The Investment Lessons Learned from 1873

SPEAKER_1 (0:02)

Bloomberg Audio Studios, Podcasts, Radio, News.

SPEAKER_2 (0:08)

You're listening to Bloomberg Businessweek with Carol Massar and Tim Stenovec on Bloomberg Radio.

SPEAKER_3 (0:16)

He's the Pulitzer Prize-winning author of Lords of Finance, The Bankers Who Broke the World about what led to the Great Depression. His latest book out earlier this year, 1873, I got it in my hand right here, the Rothschilds, The First Great Depression and the Making of the Modern World. We got the author, he's a former investment manager, Liaquat Ahamed with us right now. He joins us here in the Bloomberg Interactive Brokers Studio.

SPEAKER_2 (0:40)

Welcome, welcome.

SPEAKER_4 (0:41)

We're kind of rushing because we're going to be quite honest. We have been talking about your book in the newsroom with different colleagues. We've been kind of thinking about, we do a three-hour show, we just couldn't wait to get to this four o'clock hour because we feel like so much in the book is relatable to kind of where we are. But I guess we kind of want to start with your first book. Congratulations. Thank you. A Pulitzer Prize. It was about the 1929 depression and the events leading up to it. And this book is about 1873 and the events leading up to another time where we went from a boom to bust.

Why choose this moment in time as your second book?

Liaquat Ahamed (1:18)

Well, I was looking for another financial crisis, and this was readily at hand.

It was actually the first global financial crisis and covered both Europe, the US., and in fact, across the world. And I started it five years ago, so I had no idea...

SPEAKER_4 (1:46)

How funny.

Liaquat Ahamed (1:46)

that we were going to be talking about AI and the boom in AI infrastructure.

SPEAKER_3 (1:55)

Well, let's get to that part, because you mentioned it. I mean, I couldn't help but, as I was reading the book, to compare what's happening with the AI investment boom right now, the financing of it.

Liaquat Ahamed (2:08)

Right.

SPEAKER_3 (2:08)

Every time I read something about the frenzy around railroads and railroad financing, not just in the United States, but really throughout the world, what are the parallels there?

Liaquat Ahamed (2:21)

Well, many parallels. So start out with there's a new technology, the railroads, gets people very excited. It's a technology that requires a gigantic amount of capital. So in the US, 5% of GDP was devoted to railroad construction, which in today's terms would be $1.5 trillion. So comparable to the amount of money that's going into data centers and AI infrastructure.

What was also true then and is beginning to be true now is most of it was debt financed. The equity market was tiny and 80% of the money that went into railroads was financed through the bond market.

SPEAKER_4 (3:22)

And I feel like, you know, we just take the bond market for granted today. It wasn't, I mean, it was the creation, really, in many ways of the bond market that we exist in today.

Liaquat Ahamed (3:32)

Yes. I mean, it was actually the main financial market. Equities, in the US, the bond market was $3 to $4 billion. Equities were less than a billion. So it was dominated by the bond market.

And I suppose the other parallel, I mean, I can come to all the many parallel. But, so the first was, you get this construction boom in railroads, and like lots of booms, there's over investment. So there's too much money going into the railroads. As a consequence, the profitability of the railroads starts eroding.

So by 1872, only one in five railroads was paying a dividend. So sort of watch out for this AI boom when profitability starts declining.

SPEAKER_3 (4:45)

Should we be watching out right now? I mean, you write about bubbles in the story, in the book. You write, quote, it does not actually take enormous pressions to spot when a market has entered bubble territory. What is difficult is predicting when exactly it will burst. Are we in an AI bubble right now?

Liaquat Ahamed (5:07)

Yes, but getting the timing right of when it's going to burst is the giant challenge. Previous infrastructure booms have taken anywhere from two to four years to play themselves out. So I don't know, we're two years into this one, it could go on for another two years.

So, you know, some of them have only lasted two years. Some of them have lasted as long as four years.

SPEAKER_4 (5:39)

So do they all end badly?

Liaquat Ahamed (5:45)

The major ones all end badly.

SPEAKER_4 (5:47)

And this would be a major one?

Liaquat Ahamed (5:48)