Bill Hillmann, a skilled bull runner and author, merges his two passions in the book he co-wrote in 2014, titled “Fiesta: How to Survive the Bulls of Pamplona.” This guide serves as an essential resource for those daring enough to participate in the renowned San Fermín festival.
Just a month after the book’s release, Hillmann put his advice to the ultimate test during a run in July 2014, when a bull named Bravito taught him a harsh lesson about survival.
Hillmann suffered two goring injuries to his right thigh, narrowly missing a major artery—a fortunate detail that, he later stated, saved his life. Although he was rushed to the hospital for surgery, the damage had already been done.
After the incident, his co-author commented to The New York Times, “We will probably need to update the book.”
Surprisingly, this did not mark the end of Hillmann’s bull-running adventures. The following year, he returned to Pamplona for another run.
In 2017, Hillmann faced a second goring during the Pamplona run, yet, true to the spirit of his guide, he survived once again.
This narrative underscores the reality of facing undue risks. While Hillmann survived twice, it was luck rather than skill that kept him safe.
In a parallel vein, stock market investors are currently reveling in the overwhelming potential of AI, effectively running with the bulls of Wall Street. The thrill is undeniably enticing—until, of course, the goring happens.
Bundling Risk
This scenario feels familiar. The players and objects of speculation may shift, but the overarching plot remains constant. Today, let’s delve into a figure, a quote, and a monumental crisis that continues to resonate in the U.S. economy and the Federal Reserve’s balance sheet.
Chuck Prince, a lawyer-turned-banker, took the helm as CEO of Citigroup in 2003. He presided over one of the world’s largest financial institutions during an era rife with chaos.
The mid-2000s were characterized by fervent financial activity. The economy was booming, credit was readily available, and the housing market appeared infallible. Banks reaped massive profits by developing and trading mortgage-backed securities, including those linked to high-risk subprime mortgages.
These loans were extended to borrowers with poor credit histories, deemed higher risk. Wall Street engineers devised methods to package these mortgages together, thus dispersing risk and creating an illusion of security. By bundling thousands of mortgages—including subprime ones—into a single investment, they believed that even with some defaults, the overall investment would remain stable. The success seemed limitless, and the revelry was palpable.
However, in July 2007, warning signs began to surface in the housing market. Subprime mortgage defaults started to rise, leading to questions about whether the party was nearing its end.
When the Music Stopped
It was at this juncture that Chuck Prince shared insights during an interview with the Financial Times, stating:
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.”
What did he mean by that?
Prince was implying that the entire financial system rested on precarious foundations. He recognized that the easy credit and significant profits could not be sustained and that a crash was inevitable. He openly acknowledged his awareness of the risks involved.
The “music” represented the flow of effortless credit, while the “dance” described the lucrative yet perilous business of creating and trading mortgage-backed securities.
Tragically, for Citigroup and the global economy, the music abruptly ceased. Just months after Prince’s commentary, the subprime mortgage crisis erupted. By late 2007, major banks began reporting staggering losses tied to their mortgage investments, culminating in a total system collapse in 2008.
The downfall of Lehman Brothers in September 2008 marked a pivotal moment that instigated a worldwide financial panic. Credit markets froze up, as banks hesitated to lend to one another, fearing the next failure. The liquidity Prince had referred to vanished entirely.
Citigroup, alongside other major banks, required a government bailout. Prince stepped down as CEO at the end of 2007, just as the crisis spiraled into the most severe financial downturn since the Great Depression.
So, what’s the takeaway?
What a Bull-Runner Can Teach Us About the AI Bubble
The current bull market driven by AI shares striking similarities with the dot-com bubble of the late 1990s and early 2000s. Yet, it may well be that once the music stops, the fallout for financial markets, U.S. government debt, and the Federal Reserve’s balance sheet will far surpass the consequences seen during both the dot-com crash and the great financial crisis.
The stock market, according to all standard valuation metrics, is deeply embedded in a bubble. Ultimately, these valuations are expected to revert to historical averages—though when they do, they may overshoot on the downside. That’s simply how averages operate.
However, when exactly this correction will occur is uncertain. Nonetheless, the size of the AI bubble is so significant that, much like Chuck Prince in 2007, industry insiders can no longer overlook it.
For instance, on August 14, Sam Altman, CEO of OpenAI and a pivotal figure behind ChatGPT, dined in San Francisco with several OpenAI executives and a select group of reporters. During this gathering, he shared his thoughts on the situation:
“When bubbles happen, smart people get overexcited about a kernel of truth. If you look at most of the bubbles in history, like the tech bubble, there was a real thing. Tech was really important. The internet was a really big deal. People got overexcited. Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes. Is AI the most important thing to happen in a very long time? My opinion is also yes.”
Since Altman’s remarks, the NASDAQ has plummeted by over 600 points, with leading AI stocks like Palantir and Nvidia seeing drops of about 11.5 percent and 3.5 percent, respectively.
Is this the peak, or merely a small correction before AI stocks resume their upward trajectory?
Only time will tell. Yet, like any speculative frenzy, the music will eventually stop. When it does, those who have been reveling might find themselves unexpectedly gored, not by a bull in Spain, but by a bear in Wall Street.
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Sincerely,
MN Gordon
for Economic Prism
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