Devina Mehra of First Global challenges the belief that markets are always efficient, citing George Soros' theory of reflexivity. She warns that stock prices in sectors like AI may be creating feedback loops that mask weak fundamentals. Investors are cautioned that when these expectations decouple from economic reality, the resulting correction can be severe.
Devina Mehra, founder of First Global, has questioned the long-standing academic belief that financial markets are always efficient. The Efficient Market Hypothesis suggests that asset prices reflect all available information, meaning they are usually accurate. However, Mehra argues that real-world volatility often proves this wrong, as markets are frequently driven by systemic distortions rather than pure logic.
To explain these deviations, Mehra points to George Soros' theory of reflexivity. In this framework, the relationship between prices and business fundamentals is not one-way. While business results usually drive stock prices, reflexivity suggests that stock prices can also influence business results. When a company's stock price rises significantly, it can raise capital more cheaply. The company then uses this capital to spend on growth or expansion, which can boost its financial performance, further justifying the high stock price. This feedback loop can create a cycle where momentum takes over, often decoupling a stock's valuation from its actual earning potential.
Mehra draws a parallel between this theory and the current excitement in the artificial intelligence sector. With significant capital being directed toward AI projects, she suggests the sector shows characteristics of a bubble. The risk arises when high-interest debt is used to sustain growth that is driven more by market hype than by sustainable earnings. If companies prioritize keeping the momentum going over maintaining financial health, the structure becomes fragile.
This is not a new risk. History provides several examples of what happens when credit-fueled cycles hit a breaking point. For instance, the BSE Sensex fell by roughly 61% between January 2008 and March 2009. That period was a stark example of how markets can swing from excessive optimism to extreme panic when credit availability tightens and expectations fail to match economic reality.
For investors, this perspective highlights the importance of looking beyond just price trends. A business might look successful because of a high stock price or easy access to capital, but that does not always translate into long-term value. Investors may monitor indicators such as debt levels, actual cash flow, and whether earnings growth is keeping pace with the money being spent on expansion. When market prices dictate business decisions rather than the other way around, the likelihood of a correction increases. Understanding the difference between value created by fundamental performance and value driven by market feedback loops is essential for navigating volatile market cycles.