Before every financial bubble bursts, wise as well as unwise prophets issue warnings, sometimes years in advance. (Timing is part of the problem, as we’ll see later.)

Yet seldom has there been so much agreement, and so many signs, that securities markets and the U.S. economy are in a bubble that may soon peak:

• The hedge fund manager Michael Burry, featured in Michael Lewis’s book The Big Short for his winning bets on the 2008 housing market crash, has taken short positions (through options) in some of the highest-flying AI companies.
• The big AI corporations are so interlocked through a network of 11-figure investments that trouble in one could easily cascade through others and the wider economy.
• The disparity between affluent shareholders and the rest of the population has been growing steadily – just as in the Roaring Twenties, when soaring stock prices of the day’s high-tech corporations such as RCA encouraged indifference to structural economic weakness, notably severely depressed farm income. That period ended in the Great Depression.
• Despite the recent truce with China, Donald Trump’s tariff drive recalls the infamous beggar-thy-neighbor Smoot-Hawley Tariff Act of 1930, which deepened the Great Depression.
• The explosion of day trading and rise of meme-driven mass speculation, along with regulators’ seeming difference to letting unsophisticated small investors join the volatile world of private equity, raises warning signs about Main Street investors betting their farms on speculative ventures.
• Donald Trump and his family’s embrace of cryptocurrencies creating dangerous conflicts of interest in public policy, which when combined with increasing integration of cryptocurrencies with the banking system, is inherently destabilizing. 
• Alarm bells are ringing over bad loans at regional banks, including Zions Bank, Western Alliance and Jefferies.
• Bankruptcies are spreading in the auto-supply sector, with problems not limited to embattled First Brands. 
• Major technology firms, including Amazon and Microsoft, which in the past have always seemed to be hiring, have announced tens of thousands of layoffs.

Each of these straws in the wind may be less than dire news, yet together they suggest alarming weaknesses in the economy. The most convincing source of alarm may be the celebrated expert on bubbles, Yale economist and Nobel Laureate Robert Shiller. In a recent market forecast he noted that “history offers a cautionary tale: past technology booms produced only a handful of long-term winners.”

Shiller’s forecasting record is reassuring – or daunting, depending on your perspective.  His book, Irrational Exuberance, whose title was borrowed from Alan Greenspan’s 1996 warning of a market collapse to come, was released with timing rare in the publishing industry, at the very peak of equities markets in March 2000. Not coincidentally, the $37 million, eight-story high Nasdaq sign in New York’s Times Square, commemorating the new dominance of tech stocks in the equities firmament, had been completed the previous month.

The four-year gap between Greenspan’s warning and the bursting of the bubble points to the difficulty of profiting from the eventual pop. It’s analogous to the challenge that blackjack gamblers faced in the days when skilled play based on statistical insight, if undetected by Las Vegas casino security, could win against the house. In practice, this meant casino surveillance would let a team executing carefully choreographed deception accumulate significant earnings. The so-called MIT blackjack team of the ’80s and ’90s was thus a meticulously trained theatrical troupe as well as a gang with formidable memory for hands played.

If the odds are against you, you will eventually go broke. But what if the odds are slightly on your side as in the case of the MIT gang? It is still essential to have a bankroll large enough to withstand losses until your advantage kicks in. Skilled individual bettors without those resources risk going broke, even without facing today’s ubiquitous casino countermeasures.

One poster child for this risk is the hedge fund manager Michael Berger. Growing up in Austria in the 1980s, Berger was one of an international generation of young people who saw Michael Douglas’s character Gordon Gekko in the film Wall Street not as an object lesson in the perils of greed but rather as a role model. The Austrian documentary filmmaker Thomas Fürhapter traced Berger’s path in Michael Berger: A Hysteria (2010). Berger ran the blandly named Manhattan Investment Fund, betting that irrational exuberance would lead to a new crash by selling early tech stocks short as the tech bubble of the ’90s inflated. 

He turned out to be right, of course. The catch with betting by short selling, though, is the interest that must be paid on shares that are borrowed to sell short. If a bubble continues to expand, the cost can also grow beyond the borrower’s capacity to sustain it. Berger managed to carry on by defrauding investors with fake statements of the kind that Bernard Madoff was creating. Berger, like Madoff, operated a Ponzi scheme. But unlike Madoff, he saw a possible pot of gold at the end of the rainbow.

In fact, only two months elapsed from his fraud indictment in January 2000 to the dot-com crash in March. With sufficient reserves to last for those two months, he might have been acclaimed as a genius. Instead, he became a convicted felon and a permanent fugitive — Austria denied the U.S. extradition request.

• • •

Whatever happens to markets in coming months, the lesson of the Berger case is that successfully betting on a bubble bursting takes reserves beyond the means of most people. And this applies to professional gambling, too. One of the most skilled of the casino-team academics is Persi Diaconis, a Stanford professor of mathematics and statistics and MacArthur Fellow, who decided the pain wasn’t worth the gain. He abandoned blackjack and returned to what we must imagine is a handsome but not Gekko-grade university salary. As he told New Scientist magazine: “I realized that you make much more money proving theorems.”