The False Boom

In the summer of 2021, Lordstown Motors held a ceremony.

Cameras. Executives in hard hats. A gleaming electric pickup truck rolling off the line in rural Ohio. Politicians gave speeches about the future of American manufacturing. CNBC ran the footage on a loop.

Eighteen months later, Lordstown Motors filed for bankruptcy.

The factory was sold. The workers were gone. The Endurance, their flagship truck, endured for exactly one commercial model year before the company collapsed under the weight of its own implausibility.

Nobody went to jail. Nobody gave the money back. The executives collected their salaries and stock options and moved on to the next story.

And somewhere in DC, the same people who subsidized Lordstown were already designing the next round of EV incentives.

Though there was fraud and mismanagement, the more important story was one of malinvestment. And once you understand what that word means, you will never watch a boom the same way again.

The Lying Signal

To understand malinvestment, you have to understand what interest rates actually do.

They aren’t just a price. They are a signal.

A high interest rate says that capital is scarce. Savings are low. Be selective. Only the most productive projects should proceed.

A low interest rate says that capital is abundant. Longer, more ambitious projects are viable.

The problem is that central banks fake the signal whenever it’s politically expedient for these “independent” actors to do so.

When the Federal Reserve cuts rates to zero, it sends the “capital is abundant” signal. But it hasn’t created any actual capital. It hasn’t increased savings. It has simply changed the price of money without changing the underlying reality.

It’s like rigging a thermometer. The reading says 72 degrees. You walk outside in a t-shirt. It’s actually 40 degrees. The thermometer didn’t warm the air. It just told you a lie.

Entrepreneurs, investors, and executives look at that interest rate signal and conclude that now is the time to build capital-intensive projects. And they only make sense if cheap money lasts forever.

Then, the economy roars. That’s the boom.

But it isn’t genuine prosperity. It’s a lie that looks suspiciously like the truth.

The Austrian Diagnosis

Friedrich Hayek mapped this mechanism in the 1930s. He called it the cluster of errors.

Here’s the key insight that most economists still refuse to accept:

In a free market, entrepreneurs make mistakes all the time. But they make them randomly. One businessman overestimates demand for widgets. Another underestimates the demand for gadgets. The errors are scattered across the economy, cancel each other out, and are corrected quickly through profit and loss.

But when the interest rate signal is falsified, like when the Fed holds rates at zero for years, entrepreneurs don’t make random errors. They make the same error, simultaneously, in the same direction.

Everyone chases yield, funds long-duration projects, and bets that the cheap money will last. Up goes the EV factory, the cryptocurrency exchange, the speculative office tower, and the data center for an AI company with no revenue.

The errors cluster.

That’s what a boom actually is: not true prosperity, but a synchronized mistake. It’s thousands of businesses betting wrong at the same time because the price signal told them to.

And the bust? The bust is simply the moment when reality reasserts itself. When the projects that only made sense at 0% interest rates no longer make sense at 5%. When the capital that was misallocated has to be written off, liquidated, and reallocated to something real.

The bust isn’t the disease. It’s the cure.

The Graveyard Tour

Let me take you through the last twenty-five years.

The Dotcom boom. 1995-2000.

The Fed kept money loose through the late 1990s. Capital flooded into internet companies. Pets.com raised $82 million and spent $11 million on a Super Bowl ad before collapsing nine months after its IPO. Webvan raised $375 million to deliver groceries before it had figured out if anyone wanted grocery delivery. Kozmo.com promised one-hour delivery of anything in twelve cities and burned through $280 million, proving the unit economics didn’t work.

The signal said to build, so they built. But the signal was wrong.

$5 trillion in market value evaporated between 2000 and 2002.

The Housing boom. 2002-2007.

The Fed cut rates to 1% after the Dotcom bust and held them there. Capital needed somewhere to go. So it went into housing. Mortgage originators issued loans to anyone with a pulse. The incentives told them to.

Las Vegas. Inland Empire. Suburban Phoenix. Entire neighborhoods were built, sold, foreclosed, and abandoned within five years.

The correction destroyed $8 trillion in household wealth.

Alan Greenspan was the Chairman of the Federal Reserve during both those disasters. Once feted as the man more powerful than his President, the cold light of history has a decidedly different view of him now.

The Shale boom. 2010-2019.

Low rates sent capital into shale oil. Hundreds of companies drilled wells that were only profitable at $80 per barrel of oil. They raised money on junk bonds. They drilled anyway. American oil production soared. So did the debt. Roughly 250 shale companies filed for bankruptcy between 2015 and 2021, shedding over $300 billion in debt.

The signal said to drill, so they drilled. The signal lied again.

The Crypto boom. 2020-2022.

Zero interest rates plus $5 trillion in pandemic stimulus. Capital with nowhere productive to go flooded into digital tokens, NFTs, and exchanges. FTX, a company run by an immoral 29-year-old in cargo shorts, reached a $32 billion valuation. Bored Ape Yacht Club JPEGs sold for $300,000 apiece. Luna, a cryptocurrency backed by nothing, reached a $40 billion market cap before collapsing to essentially zero in 72 hours.

$2 trillion in crypto market value was gone by the end of 2022. “The fooled” and their money were parted.

The EV boom. 2020-2024.

Subsidies, mandates, and cheap capital created an EV industry far larger than actual consumer demand could support. Rivian went public at a $150 billion valuation, having delivered fewer than 200 vehicles. Lucid Motors, Fisker, Canoo, Arrival, and Electric Last Mile Solutions raised billions, built little, and collapsed or are collapsing now.

Lordstown Motors held its ceremony, then filed for bankruptcy.

The Current One

Since 2023, American technology companies have announced over $1 trillion in AI infrastructure investment. Datacenters. Chips. Power plants to run the chips. Fiber to connect the datacenters.

Microsoft. Google. Amazon. Meta. They’re building at a pace that has no historical precedent outside wartime mobilization.

The question Austrian economics forces you to ask is simple:

Is this real capital formation or malinvestment?

Is there real demand for this much compute? Or are companies, flush with cheap capital from years of zero rates and now competing on narrative, all making the same directional bet simultaneously?

I don’t know the answer. Nobody does yet.

But I do know what a cluster of errors looks like.

The datacenter boom may be real. The productivity gains from AI may justify every dollar spent.

Or we may be standing in the Lordstown Motors ceremony, watching the cameras roll, believing the speeches.

The bill hasn’t arrived yet. That doesn’t mean it isn’t coming.

Incidentally, on Monday, young wunderkind fund manager Leopold Aschenbrenner released his fund’s latest 13F. According to one summary, he kept his core AI infrastructure longs but opened roughly $ 8.5 billion in new put positions across the semiconductor and broader tech stack, including SMH (the VanEck semiconductor ETF), Nvidia, AMD, Oracle, Intel, ASML, and others. In plain English, he’s now heavily short the semiconductor supply chain via options.

Do with that information what you will.

Wrap Up

The malinvestment cycle has a playbook. It’s been run enough times for the pattern to be visible.

During the boom, the malinvestment is invisible. Everything looks like genius. Valuations are “justified by the new paradigm.” This time is different. Anyone who questions it is a dinosaur, or worse, a pessimist.

At the turn, credit tightens, rates rise, and, usually, a single high-profile failure breaks the narrative. Suddenly, everyone sees what was obvious in retrospect.

During the bust, the weakest hands fail first. They’re the overleveraged companies or firms with no path to profitability. Simply, the businesses that only existed because capital was free.

After the bust: the real opportunities emerge. Assets that were genuinely productive, but got caught in the liquidation, trade at distressed prices. This is where you can build generational wealth.

Right now, we’re somewhere between boom and turn. Rates have risen in the markets, much to the chagrin of the President and, perhaps, the Fed. The market has already revealed some malinvestments: crypto, EVs, SPACs. Others are still wearing the emperor’s clothes.

Your job isn’t to predict the exact moment of revelation. Your job is to avoid being long the lie when it breaks, and to have dry powder ready for the aftermath.

Short the story stocks with no earnings and infinite promises. Own the boring, profitable, asset-heavy businesses that the boom ignored. Energy looks especially good right now. Keep cash or gold as an optionality for the other side.

The boom always ends. The butcher’s bill always comes.

The only question is whether you’re holding paper or something real when it does.