I know that most investors and pundits see all time highs in the largest equity market in the world as some sort of victory for capitalism. It’s been a victory, but not exactly for “free market” capitalism. I am not an economist, or even a market strategist, so I’ll save you a bunch of mumbo jumbo. But I’ll just say this, in my nearly two decades in this business (or that I’ve read about in the modern post war era) I’ve seen sequences of events that come close to the Stranger Things that have gone on since the financial crisis. And anyone that tells you confidently what the long term ramifications of all this monetary policy will be is lying.
Yet, there have been some extraordinary developments in our economy since the financial crisis, and in many ways one could make the argument that the massive advancements and adoption of certain technologies (mobile & cloud computing, big data, machine learning / artificial intelligence, electric/ autonomous vehicles, solar power, drones etc etc) are more significant long term, and have the potential to outweigh any long term damage done to traditional monetary policy. And there’s an argument that these would have never been possible without the environment created by zero interest rate policy (ZIRP). This is not a new theory (do a google search for “in defense of bubbles” for examples) but it’s worth exploring again.
Let’s first consider a few things. Prior to the age of financial innovation that led to the financial crisis, some of the technological innovation we enjoy today were only in practice in sci-fi novels. The zero interest rate policy that arose in the aftermath of the financial crisis made capital easily available to corporations and those looking to invest in start-ups, or merely big ideas. The reopening of the capital markets with the stabilization of financial conditions due to years of coordinated global monetary accommodation made it possible for corporations of all sizes to borrow or use their rapidly inflating public equity value to buy technology, talent (or merely ideas), invest in money losing businesses, while venture capitalists went on commensurate spending spree. Thus the rise of aqui-hires, drone delivery, gig economy, autonomous cars, electric SUVs with wings for doors, AWS, Pokemon Go, Siri and disappearing pictures with branded stickers.
Like Web 1.0 at the turn of the century, some of today’s companies that benefited from this extended period of unusual monetary policy will have lasting effects on our economy and our society (like e-commerce, internet infrastructure and search tech like Google), but most will be more like Pets.com. But what’s really clear this time around is that many of the current “technological” advancements maybe prove to be a massively destabilizing, deflationary, economic force, displacing hundreds of millions of workers globally. This can be true even while making billions of people’s lives better. Bubbles can be defended as creating a sort of punctual evolution in technology that launches the world forward in a way that the gradual evolutionary route technology normally takes can’t. But those defenders must also acknowledge the disruptions felt in the near term to traditional economies as workers, economies (and politics) need to scramble to changes that came on a lot faster than normally seen.
Again, all of this stuff is a bit above my pay-grade. But I will say, as I’ve done before in the last two years, the measure of the S&P 500 says a lot more to me as a reflection of ZIRP (and now globally NIRP) than of some sort of sustainable organic economic growth. The hope of central bankers has been to prop up the economy long enough for it to find its own legs, but nearly 8 years on from the worst financial crisis we’ve seen in almost a century, we see few signs of that happening. And many more signs of side effects of that monetary policy, including investment and asset bubbles.
Oh and one last thing, over the last week I watched Netflix’s (NFLX) original sci-fi series Stranger Things, which was awesome. After it ended I thought to myself, if this company were use the currency given to them by their own little stock bubble to buy other studios, and create a seasonal schedule like Time Warner’s (TWX) HBO, why couldn’t NFLX be one of the largest media properties in the world given their installed base and first mover advantage?
But then I recalled those pesky fundamentals, like user growth that has decelerated massively, the company in Q2 adding the smallest net subscriber gains since the launch of their streaming service 5 years ago. Also, that Amazon has more U.S. streaming subs than NFLX, that the company has a market cap of $41 billion, or 66% of TWX, a company expected to have 3x NFLX’s $8.7 billion in 2016 sales.
But maybe none of that matters in the environment we are in? Microsoft just paid $27 billion for LinkedIn (LNKD), a money losing (GAAP) company that had $3 billion in sales last year. Why couldn’t we see a $55 billion deal for NFLX? Trust me, if you’ve been doing this long enough, you’ve seen Stranger Things (AOL/TWX).