Why do cycles die?
There are a lot of possible (plausible) answers, but one of them isn’t “old age.”
Most of you will recognize that as an allusion to a pithy macro aphorism. At the risk of mixing and combining metaphors, I’ll note that while trees don’t grow to the sky, economies can expand more or less indefinitely absent a shock or a policy mistake.
Although exogenous shocks have a part to play, it’s often central banks which end up killing cycles, either with policy tightening or, in a lot of cases, persisting too long in loose policy which facilitates excessive risk-taking thereby sowing the seeds for speculative bubbles which eventually burst.
It’s my opinion that we’re in a bubble right now, but not so much because monetary policy’s been unduly easy — although there’s an argument to be made that policy settings in the US aren’t nearly as “restrictive” as the Fed claims — but rather because we’re in the hype phase of a new technological epoch. The phase where smart people suggest “this time’s different,” even as the voice in the back of their minds whispers, “It’s never different this time.”
The problem with betting against an ostensible bubble is that it’s akin to market timing, and as I explained for the umpteenth time earlier this week, trying to time a burst bubble is far more likely to lead to underperformance than it is to make you Michael Burry. (You’re reminded that Burry didn’t time it exactly right either, he was just obstinate enough to stick with it.)
Besides all that, the other problem with betting against this bubble is that it’s now being aided and abetted by monetary policy. Actively aided and abetted. The Fed’s cutting rates with the S&P trading on a 23x forward multiple, which some critics might be inclined to call crazy, irrespective of nascent labor market weakness.
Regardless of what you’re inclined to call the September rate cut and the 50bps of additional easing the Fed’s likely to deliver over the balance of 2025, you can’t call it bearish for risk. The easier the money, the “better.” With that in mind, have a look at the chart below, from BofA.
There were no global rate hikes over the past two months. None. Nobody, anywhere was hiking, or at least not on BofA’s count using Bloomberg’s data.
So… what? So to short this bubble (if that’s what it is) is to bet against the Fed (and swim against a dovish tide more generally). Historically, that’s not a great bet, and you’re encouraged to note that Donald Trump wants and needs a booming stock market and booming economy. Indeed, there’s every reason to believe he’ll insist on both.
“Price action, valuation, concentration and speculation are all frothy,” BofA’s Michael Hartnett said in his latest, warning that such froth could push up inflation.
And yet, in the very next breath, Hartnett alluded to the peril in betting against risk assets when monetary policy’s dovish. “Every bubble in history was popped by central bank tightening,” he said. “And no central bank in the world has hiked rates in the past two months.”
It is a bubble. It will burst. H has been doing a good job of laying this out lately. Only question: is it 1994/2004, 1999/2006 or 2001/2008. Or possibly the better historical context: is it 1925, 1927 or 1929?
BoA apparently has note out today expecting AI investment to triple to $1.2T from 25-30. Essentially, US equities have become a a macro level Ponzi scheme is which service/infrastructure providers leverage their balance sheets (either cash on hand or worse debt issuance) to sign “mutually beneficial” reciprocity agreements with strategic partners meeting accounting standards for Rev Rec to inflate earnings. The other side of the deal then does the same back and or inflates the assets on their balance sheet. US tech companies are no longer asset light, they are asset massive. All of this is all being done with no valid end user ROI model.
So when the talking heads in the finance infosphere say this time is different because there are real earnings, they are lying even if they actually believe it. At best the earnings growth is solely driven by infrastructure overbuild and are transitory, not structural.
Right! The large asset mgrs are all uniformly saying its not 1999 bc there are earnings. They also are v quiet on the Quarterly calls about comparisons to ‘vendor financing’. Then it was with debt, now its cash upfront for shares. And THAT is the reason they give, this its OK this round…no debt pmts.
And once AI disappoints like 2001 internet capabilities…ppl always expect things too fast….orders will drop, earnings will -gasp- not climb so fast (they dont even have to go down, as this is all part of Sentiment), the AI hype will die down, combine that shift in mood with the bs from djt….sentiment shifts and markets fall. Wall St seems think that numbers need to nominally be worse than 1999, when really its the direction…the relative change that hits people.
As you have stated, the problem is really with the top 7- 8 largest companies in the S&P 500 (by market cap). Currently, the top 8 represent 33% of total market cap. In 2015, top 8 were15% of total market cap.
So if this pops, where does all the money go?
https://www.finhacker.cz/top-20-sp-500-companies-by-market-cap/#2025
The money lost when prices die doesn’t “go” anywhere. It simply disappears. The assets (rights to future cash income) are still there. They are just worth less. In the case of stocks whether the price ever “comes back” is in no way guaranteed, nor is the price itself. There are no promises with stock.
Quite right Mr Lucky. I sometimes find it useful to remind myself that the entire 50+ trillion market cap of the S and P is derived from a population of transactions that total a little more than 100k USD (the sum of the last recorded trade for each of the 503 component stocks). Other than limit-down rules, there really isn’t anything stopping that 50 trillion pretty much disappearing next week.
Valuations are a figment of the shared imagination. My favorite explanation is thus: Create a new crypto fixed at X units, sell 1 unit to me for which I pay you $1, and you suddenly have X dollars on paper, assuming you can convince anyone about the liquidity of your crypto, i.e. there is someone else willing and able to buy it from you at that price. The principle is the same with stocks.
Actually easier and more lucrative with crypto not being regulated as a “security”.
Take the example farther, and you have a very real example of what happens in crypto.
1) Print 1 billion and 1 tokens.
2) Sell 1 token for $1.
3) Congratulations, you’re not a billionaire on paper. Actually, not even on paper. On the blockchain.
I know a couple guys who actually did this as a joke. It’s a simple transaction to create a token on the ethereum blockchain. They created the F#CK coin and sent it around to people so that they, “Would never run out of F#CKs to give.” They printed a pile and sold a few to friends for $0.10 so they could claim to be millionaires. I still have a few in my wallet.
I found the old contract! I forgot they named it “Finally Usable Crypto Karma.” Nice acronym. 70 million coins printed, and they traded for a time on EtherDelta when that DEx still existed.
Coin contract address https://etherscan.io/token/0xab16e0d25c06cb376259cc18c1de4aca57605589