Financial luminary Andrew Ross Sorkin, author of “1929,” sees unsettling reflections of the pre-Great Depression era in today’s market. With an AI-fueled speculative frenzy, rising debt, and a rollback of critical financial guardrails, Sorkin issues a stark warning: a significant market correction is not a question of if, but when. Savvy investors must understand these historical parallels to navigate the impending turbulence and protect their portfolios.
In the high-stakes world of financial journalism, few voices carry the weight and historical perspective of Andrew Ross Sorkin. Known for his bestselling book “Too Big to Fail” which chronicled the 2008 financial crisis, and as co-anchor of CNBC’s “Squawk Box,” Sorkin now turns his discerning eye to an even earlier, more infamous market collapse: 1929. His new book, “1929,” arriving October 14, draws alarming parallels between the exuberance, speculation, and systemic risks of nearly a century ago and the present-day market landscape, particularly concerning the burgeoning artificial intelligence (AI) boom.
The Plaza Hotel: A Century Apart, Yet Strikingly Similar Market Mania
Sorkin often grounds his historical analysis in vivid imagery, recalling the opulence and frenzy of New York City in 1929. The storied Plaza Hotel, a setting in his book, was not just a gathering place for the city’s elite; it was a hotbed of market activity. “In 1929, people would come here and it was insane — every business guy would be here and they would all sort of gawk at each other,” he recounts. Even the hotel’s Oak Room bar was transformed into an EF Hutton brokerage, illustrating how deeply speculation permeated daily life during Prohibition.
This historical tableau, where financial markets became a “national pastime,” eerily echoes today’s landscape. While the specific venues have changed, the spirit of “democratizing finance” and providing widespread access to speculative opportunities remains strikingly similar. Sorkin points to this as a key rhyme in history.
The Echoes of Emerging Technology: RCA vs. AI
One of Sorkin’s most compelling parallels lies in the role of transformative, yet unproven, technology. In the 1920s, Radio Corporation of America (RCA) captivated investors, its stock soaring to exorbitant levels. Despite radio’s genuine revolutionary potential, RCA’s share price plummeted from approximately $530 to a mere $3 during the crash. The speculative frenzy far outpaced the underlying value.
Today, the same fervent excitement surrounds Artificial Intelligence (AI). While AI is undoubtedly a game-changing technology, Sorkin questions the sustainability of current investment levels. “Is there overbuilding going on when you have customers who are ultimately being financed by the supplier?” he asks, citing instances like Nvidia’s substantial investment in OpenAI. This raises concerns about whether the massive capital inflows constitute a genuine gold rush or merely a “sugar rush” that could lead to an eventual crash.
Democratizing Risk: From Margin Buying to Crypto and 401(k)s
The “democratization of finance” was a seductive concept in both eras. In the 1920s, ordinary investors were lured into the market through margin buying, putting down as little as 10% of a stock’s price and borrowing the rest. This easy credit fueled unchecked speculation, often with catastrophic results when the market turned. Sorkin notes that financial instruments like “buying on a margin” were initially presented as a way to give everyone access to wealth, but in bad times, investors were left heavily indebted.
Today, a similar narrative unfolds. The riskiest parts of the market, traditionally reserved for accredited investors, are becoming increasingly accessible to the average person. This includes private equity, private credit, venture capital, and, notably, cryptocurrency. There’s a significant push to open up these opportunities, including proposals from figures like BlackRock CEO Larry Fink, who suggested allowing riskier private investments into 401(k) retirement funds in the name of diversifying portfolios, as reported by InvestmentNews. Sorkin warns that while this grants broader access to potentially higher returns, it also exposes everyday investors to unprecedented risk, as seen with the volatility of assets like meme coins, which can soar and then crash dramatically.
The Erosion of Guardrails: Deregulation’s Perilous Path
Perhaps the most concerning parallel Sorkin identifies is the systemic weakening of financial regulations. The devastating 1929 crash led to crucial reforms, including the creation of the Securities and Exchange Commission (SEC) and requirements for companies to issue prospectuses. These “guardrails” were designed to prevent a repeat of history’s worst financial collapse. Even after the 2008 crisis, additional protections were implemented.
However, Sorkin observes that many of these protections are now being rolled back. He highlights efforts to weaken the Consumer Financial Protection Bureau (CFPB), which protects individuals from predatory financial practices. The Trump administration, as discussed by The New York Times, notably sought to dismantle or significantly weaken this agency. Other concerns include potential shifts from quarterly to twice-yearly earnings reports, reducing transparency, and revisions to the definition of an “accredited investor,” which could open riskier investments to those less prepared for them.
Sorkin emphasizes: “It’s not that we’re going off a cliff tomorrow. It’s that there’s speculation in the market today, there’s an increasing amount of debt in the market today, and all of that’s happening against the backdrop of the guardrails coming off.”
An Inevitable Crash? Understanding Sorkin’s Prediction
Despite his historical warnings, Sorkin doesn’t claim to predict the exact timing or depth of a future crash. “I don’t want to tell you that today is 1929… I think it’s actually unlikely,” he states. However, his conviction remains firm: “We will have a crash.” He sees undeniable signs of a bubble, with investor exuberance around AI driving stock valuations to “nosebleed levels.” Indicators like the Shiller CAPE ratio are at their third-highest level ever, and the so-called Warren Buffett indicator has reached an all-time high, signaling potential overvaluation, as discussed in Business Insider and in an article on AI-driven valuation risks. While bubbles can fuel innovation and wealth creation, human nature’s tendency towards greed ensures that excesses in financial markets will always lead to a subsequent downside.
Investor Action: Lessons from Einstein and History
Sorkin’s “1929” includes a poignant epigraph from Albert Einstein, dated just three days before Black Tuesday: “The ordinary human being does not live long enough to draw any substantial benefit from his own experience. And no one, it seems, can benefit by the experiences of others. Being both a father and teacher, I know we can teach our children nothing…Each must learn its lesson anew.”
This powerful quote serves as a stark reminder for the investment community. While the market’s current trajectory might feel like an unstoppable force, history provides invaluable lessons. For long-term investors, Sorkin’s insights underscore the importance of:
- Due Diligence: Thoroughly understanding the fundamentals of investments, especially in speculative sectors like AI and crypto.
- Risk Management: Avoiding excessive leverage or over-concentrating portfolios in highly volatile assets.
- Long-Term Perspective: Resisting the urge to chase short-term gains driven by speculative frenzies.
- Awareness of Regulations: Understanding how changes in financial oversight can impact market stability and investor protection.
Sorkin’s work is not a call to panic, but an urgent invitation for investors to study history, recognize its rhymes, and arm themselves with knowledge. The market may always seek to teach its lessons anew, but informed investors can choose to listen to the echoes of the past.
