Peter A. Thiel
Hoover Institution Policy Review, February-March 2008
Edited by Andy Ross
An apocalyptic dimension has emerged in the modern world. Will
the end of the world be an environmental catastrophe like runaway global
warming, or will it be murderous robots, genetically recombined viruses,
nanotech devices, or the spread of nuclear weapons?
The world's financial markets remain eerily complacent. The news and business
sections seem to inhabit different worlds. Apocalyptic thinking appears to have
no place in the world of money. Anyway, how should the risk of a comprehensive
collapse of the world economic and political system factor into one's decisions?
From the point of view of an investor, one may define such a secular apocalypse
as a world where capitalism fails. The secular apocalypse would encompass not
only catastrophic futures in which humanity completely self-destructs but also
other scenarios in which free markets cease to function.
By definition, the apocalypse would be worldwide in extent. For this reason, the
point of departure for our thought experiment centers on the future of
globalization. We are guided by the hope that the right sort of globalization
might prevent the apocalypse.
Globalization means a breaking down of barriers between nations, an increase in
travel and knowledge about other countries, an increase of trade and competition
among and between the peoples of the world, and the death of divisive cultures.
On the level of economics, it means a global marketplace. On the level of
politics, it means the ascent of transnational elites and organizations.
A large segment of the global population perceives much of globalization to be
injurious. Groups that once managed to live in relative peace through
separateness feel increasingly threatened. For every account of globalization
that culminates in the capitalist paradise, there are others in which
globalization results in world-wide anarchy or tyranny.
All versions of anti-globalization are incoherent. One can imagine various
details, but the pieces do not add up on the level of the whole world.
Anti-globalization cannot be a global political agenda.
Globalization may end by accident or by terrible miscalculation. Because there
would be no winners in a new world war, every path away from globalization will
end in catastrophe. Investors have no choice but to bet on globalization. There
are no good investments in a world where globalization fails.
For the past three centuries, the great rises and falls of the West track the
high and low points of the hope for globalization. And the rises and falls of
the globalizing West have been tracked by the peaks and valleys of the stock
In the real estate mania of recent years, local markets have been sold and
oversold as the keys to the global economy. The greatest booms have taken place
in the cities that will centralize the world of the future: Shanghai, Dubai,
Manhattan, and London.
Recent bubbles represent different facets of a single Great Boom of
unprecedented size and duration. As with the earlier bubbles of the modern age,
the Great Boom has been based on a story of globalization, told and retold in
This time around, globalization either will succeed and humanity will achieve a
degree of freedom and prosperity that can scarcely be imagined, or globalization
will fail and capitalism or even humanity itself may come to an end. The real
alternative to good globalization is world war. Such a war would be apocalyptic
in the twenty-first century. So the Great Boom either is not a bubble at all or
it is the final and greatest bubble in history.
Let us assume that, in the event of successful globalization, a given business
would be worth $100 per share, but that there is only one chance in 10 of
successful globalization. Theoretically, the share should be worth $10, but in
every world where investors survive, it will be worth $100. Would it make sense
to pay more than $10, and indeed any price up to $100?
The reverse version of this sort of investment would involve the writing of
insurance and reinsurance policies for catastrophic global risk. In any world
where investors survive, the issuers of these policies are likely to retain a
significant portion of the premium, regardless of whether or not the risks were
To take a recent example, in 1999 investors would not have risked as much on
internet stocks if they still believed that there might be a future anywhere
else. Perhaps investors perceived that in the long run the New Economy, no
matter what the risks, represented the only chance.
Such an extreme combination of hope and despair can be found in many places. On
the level of the individual, there is the aspiring actor or model in Los
Angeles. On the level of the nation, there is Israel, where entrepreneurs are
racing against a background in which everything might be destroyed overnight.
Just as the risk of a secular apocalypse defines the limits of our world, one
might speak of the risk of a "personal apocalypse" that defines the limits of
our lives. The subprime housing boom in the United States is not simply the
result of extreme optimism about the prospects for housing, but also a
reflection of the fact that millions are approaching retirement in a bankrupt
The greatest investments of our time remain those most highly levered to genuine
globalization. But because the line between good and bad (or no) globalization
is very thin, catastrophic approximations abound. The difficulty of the
challenge can be illustrated by considering three related examples: the China
bubble, the Web 2.0 bubble, and the hedge fund bubble.
The rise of China is impressive. If its growth rate can be sustained, China will
become the world's leading economic power in about 20 years. For the rest of the
world, China's emergence will be a positive development so long as it remains
deflationary. The globalization of the labor market will make goods cheaper
throughout the developed world.
However, there is no good scenario for the world in which China fails. Should
one therefore simply invest in the Chinese stock market? There are many
parallels between the Chinese stock market of early 2007 and the Nasdaq of early
Web 2.0 businesses represents a leveraged bet on globalization. But the internet
already has seen one large boom and bust cycle. The valuations may be a bit more
reasonable this time around. On the other side, the extreme distribution of
outcomes imposes a severe challenge on any positive expected returns.
Hedge funds buy and sell mispriced assets. In today's globalizing and unbalanced
world, there are many seemingly mispriced assets and correspondingly many
opportunities. If the Great Boom ends well, then the hedge fund industry will
outperform other sectors less levered to globalization. A world where global
financialization stops is a bad world for hedge funds, but also for just about
Investors who limit themselves to what seems normal and reasonable in light of
human history are unprepared for the age in which they now find themselves.
Because we find ourselves in a world of retail sanity and wholesale madness, the
truly great opportunities exist in the wildly mispriced macro context, rather
than in the ever-diminishing spreads on esoteric financial markets or products.
The narrative of the past four centuries has not been one of continuous
progress. A near-term backlash against globalization should not be confused with
the end of the world.
Peter Thiel is the president and portfolio manager of Clarium Capital Management
and the chairman of the board of Palantir Technologies, Inc. He co-founded and
served as the chairman and CEO of PayPal, Inc.