“Number Go Up” & The Ouroboros-Like Asset Inflation of the Post GFC Era

“Number Go Up” [is] one of the many memes that sprang up during a previous crypto surge, representing a similar vibe as “to the moon” or “hodl” – the idea that the faithful would keep buying in the belief that prices would continue to climb. …

it seems a safe bet that at least some of the recent enthusiasm is an ouroboros-like construct: People are buying because they expect prices will keep rising. Prices keep rising because people are buying.

That mentality seems to have spread beyond the world of crypto. …Both crypto and Nvidia – heck, even the S&P 500 – have taught investors that, indeed, “number go up.” –Julie Hyman, “Number go up is alive & well”

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Ouroboros: noun, a circular symbol that depicts a snake or dragon devouring its own tail and that is used especially to represent the eternal cycle of destruction and rebirth. In alchemy, the ouroboros is considered one of the oldest symbols representing the idea of eternity…One of the most highly desired but challenging aims for an alchemist was to discover a way to turn a base substance such as lead into gold…[1]

The symbol dates back to Tutankhamun’s tomb in the 14^th century BCE, but the ouroboros first went viral in the 3^rd century AD. It was then that one of the few alchemists credited with actually being able to turn base metals into gold wrote the Chrysopeoeia of Cleopatra. The title, translated, means “Cleopatra’s Gold Making.”

Considering the financial benefits of such knowledge, one can only imagine how the text, penned on a single page of papyrus, would be popular. [2]^,[i]

The Chrysopoeia of Cleopatra, possibly 3^rd century AD

The alchemist Cleopatra and her mentor, a giant in the field of alchemy, are credited by some as having invented the chemical instrument and heat bath, the bain-marie, discovering hydrochloric acid and inventing hermetic sealing. Hydrochloric acid is used in everything from batteries to bridges – and we may owe much of modern life to these accomplished alchemists.

But back to the possible investment merits of alchemy. How to use the four basic elements of fire, earth, water and air to turn cheap metal into gold. This incredible feat of financial innovation eludes us to this day. Based on the many articles we read, KCR offers our readers two possible explanations for why this science has been lost:

1. Roman Emperor Diocletian burned all the books that explained how to turn lead into gold to prevent the Egyptians from gaining enough wealth using the technique to challenge the Romans. Having located and burned all copies, the science was lost forever. OR…

2. The people who saw lead turned into gold were being deceived by the alchemists, and any perceived wealth-creation was simply an illusion doomed to eventually fail under any significant scrutiny

It turns out that financial innovation is, in many ways, timeless. Today’s alchemists lean not on fire, earth, water, and air. Instead, today’s financial alchemists use fiat money, debt, equity, and real estate to create wealth.

Our paper today quotes extensively from terrific work McKinsey did in 2021 and 2023 on asset values. Titled The rise and rise of the global balance sheet: How productively are we using our wealth? and The future of wealth and growth hangs in the balance, their research offers a comprehensive review of the increasingly untenable disconnect between asset prices and GDP on a global level.

Here is a brutally insufficient summary of our conclusions from McKinsey’s impressive body of work:

• 20+ years of asset inflation have created a wealth illusion ever further detached from fundamental reality
• There are many paths forward. Unfortunately, most involve pain that few people are prepared for
• The most appealing path forward requires society to halt speculative capital misallocation

KCR readily admits to confirmation bias. McKinsey’s work lends significant empirical heft to our pieces on:

• the brutal headwinds facing corporate margins that are above levels last seen in 1929
• our relentless hammering of market-cap to GDP metrics championed by Warren Buffett
• the growing evidence that bipartisan support for labor and anti-trust are the klaxons of change being recklessly disregarded by investors

Had we seen McKinsey’s work at publication in 2021, it would have helped us respond to those who grumbled about our relentless adhesion to the lessons of history and our fervent belief that this time is not different.

Weighing in at over 200 dense pages of data-rich material, the McKinsey work is a “must read” in our view. But we recognize the works’ complexity and our readers’ time constraints make it unlikely many will get through them. Today’s piece is “KCR-lite” and chart-rich. The pictures tell the stories better than we could.

This truly is a moment of “number go up.” Every day this persists, the consequences of capital misallocation grow more severe. But as always, epic capital misallocation creates significant opportunities for evidence-based investors willing to put even a small amount of their capital in “non-consensus” stocks.

The stack of charts will begin with “net worth” and then move to the four basic elements that drive that figure: equity, real estate, debt, and profit margins. Each chart will be a pair – the nominal value of, say, net worth, and then that value scaled by US GDP. Any bolded text in the quotes from McKinsey is KCR’s doing. Let us begin:

“The past two decades stand in marked contrast to the post-World War II historical trajectory of global wealth (and debt) accumulation. Before the turn of the millennium, growth in global net worth largely tracked GDP growth. But then something unusual happened. Around [1995]…net worth, asset values, and debt began

growing significantly faster than GDP. In contrast, productivity growth among G-7 countries has been sluggish, falling from 1.8 percent per year between 1980 and 2000 to 0.8 percent from 2000 to 2018.”[3]

“Over the past several decades, there has been too little productive investment. In advanced economies, net investment has declined as a share of GDP. In the 2010s, this ratio was roughly 40 percent lower than before the 2008 financial crisis … in the United States. … growth in capital stock per worker dropped to the lowest rate in the post-World War II period. Public investment has also lagged…in infrastructure and affordable housing.”[4]