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The Next Grand Deception

A few of my colleagues sat around Friday trying to guess which company or industry would be exposed as the next Ponzi scheme or bubble. We have suffered through Worldcom and Enron and Lehman, AIG, B of A, and Citibank.

In each of those cases, we saw the same pattern.

• The whole world thought they were geniuses, and they believed it too.
• Even adversaries in the marketplace and regulators were dazzled.
• In each case there was a conceit: "We play by a new set of rules."
• The "new rules" turned out to be finite, not sustainable; like a Ponzi scheme.
• Problems were obvious in retrospect: we all suffered from willful blindness.

In some cases there was outright fraud; in other cases there was just a lot of self-deception, but despite the particulars and differences, there was actually a lot of commonality behind all of these cases.

Can we find the Next Grand Deception before the bubble pops?

A Kernel of Truth

At the heart of a bubble is always some kernel of truth, some interesting story. The Internet is changing the world, so we get the Internet Bubble. Telecommunications will be consolidated, so we get Worldcom. Energy will be traded like a commodity, so we get Enron. Derivatives can be valued efficiently using computer models, so we get Long Term Capital Management. In each case the "good idea" became a story with a life of its own, justifying a rampage of self-overconfidence.

In each case the story became an excuse to build an old-fashioned pyramid scheme, drawing money and goodwill from finite accounts on a bet that the good news could continue forever. But while you can make some new money on the Internet, in consolidated telecom, in energy trading, and in derivatives, the pool of money to be made is not infinite. No good story can justify infinite borrowing, infinite investment, or infinite leverage. The world is finite.

Looking for a False Infinity

So the question is this.

The next grand deception (and self-deception) is happening now, a bubble inflating in plain sight. It is driven by a world-changing story, a profound idea that is so big that it justifies endless investment. And yet it is a bubble that will pop when the world suddenly recognizes that the opportunity is limited. At the moment, we are all willfully blind to the limits of it.

So where is the next grand deception? We know that:

• The deceivers look like brilliant geniuses. They believe in themselves.
• Even adversaries (who are getting crushed) and regulators are dazzled.
• They are claiming to play by a new set of rules. Something unprecedented.
• However in reality you cannot play by those "new rules" indefinitely.
• Problems will seem glaringly obvious in retrospect.

Who do you think is building the next Grand Deception?

Is it obvious to you?

Posted by David at March 20, 2010 07:24 AM