interest-cost projections, shrink the apparent urgency, and let incumbents assure voters the debt is someone else’s problem. If Congress and the administration are unlikely to touch entitlements even with the market’s signal, they are certain not to touch them without them. Whatever this operation saves in basis points, it will cost multiples in delay.”
This set up an interesting triangular dialogue with Federal Reserve Chairman Kevin Warsh, another Druckenmiller mentee who spoke three days later at Jackson Hole. Mr. Warsh’s eagerly awaited speech was predictably short on details but heavily emphasized concerns about stubbornly high inflation. The clear message was that elevated prices need to be the Fed’s primary focus. Mr. Warsh described financial conditions as not broadly restrictive (a change from his July press conference), opening the door for a September rate hike. He also pointed to multiple inflation readings coming in well above the Fed’s 2% target. Reiterating that “short-term interest rates are the predominant tool to achieve the dual mandate,” it seems clear that higher interest rates are around the corner. The question is whether he will wait until after the midterms to move. There is no reason to delay other than politics as this point. Real rates are barely positive (based on phony government inflation numbers) and inflation is not easing meaningfully.
Mr. Warsh knows he needs to raise interest rates; he can’t tolerate another five years of inflation running well above a 2% target rate he refuses to abandon. The gap isn’t narrowing much despite optimistic forecasts by politicians and Wall Street talking heads. Demand for debt remains robust. But all this debt will be inflationary until it breaks the system and causes a deflationary bust. That is where we are headed.
Gold popped by $100/oz. on Secretary Bessent’s announcement (Bitcoin also rallied to over $80,000) as investors reacted to the continuing debauchment of fiat currencies by deficit-ridden governments (though viewing Bitcoin as a fiat alternative may prove to be an error). Gold should be bought as a hedge against inevitable and infinite fiat debasement. We will see $10,000 gold sooner than expected as the U.S. deficit hits $50 trillion by 2030 and $60 trillion by 2035. The AI hyperscalers may want to think about that as they borrow hundreds of billions of dollars based on the expectation (hope) of future revenues.
Every level of our economy, from the micro to the macro, is characterized by denial about debt and deficits. So much of modern wealth is counterfeit because it is grounded not in equity but in debt that can never be repaid, just deferred in an endless pattern of what Hyman Minsky called “Ponzi finance.”[3] As long as refinancing is available, the wealth appears legitimate but once the Ponzi chain is broken, wealth evaporates quickly. Governments can engage in Ponzi finance as long as they can survive politically but businesses and individuals cannot. As the cost of refinancing rises for corporate and individual borrowers, many of them will see their wealth transferred to their creditors (or vaporized entirely). Many of their creditors will end up losing money on loans they thought were adequately secured by inflated collateral values. As Mr. Druckenmiller warns, measures seeking to save a few basis points in the short term end up costing hundreds of basis points in the long run when they don’t address debt metastasizing below the surface.
