I began my career as an investment banker in 1998 during the first dot-com frenzy, which drove one of the most ebullient markets we’ve seen in recent memory, surpassed only by the two bull markets that have followed since. In between, we’ve lived through wild corrections and recessions, including the Great Recession that threatened the global economy and brought some of the world’s largest banks to their knees. Let’s also not forget last year’s flash correction that today seems like a distant memory but a year ago felt like Armageddon in the wake of a rapidly spreading deadly virus.
From market cycle to market cycle, I’ve identified four common themes that seem to presage major corrections. I first noticed these elements in 2001, and at the time dubbed them the “Four Horsemen of the Apocalypse.” The publication last week of a deck of complaints from a handful of analysts at Goldman Sachs brought back to memory these mile markers, and got me thinking about what the future might hold.
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I share them here not to predict a crash. After all, the inflated asset prices we’re seeing across multiple markets could largely be inflation in nominal prices, not growth in real valuations. But I’m no expert. I’m neither a great prognosticator nor a market timer. In my own portfolio, I’m a strong subscriber to the buy-and-hold strategy: make thoughtful picks (both public and private, macro and micro) and then have the courage (and cash cushion) to stick with them. So timing the market doesn’t matter much to me and my time horizon.
Still, since history doesn’t repeat but does rhyme, I present my “Four Horsemen,” which have served as signs of a market that may be heading towards the end of a long bull run.
Last month, a group of 13 intrepid first-year investment banking analysts at Goldman Sachs published a pitchbook highlighting their dissatisfaction with 100-hour work weeks. Their observations seemed spot on, although having survived my years as an analyst, I wouldn’t trade that experience for anything. We’ll leave for another column the debate over the fine line between hazing and apprenticeship.
What’s notable, though, is that this deck — and the concessions made by banks in the days that followed, including five-to-six figure bonuses and free Pelotons — is a sign of the shifting balance of power between capital and labor. When markets become over-heated, workers demand more.
In my experience, it’s at precisely that moment that the pendulum swings hard the other way. During the dot-com boom, it was analysts at Salomon Brothers who revolted, requesting toothbrushes and dry cleaning and massages. Less than a year later, Wall Street was beset by mass layoffs. Analysts, be forewarned!
Energy Tech Frenzy
Each boom in software technology seems to be followed closely by a boom in energy technology. In the late 90’s, companies like Plug Power, FuelCell Energy, and Capstone Microturbine were all the range. Guess which stocks are back?
There’s an even bigger boom underway today — the promise of electric vehicles. One industry banker recently pointed out to me that if you sum up the vehicle projection numbers in the business plans of all the multi-billion-dollar electric automakers (many of whom don’t even have a commercial product yet, let alone revenue), you’ll quickly outstrip global auto production. Surely, the auto industry is rapidly heading towards a gasoline-free future, but it can’t be that these new upstarts will take more than 100% market share.
During the dot-com boom and bust, shoeshine guys were sharing stock tips, taxi drivers would talk to me about the condos they were buying and flipping, and firefighters in Staten Island were glued to CNBC’s scrolling stock ticker.
Today, we have the GameStop mania and dramatic non-fungible token auctions, where at least a portion of the trillions of dollars of government stimulus seems to be seeking a speculative home. When everyday citizens start driving the marginal prices of assets, there’s reasonable cause to be concerned that a correction may be on the horizon.
It took me a while to remember the last of my four horsemen, since I haven’t been on a plane in more than a year. It’s a simple measure: are more than 50% of the advertising pages in American Airlines’ American Way magazine devoted to sales of south Florida condos?
That was the metric that broke the camel’s back in 2007, just prior to the greatest financial crisis we’ve endured since the Great Depression. Speculative real estate purchases drive both increases in debt and all sorts of spending — new cars, home furnishings, art. It’s precisely the sort of debt-fueled spending that can unravel so spectacularly when markets turn south. Granted, there are sound reasons to diversify into real estate when the hum of government printing presses makes inflation a logical fear and when finance jobs are (at least temporarily) moving to warmer and more tax-friendly climes.
But the frenzy in the housing markets (it was recently reported that a fixer-upper in the D.C. suburbs received 88 offers, 76 of which were all-cash) might be driven by more than low interest rates. Houses are one of the most leverageable assets classes, a relatively easy way to make a directional bet on the markets, further supported by generous tax benefits. The mortgage market, as chronicled by Michael Lewis in Liar’s Poker, and again later in The Big Short, has become one of the largest assets classes and its demise led to the Financial Crisis.
While no two markets are the same, and there are plenty of reasons to suggest that the current boom can continue, Wall Street is known to “climb a wall of worry,” meaning that you know you’re in a bull market when even bad news doesn’t spook the markets. While a correction may or may not be looming, it’s important not to forget how quickly the tide can turn.
It’s for that reason that I’ve made my biggest bet on MaxMyInterest and a $16 trillion dollar asset class that seems to persist amidst bull and bear markets alike: cash.
Gary Zimmerman is the Managing Partner of Six Trees Capital LLC and Founder of MaxMyInterest.com. Previously, Mr. Zimmerman was an investment banker at Citigroup, where he was a Managing Director and Global Head of Strategic Solutions for Sovereign Wealth Funds, responsible for advising these funds on their direct investment activities globally.
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