The stock market indices are on a remarkable ascent, reaching unprecedented highs. As of now, the S&P 500 has climbed 8.43 percent year-to-date, while the NASDAQ has surged 9.22 percent.
The initial panic over tariffs in early April has ultimately proven to be an advantageous buying opportunity. Valuation measurements such as the CAPE ratio and the Buffett Indicator are currently at peaks that few seem to mind.
Meme stocks are once again capturing the spotlight. On June 25, shares of Opendoor Technologies Inc. traded for a meager $0.51. By July 21, they skyrocketed to a temporary high of $4.97, marking an astonishing rise of 874 percent. However, they then plummeted, closing at $2.42 on July 24.
No significant changes occurred in Opendoor’s online iBuyer real estate operations during this period to justify such extreme fluctuations. Nevertheless, much like GameStop and AMC Entertainment in previous years, Opendoor has become a “meme stonk,” igniting a speculative excitement.
If you’re not familiar, meme stonks are stocks that grow immensely popular not based on the financial viability of the company, but rather due to viral phenomenon on social media platforms like Reddit’s WallStreetBets.
These stocks often experience crowd-sourced pumps, where retail investors band together to boost a particular stock. Typically, these meme stonks are heavily shorted by large hedge funds, aiming to initiate a short squeeze that forces these funds to buy back shares at elevated prices, driving the stock’s value even higher.
Meme stonks are detached from conventional investing principles; they emerge from collective action and an ‘us versus them’ mindset.
Speculative Frenzy
Undeniably, meme stonks are fascinating, emerging as part of a broader spectacle. They typically arise when the overall stock market is already caught in a speculative whirlwind—much like the current climate.
Historically, these frenzies often originate from the optimism surrounding new technological advancements, reminiscent of the early internet days, or the current excitement around artificial intelligence (AI).
This fervor is rooted in the potential for transformative change, alongside anticipation that this will generate significant wealth for early investors. Consequently, stocks associated with these innovations can experience rapid ascension, often without the earnings to justify such rises.
Fear of missing out (FOMO) amplifies this phenomenon—news outlets buzz with excitement, social media platforms ignite, and everyone clamors for a slice of the action. Valuations explode while companies with minimal or no profit see their stock prices soar, diverging from traditional financial metrics.
Conditions like low interest rates further fuel this scenario, enabling easier borrowing and investment. Ultimately, genuine enthusiasm morphs into a speculative bubble.
Taking an Austrian economics perspective offers a significant lens for understanding human behavior, individual decision-making, and the consequential ripple effects through the economy—crucial for recognizing and interpreting bubbles.
Consider the dot-com bubble, the 2008 housing crisis, or even the recent meme stonk phenomena. What triggers these boom-and-bust cycles?
Many mainstream economic theories grapple with these complexities, often attributing them to external shocks. In contrast, Austrian economics provides a coherent explanation.
Feel the Buzz
At its heart, Austrian economics emphasizes the significance of time preference and capital structure. Simply put, time preference reflects how we value immediate versus future benefits. Would you prefer to spend a dollar today or save it for tomorrow?
When central banks set interest rates artificially low, they distort time preferences. This environment triggers asset price inflation, misleading entrepreneurs and investors into perceiving certain projects as viable, even when they wouldn’t be otherwise.
Investment flows into these misallocations, particularly in sectors like real estate, technology, and commodities, leading to asset inflation beyond sustainable values. This marks the boom.
While it occurs, the boom feels exhilarating. Early speculators reap profits, while newcomers are drawn in by the promise of easy riches.
However, these investments often lack a solid foundation of true savings or consistent demand—they’re fueled by cheap credit.
Eventually, the misallocation of resources becomes apparent. Interest rates may rise, or the artificial demand may simply dissipate. Unsustainable projects collapse, unveiling squandered capital.
The bubble then bursts, causing asset prices to crash and ushering in a painful readjustment phase.
Austrian economics excels here due to its focus on price signals as vital carriers of information and the distorting effects of central planning, including fiscal and monetary policies, on these signals. Attempts by central planners to stabilize the business cycle through artificial means often lay the groundwork for even larger future disruptions.
Stargate’s AI Dreams Meet Reality
The foundations of the current stock market bubble were established during the pandemic turmoil of 2020-22. Artificially low interest rates combined with significant deficit spending unleashed record consumer price inflation. When the Federal Reserve finally began to raise interest rates in 2022, it was already playing catch-up.
Stocks saw declines throughout the first nine months of 2022, but following the launch of ChatGPT and other AI chatbots, a new bullish trend emerged. Subsequently, for political reasons, the Fed cut rates in September, November, and December.
Aside from a brief tariff panic in early April, stocks climbed in response to these rate cuts, culminating in a speculative frenzy. Capital stocks like NVIDIA and AMD have become targets of speculation.
Since reaching interim lows in early April, NVIDIA and AMD have increased by 80 percent and 108 percent, respectively. The AI boom has created unprecedented demand for their chips, highlighting their innovation and technological progress.
However, they still face fundamental constraints. What if demand for AI chips were to falter even slightly?
Establishing the necessary data center infrastructure to support AI has proven to be a daunting challenge. Consider the hype surrounding the Stargate project?
In January, an announcement at the White House featured Japanese billionaire Masayoshi Son from SoftBank alongside Sam Altman from OpenAI, promoting a $500 billion investment meant to bolster U.S. AI competitiveness through a significant number of data centers.
The reality is stark…
As of now, Stargate has yet to finalize a single data center deal after six months. The company has set a goal of constructing a modest data center this year, likely in Ohio.
The AI boom and its accompanying development are indeed real and transformative. We are still at the early stages of the AI revolution.
Yet, once again, the stock market seems to be jumping ahead of reality. Enjoy this speculative exuberance while it persists.
[Editor’s note: Have you ever heard of Henry Ford’s dream city of the South? Chances are you haven’t. That’s why I’ve recently published an important special report called, “Utility Payment Wealth – Profit from Henry Ford’s Dream City Business Model.” If exploring how this often-overlooked piece of American history could lead to wealth interests you, I encourage you to pick up a copy. It will cost you less than a penny.]
Sincerely,
MN Gordon
for Economic Prism
Return from Stargate’s Dreams Meet Reality to Economic Prism
