Ferg’s Finds

This is a short weekly email that covers things I’ve found interesting during the week.

Article/Research

Myrmikan Research: AI Debt Failure Will Prompt Another Wave of Fed Bailouts

Nothing like a good dose of history to help understand the present.

I just started Tomorrow’s Gold (I have a rule: after a book is recommended three times, I read it!) and found this humorous, having only recently read the above.

Podcast/Video

The AI Boom Is Creating a Financial System We Haven’t Seen Before (Paul Kedrosky Explains)

This was the best articulation of the danger of high multiples/valuations I’ve heard.

At high valuations, failure is overdetermined in a statistical sense, meaning that there are so many ways to fail, all of which are low likelihood—maybe 5% at most—that when you combine them all and turn it around and say, given 20 different ways this could fail because we’re at this precipice, it’s high valuations and everything else... an overdetermined system tells you that... there’s greater than a 60% chance of failure.

So what looks not particularly risky or unpredictable is actually highly predictable because, as you say, when your PE is 70... failure is overdetermined. Lots of ways things can go bad because the market increasingly looks at it and says, ‘How can this thing continue to outperform expectations?’ And the answer is, whoops, it can’t. And it starts pointing around. And the same thing is true in this AI moment.

I’ve been pointing lately to the incredible and unprecedented cash inflows into Taiwanese and Chinese chip manufacturers, with what looks like a tsunami of supply in early 2028. And you know this is a boom-bust industry. So once you lock in supply, my friend, prices are going to zero. Why? Because I’ve got to cover my fixed costs. So this stuff is all going out the door.

Quote

“When you find a winner, people will say you are wrong. When you hold a winner, people will say you are stupid. When you get rich from a winner, people will say you got lucky.”

-Ian Cassel (whose new book is now on my to-read list).

Tweet

More on this below.

Charts

I’m annoyed I missed this! It was a perfect “KOL delisting” set-up.

FM: iShares Frontier and Select EM ETF, was delisted after its final trading session on January 6, 2025. Trading was suspended before the market opened on January 7, and shareholders received the liquidation distribution of $27.23 per share on January 9, 2025

A quick backtest….

Something I’m Pondering

I’m pondering how market cap weighting became the optimal way to allocate capital passively. Yes, it is incredibly efficient and is hard to beat, yet it reminds me of the same arguments made for “just-in-time supply chains.” Can’t beat them until something breaks; then resilience/redundancy is everything.

Take EEM, where it’s comical that it has 1,226 holdings yet allocates 27.61% to three companies…

This doesn’t mean I want to take the other side of market cap weighting; I want to go long in a smarter, passive way. My favourite approach is Meb Faber’s shareholder yield. As I went over in my recent piece, I see little opportunity cost and a fat margin of safety in shareholder yield, as it has outperformed and is what I plan to benchmark my portfolio against moving forward.

What’s even more impressive is that EYLD sits on a forward PE of 9x, while SPY is 20x and QQQ is 22.5x.

My view is that the above performance gap will continue to widen for years to come.

Hope you all have a great week!

Cheers,

Ferg

P.S. I really enjoyed putting together this piece, which is really a continuation of what I started with Hugo’s Portfolio: 60/40 for the next Decade.