Fabricated Knowledge
When I started this newsletter, I never thought I would be this profoundly involved with cycles. After specializing in semiconductors, cycles have become my overarching industry framework, and they feel universal to most human activities.
Everything has cycles. As sure as the tide comes in, tides go out. A glut follows every semiconductor shortage. It’s a universal law and rule of capitalism. We are in the middle of the most potent cycle I’ve seen in my professional career: AI.
There are many frameworks and ways to think about this concept, but my favorite is “The Capital Cycle.” Marathon Asset Management uses the capital cycle framework to demonstrate that even money is cyclical.
Simplistically, money chases high returns. This is intuitive. When an investor makes an extremely high return on capital, capital chases high returns into the space until returns on that capital diminish. This is a fundamental tenant of capitalism.
Usually, there is a correction mechanism. When the supply of capital is too high, the supply and demand of the underlying investment crosses, and returns plummet in the space. Now, there’s another consideration: from time to time, this cycle breaks with a short-term feedback loop, and that is often called a bubble.
