00:00Over the last really last couple of years, everybody's been trying to sort of either draw parallels or squash the
00:04parallels between what we're seeing now and what we saw during the dotcom boom and bust.
00:08The narrative was during the dotcom boom, these were all unprofitable companies, you know, selling into the market.
00:15And eventually investors woke up and, you know, the air got let out of the bubble.
00:19You make the case and it's very easy to verify that a lot of those names during the dotcom boom
00:26were not only profitable,
00:27they were growing at revenue growth that was pretty solid here.
00:30We're talking about names. Some of that are familiar today, like a Microsoft, like Oracle, Sun Microsystems.
00:37And I'm probably forgetting a few others there. But what happened? Cisco.
00:41That's the one I'm trying to think of. But what happened there?
00:44Because when the bubble did pop, it was those names, certainly on a dollar basis, that dragged the whole market
00:49down with it.
00:50Yes, exactly. So I think that the first point of this, as you said, that in this debate of the
00:55comparisons with 99, 2000,
00:57the popular narrative is that one big difference with them, which I think most people agree with,
01:02is to say that, listen, the earnings growth this time is great.
01:05And so therefore, the first quarter, when we got earnings growth of the S&P 500 of 25 percent or
01:11so,
01:11everyone said, hey, look at that. We don't need to worry about the tariffs or oil or anything else.
01:17Earnings are growing at 25 percent year over year. That's what we need to focus on.
01:21And then the point I make in the op-ed is basically that there are three cracks to this narrative.
01:26First, that these earnings in one way or the other are being artificially boosted by the fact that the government's
01:34running such a large fiscal deficit.
01:36That the fiscal deficit is 6 percent of GDP.
01:40Now, back in 99, 2000 or so, there was no fiscal deficit.
01:44The government was basically running in balance one of the very few times in the last few decades where the
01:50government has actually run a surplus.
01:52Right. So there was no government.
01:53And so then I show this mathematical equation called the Kaleke-Levy equation to show that this is an accounting
02:02identity,
02:03which is the government's running a big deficit.
02:05It means that the households and the corporate sector is running a surplus.
02:09It's a mirror image really of each other. And so the big difference between 99, 2000 and now in one
02:16way is that the government ran no deficit.
02:18Then now runs a big deficit. And some of that deficit is showing up in very elevated corporate profits.
02:24And you could see that even in the last quarter or so that, you know, that people are getting tax
02:31breaks.
02:32People are getting, you know, for both the corporate sector, the household.
02:35So the fact that the government's running a 6 percent of GDP deficit is something which is which is artificially
02:41boosting profits.
02:42Right. And then there is the other point, which is that people wrongly remember the 99, 2000 period because everything
02:47crashed.
02:48So everyone likes to paint that in a very negative way. Right. That this was just a bubble and look
02:52at it now.
02:53The earnings are strong. But leading up to that bubble, including in years such as 1999, the profit growth, if
03:00you look at the overall economy, was in fact very strong.
03:03So if you look at the tech sector, just focusing on the tech sector, the profit growth was about 20
03:08percent that year.
03:09Exactly the same kind of profit growth that we've got in the tech sector over the last year.
03:13And there's one of the very important difference with 99, 2000 back then, if you needed to raise money, you
03:20needed to go to the public markets.
03:22So you saw a massive IPO boom. And a lot of those companies which went to the public markets were
03:28not making profits.
03:29So they were very visible. The big change since then is 25 years later, is that now a lot of
03:36the funding happens in the private markets.
03:38Yeah. And a lot of early stage companies get their funding in the private markets and stay private for a
03:43very long period of time.
03:44Right. So therefore, the comparison with the S&P 500 is not like to like.
03:49You look at the overall profits of the economy. Yeah. And you get a different picture.
03:53I am curious, though, that what breaks this, if at all. And I want to go back to the deficit
03:56side.
03:57Is this a situation where if the government doesn't continue to increase that, that that creates a problem?
04:03I mean, what if it just stays at the same level? They don't increase it. It doesn't decrease in any
04:07meaningful way.
04:07What happens to corporate? Well, it's less of an impulse. So, you know, like this is all about rate of
04:12change.
04:13And, you know, there are other factors also. So it's not the causality in the short term is hard to
04:16establish.
04:17There are other factors. But the point I make in the piece is the fact that as long as bond
04:22deals don't rise, this party can continue, which is.
04:25And this goes back to a bigger point, which is that are we in a bubble? And if you're in
04:30a bubble, what ends the bubble?
04:32And here my sort of framework is this. And I've looked at bubbles for the last 300 years or so.
04:36And they typically follow a certain pattern. There are four O's, as I say, which every bubble ticks of overvaluation,
04:45overinvestment, overownership and overleverage.
04:48On many of these metrics, you can say, check, check, check. Right. But there's no science that when does this
04:53end?
04:54Yeah. Just going back to the 99, 2000 comparison, that the valuations got even more extreme before the whole thing
05:01ended.
05:02And there's only one factor which ends all bubbles over 300 years. That's higher interest rates.
05:08So until we get higher interest rates, it's very hard to see this party stopping because the amount of capital
05:14available for people to spend on this bubble is enormous.
05:17Let's get to the idea, though. What would be the argument at this point way for moving interest rates lower?
05:24But as everyone's focused on what's going on in the straight over moves and what's now become a relatively prolonged
05:28energy shock, if you will, that could get longer.
05:33Why am I to believe that somehow interest rates would even stay where they are, let alone come down, as
05:38some people are hoping for?
05:39No, in fact, I think that there's a case for the Fed to increase interest rates just now, because even
05:44though we keep blaming short term factors for these for inflation, the fact of the matter is this, that for
05:49more than 60 months in a row, six zero months in a row, the Fed has missed its 2 percent
05:55inflation target.
05:56Yeah. Which really means that if you look at the 25 year history of the Fed, which is this century,
06:01the Fed, the actual inflation rate has been much higher than even the 2 percent target that the Fed's had
06:08for 25 years.
06:09Because in fact, in the last five, six years, they've consistently missed the target.
06:14Yeah.
06:14So this is really hurting people. So there's a populist case to be made today as to why the focus
06:20of the Fed needs to be to win the war against inflation.
06:24Inflation is a real problem. And I think that this is something which is being overlooked.
06:28Yeah.
06:28Now, of course, the other problem is the long end of the curve.
06:31Yeah.
06:31At some point in time, you keep running these deficits, the market is going to begin to revolt.
06:35We're seeing some signs of that around the world, UK, Japan, maybe.
06:38But it's not reached a breaking point.
06:40But if you keep running these deficits, you ask what will happen if you keep running 6 percent deficits.
06:44At some point in time, obviously, the bond market is going to revolt.
06:48So far, we're not seeing that.
06:50But I think that the case in the next 12 months is for higher, not lower interest rates.
Comments