The Mandela Effect

Greetings from the windswept plains of Laramie, Wyoming, where I can hear Union Pacific trains rumbling north and south, keeping the shelves of the nation stocked — for now. If you’re reading this, it means that the coronal mass ejection that left our sun about 48 hours ago did not destroy or damage the world’s electrical grids or communication satellites, which is good.

Then again, maybe a cosmological ‘great reset’ wouldn’t be such a bad idea at this point. When the world goes a little mad and financial markets no longer make sense, and when experience is actually a liability when making investment decisions, it’s time for a change. That change will come whether you like it or not. And it’s going to be ugly.

But first, what a week Tesla had! It was up nearly 17% in just five trading days. Its share price went from US$953 to US$1,114. Its market capitalisation is now US$1.19 trillion — slightly less than Australia’s entire GDP of $1.33 trillion. Tesla is worth more than the three largest UK companies combined (AstraZeneca, Shell, and Unilever).

This is not normal. But we don’t live a normal world anymore. Maybe we never did. But tech stocks dominate the ranks of the world’s largest (if not most profitable) companies. Microsoft (US$2.4 trillion), Apple (US$2.4 trillion), Google (US$1.9 trillion), Amazon (US$1.7 trillion), Facebook (now META US$1.1 trillion), and Nvidia (US$637 billion). Combined, the MAGMANT stocks are worth over US$10 trillion.

Interestingly enough, Berkshire Hathaway’s profits are greater than Tesla’s sales. Berkshire has US$144 billion in cash. But its market capitalisation is ‘only’ US$650 billion. Tesla trades at a P/E of 360. Berkshire is at 6.4.

If you had to buy one of these two stocks and hold it for the next 20 years, which one would it be? Think on that and get back to me. In the meantime, here’s a thought…

Some people think that when the Large Hadron Collider was turned on in Switzerland on 10 September 2008, that it created a parallel universe. The universe forked, and we are now living in one of those forks. Coincidentally, Lehman Brothers went bankrupt five days later on 15 September, ushering in (eventually) the era of quantitative easing we live in now.

That era has become absurd. We live in the Age of the Absurd. Traditional stock valuations are off the charts.

For example, Yale Economist Robert Shiller’s cyclically-adjusted price-to-earnings ratio (CAPE) is just below 40 right now. Its all-time high was 44.19 in December 1999. The market cap-to-GDP ratio for US stocks is now 210%. That’s Warren Buffett’s old indicator about whether the market is over or undervalued.

The historic average of the ratio is around 78%. To put today’s absurdity in perspective, the ratio peaked at 140% in March of 2000. But back then, the target Fed Funds rate was 5.85% and the total assets on the Fed’s balance sheet were well under US$1 trillion. Today, the effective Fed Funds rate is 0.08% and its balance sheet is US$8.55 trillion — filled with US government bonds to fund the nation’s spending addiction and mortgage-backed bonds to fuel another house price boom.

Low rates and trillions in liquidity have combined to create the most absurd asset bubble of all time. It’s impressive in a historical way. It’s dangerous in a real way. Why?

The Wilshire 5000 — the broadest index of publicly traded US stocks — had a total market cap of US$22.4 trillion on 23 March 2020 (the pandemic low). It’s up 112.5% since then, to US$47.6 trillion as of Friday’s record close. In that same time, the share of the nation’s wealth by the top 1% of Americans has grown from 29.7% to 32.3% — or from US$30 trillion to US$43.2 trillion, if you’re scoring at home.

If you think that’s impressive (it is, but also the sort of thing that leads to revolutions and guillotines), wait until you get a load of the next figure: US$16.3 trillion. That would be the total value of US stocks if the market cap-to-GDP ratio mean reverted back to 78%. It would wipe out US$31.3 trillion in stock market wealth. And it would do so at just the moment the baby boomers needed it most, for a comfortable, worry-free retirement.

Old timers know that when expectations are higher, future returns (over the next 10 years) tend to be lower. The same is true of valuations. When valuations are high, expected future returns tend to be low. That makes sense when you consider that high valuations imply high expectations. People think the future will get better and better. Until something makes them suddenly stop thinking that.

Something always comes along to change the social mood. And in point of fact, the future does not always get uniformly better for everyone. Although the general trend for stock prices has been up for the last 100 years, it’s been a cyclical process. Boom. Bust. Boom. Crash.

But maybe the Large Hadron Collider DID create a parallel universe back in 2008. Something important changed then, in our current timeline, valuations don’t matter and interest rates (off of which growth assets are priced) are not expected to rise again. In this timeline, growth is more valuable than profit. The old rules were never written and the old Gods were never worshipped.

There’s a name for when a minority of people share the same illusion about the present and the past. It’s called the Mandela effect. It gets its name because of a strange phenomenon where some people (all over the world) remember Nelson Mandela dying in prison on Robben Island in the mid 1990s.

No such thing happened (in this timeline). Mandela was released from prison in 1990. He won the Nobel Peace Prize a year later and was then elected president of South Africa in 1994. He died in December of 2013. Yet, some people ‘remember’ him dying in the 1990s.

The science-fiction writer Philip K Dick thought he had an explanation for this phenomenon (he didn’t call it the Mandela effect when he first spoke about it in 1977, but it was the same thing). Dick claimed that a feeling of déjà vu or a clear memory of something that other people didn’t remember, was you remembering an alternative past or even an alternative previous present. You ‘remembered’ that timeline because you lived it, in another universe.

He went on to claim that the most likely explanation for this was that our universe was a simulated digital experiment. Whomever was running the experiment would alter variables to produce more desired outcomes, ‘editing’ timelines to get them back on track, or in some cases, letting failed timelines (universes) die out. There are now many books about whether we live a simulated multiverse — an infinite number of timelines in which slight adjustments to variables produce different outcomes.

It makes for good reading and for good TV shows and movies based on the idea (The Matrix, The Man in the High Castle, The Adjustment Bureau). But as they say, life imitates art AND truth is stranger than fiction.

Financial authorities adjusted an important variable in 2008: interest rates. Then they made another adjustment in the quantity of money and credit in the system (quantitative easing). This altered and distorted our money and the financial universe in ways that we have not yet begun to reckon with.

And here’s the thing: the crisis that began in 2008 never really went away. It just got bigger, and spread across all asset classes and to all countries. True, it’s concentrated the most in the US — where government and corporate debt levels have climbed along with asset values. But when the next crisis comes, the aftermath will be global, not just American.

And when will that happen, you might be wondering? It already SHOULD have happened, according to the historical valuation metrics. The fact that it hasn’t, tells you that enough people believe the simulated reality to keep it going. That makes sense too.

If you have no personal experience of a financial crisis, currency failure, or a depression, then it’s hard to imagine what it feels like for real, or even recognise the signs that said crisis is inevitable (and possibly imminent).

A whole new generation of investors in Western countries — investors with access to 24/7 trading via apps — has no memory of a stock market crash. What’s more, there is no cultural memory of a time when money was sound and assets were priced off of discounted future cash flows and people were more worried about the return OF their capital than the return ON capital.

Don’t get me wrong. This timeline is wildly entertaining. But don’t be distracted from the real danger. To use another astronomical analogy, consider how stars die. It can help you visualise how this bull market is going to die.

Stars like our beloved Sun burn up all their hydrogen fuel. Then they begin to shed their outer layers, expanding to become a red giant. The outer layers drift away and what’s left is a dense inner core. This is known as a white dwarf, which takes billions of years to cool.

Assuming we don’t blow up our planet or make it otherwise uninhabitable before then, this is how the Earth will die. As it becomes a red dwarf, the expanding matter of the Sun will take out each of the planets in sour solar system. Since we’re the third rock out from the Sun, we won’t have to sit around and wait long. It will be quick and merciful, as the Gorn said to Captain Kirk in a famous Star Trek episode.

Really big stars die even more violently. Once they exhaust their nuclear fuel, they go ‘supernova’ and simply explode. What’s left at the core is usually a black hole. The end. One minute, you’re day trading cryptos…then flash — a blinding white light — and then nothing.

The best-case scenario for the next financial crisis is a white dwarf. You will be able to invest in a core group of ‘dense’ assets like gold, stocks with high returns on capital, and companies that produce real goods and services or resources. It’s a little like the gold at the bottom of John Exter’s inverted pyramid. After the crash, only high-quality companies and real assets will remain at the core of the financial system.

The worst case? The worst case is that your losses in a crash of that magnitude are so large that you’ll never have time to recover. The universe will go on. But your retirement will not.

I explained this case to some colleagues recently. They were slack-jawed…and then bemused. When my co-author Bill Bonner and my colleague Tom Dyson got together to discuss these matters recently in Baltimore, Maryland, we relayed our conclusions to another colleague. He was polite. But I think he thought we were dinosaurs, staring up at meteors in the sky as they fell to Earth.

Maybe so. We’ll see. Noah probably got some snarky comments when he was building the Ark. And I’m old enough to remember that when markets become absurd — like they are now — you’re closer to the end of the cycle than the beginning.


Dan Denning Signature

Dan Denning,
Editor, The Rum Rebellion

PS: One of the most intriguing and exhilarating aspects of this Age of the Absurd is how decentralised financial technology has become a ‘force multiplier’ for ordinary people to get rich. We know now that Wall Street is an insider’s game, with governors of the Federal Reserve day trading stocks in the same market in which they play a key role adjusting the most important variable of all — the price of money.

The last few years have seen the rise of meme stocks, cryptos, and digital assets. It’s like the middle class — most of whom have NOT gotten rich from the doubling of stock prices since last March — have created a printing press of their own, a legal way to manufacture bubbles in assets they actually own. They can pump up the value of companies or assets through a decentralised campaign on trading apps and message boards.

Why play Wall Street’s game when you can rig your own? How else can you explain the unfathomable rise of a crypto coin like Shiba Inu [SHIB]? It’s a parody of a parody. And yet, some people may make ‘real money’ out of it.

But if you want to get rich of parodies, illusions, frauds, and absurdities, here’s a word of advice: do it soon. This timeline is headed for a major crash. And there’s no one running the Matrix who can alter that. You’ll want to hold real, functional, material wealth before then.

PPS: Next week, I’ll write about one possible future for this financial timeline: a scenario where assets don’t crash in nominal terms but are destroyed by inflation.

Dan Denning is the co-author of The Bonner-Denning Letter.

Dan was a founder of Port Phillip Publishing back in 2005, which quickly became the leading publisher of its kind for independent financial research and insights. In 2014 he left to head up Southbank Investment Research in the UK. Dan is also the author of the 2005 book, The Bull Hunter. Today, he’s based in his home state of Colorado. Each Monday in The Rum Rebellion you’ll get Dan’s unique contrarian thinking to provide insights you won’t find anywhere else.

Dan Denning’s belief in free markets, sound money, personal liberty, and small government have underpinned everything he’s done during his 23 years in the financial publishing industry.

The Rum Rebellion