By the title, you might think I’m writing about a 4-year old’s birthday party. But I’m not.
Do you remember the phrase “Irrational Exuberance?” The phrase was used in a speech by former Fed Chair Alan Greenspan to reflect the state of the US Stock Market as the Dotcom bubble was inflating. Next question, do you remember when he gave that speech? The answer: December of 1996. That was 3.5 years before the bubble burst. The Stock Market continued to soar to record heights before coming crashing down in 2000 and finally finding a bottom in 2003. The thing is, that wasn’t the first time asset prices got over-inflated and it wasn’t the last time either.
Bidding up assets is not new. It’s probably been going on since humans first walked the earth. Tulip Mania is believed to be the first asset bubble in recorded history. Tulips were all the rage for the Dutch in the 17th century, with bulb prices skyrocketing out of control until they plummeted. In the 1980s, Japanese stocks and real estate tripled in price. You may remember Japanese investors bought the iconic American real estate treasures Pebble Beach and Rockefeller Center. They were forced to sell them in the 1990s after nearly defaulting. The Japanese Nikkei peaked in 1989 followed by sharp declines and what’s referred to as the lost decades. In fact, three decades later, the Nikkei is still well below that all-time high. We already chronicled the Dotcom bubble above, which was followed by a bubble in housing and a bubble in commodities. Housing was so hot that you barely needed a pulse to get a loan 13 years ago. Greed and enthusiasm are very strong human emotions.
When people are making money, they have often ignored underlying issues and problems. Greed prevents you from rational decisions. Discipline doesn’t. Have you ever left a party and found out the fun kept going and you missed out? People want the fun to end immediately when they leave. There really is a fear of missing out. It’s the madness of crowds. It’s precisely why Markets stay overbought far longer than oversold. The only question: is how high and how long before it’s over? As strong a sensation that is greed, it pales in comparison to fear. Sell-offs tend to be fast and fierce. Remember December? It seems as many on Wall Street have forgotten. Monday was a bit of a reminder, with the 2nd largest decline on the year for the DOW and S&P. But buyers stepped in again which erased most of the losses on the week. Buying the dip has worked for 10 years. Quite simply, it will continue to work until it doesn’t.
Next month will mark ten years without a recession. That has never happened before in recorded American history. It’s a pretty remarkable achievement. It’s also a reminder that this cycle is mature. The US economy has experienced very muted growth since the Financial Crisis, with very little inflation. There has been no real economic boom, so naturally, there shouldn’t be a bust. But growth rates are slowing and interest rates remain low. It’s worse overseas. Europe and Japan are fighting deflation and recessionary pressures. Some interest rates are negative overseas.
There have been some elements of euphoria though, and it’s come from Silicon Valley. The IPO Market has been crammed with new issues. To be sure, these are fast-growing companies with disruptive business models. They are referred to as the “Unicorns,” and were expected to take the baton from Amazon and Facebook and Google as the next generation leaders in Tech. There has been a lot of money chasing these unicorns. It hasn’t been just Wall Street. Saudi Arabia has aggressively invested here to diversify from its dependence on oil. The problem is, their growth rates are already slowing and they have no visibility to profits. It takes two to make a market. You have to pay attention to who is buying and who is selling. The new IPOs have widely disappointed, as evidenced by the trading debut of LYFT and UBER and the initial earnings report for Pinterest. All three stocks are sharply lower from their initial offer. The Unicorns are acting more like donkeys with plastic horns. The one bright spot has been Beyond Meat, which has soared to ridiculous heights. Beyond Meat is vegetable, not animal. It’s a pea-based, vegan unicorn. Beyond Meat is beyond logic.
There has certainly been an underlying mania in fast-growing Tech stocks which have sent prices to unsustainably high levels of valuation. It is reminiscent of the Dotcom days. The major difference is the fact that a broad-based euphoria has not infected the American people as it did 20 years ago. Our sense is the deep political division throughout the country is keeping excess enthusiasm at bay.
The Stock Market and the Bond Market continue to tell different stories. The Bond Market keeps telling us that growth is slowing and the Fed needs to act quickly. The Fed already reversed course abruptly in January. But they don’t seem to be willing to move any further just yet. The Stock Market views interest rate cuts like a spiked punch bowl. The Stock Market has also celebrated every time there was a positive headline on the Trade War. The Trade War appears to be completely in flux right now, but the Stock Market doesn’t seem to be pricing that in. Throughout history, there have been plenty of times when the Stock Market acted irrationally. It’s the Bond Market which maintains the discipline. The Bond Market will never be the life of the party. But the Bond Market can help us stay out of trouble.
We continue to maintain our defensive positioning and plan to increase it with signals of more trouble ahead.
Have a nice weekend. We’ll be back, dark and early on Monday.
Investing in the health of the next generation.
Bedell Frazier was proud to be a champion sponsor this past weekend at The Children’s Health Guild Spring Gala and Auction. The mission of CHG is to provide the full circle of medical care for patients including emergency care, on-going treatment, transitional and respite care. Funds raised at the event help provide the full circle of health care services through beneficiary organizations of George Mark Children’s House and UCSF Benioff Children’s Hospitals.
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