The chart below uses data from the AAII portfolio survey, ICI assets under management, and the Fed’s own data on financial variables. Taking a perspective of forty years, one must conclude that investors live in empyrean stock realms, while systemically departing from the bond territory. Could that have any relationship to Don Giovanni’s seduction of young women?
The proliferation of passive investing (as shown below) via index funds and ETFs, at a time of expansive monetary policy that proliferates capital velocity, seems to be becoming a self-fulfilling prophecy for the hottest stocks. This structural change in the markets comes with a significant risk: The lifeboats are not enough to hold all the passengers onboard the ship, but Don Giovanni states, “I have nothing to repent!”
The market has been surging higher due to a proliferation of earnings estimates (see graph below), which are stimulated by rising capital velocity and fiscal profligacy made possible by the Fed’s easy money policies, and consequently, are leading the market to a stage of melting up. More specifically, recent consensus estimates of forward earnings for the S&P 500 this year are averaging $336, and for next year, averaging $386. The Spanish dramatist Tirso de Molina, in 1630, made famous the character of Don Juan in the play known as The Seducer of Seville.
Wolfgang Amadeus Mozart’s opera Don Giovanni (with a libretto by Lorenzo Da Ponte) opened in Prague in October 1787 with sensational success. However, it failed in Vienna, and that broke Mozart’s heart. Mozart’s Don Giovanni is a person of charm and brilliance. Don Giovanni seduces young women not for love, but out of unmet curiosity that is never satisfied. Don Giovanni abandons them all and breaks their hearts. The father of his last mistress (the Commandatore) challenges Don Giovanni to a duel. Don Giovanni kills the elderly adversary while laughing. His victim asks him to dinner, and Don Giovanni, in his ever-cynical courtesy, invites him to dinner in return. Leporello (Don Giovanni’s servant) is shocked by such blasphemy.
The proliferation of AI tools is stimulating earnings growth estimates and is seducing the hyperscalers into more spending, as shown below. Could the steep cost of such spending be reminiscent of Don Giovanni’s experimenting on a woman’s soul? Don Giovanni seeks in his victims a strain of greatness that they do not possess. In the end, they always disappoint him. The father of his latest mistress is discarded until he comes to the dinner.
As the Commandatore knocks at the door, Leporello shrinks in fear, but Don Giovanni, undaunted, strides to the door and flings it open. The Commandatore takes Don Giovanni’s hand in his icy grip. Don Giovanni is fascinated by what awaits him. He has finally found a challenge worthy of him.
