The other day I was pondering what the economy and market may do in the next year. The future is always uncertain, but I think you will agree the next twelve months may be an especially interesting time. Fast forward to October 2021. If we were to then look back over the past twelve months will we say, “Of course, how did I miss that”? This activity is known as prospective hindsight.
The 1999 Tech Bubble
I entered the industry as a financial advisor in 1999 – in the Silicon Valley of all places. I experienced some of the melt-up and heard a lot of the hype. Portfolio managers and strategists justified everything because we were experiencing a “paradigm shift”; profits didn’t matter as much as growth. The question wasn’t whether Cisco Systems would double, it was how quickly. I believe Qualcomm quadrupled in price in just one month. Then came the great bubble burst.
Looking back it is all so obvious. How could profits not matter? How could those stellar growth rates continue forever? Stock price does matter – “growth at any price” was a short-term phenomenon. But it was near impossible to see this at the time. Most of the questionable stuff wasn’t known until afterward. The headlines were about all the gains and how great things were.
The Financial Crisis
The financial crisis was another situation that is now so obvious. The amount of leverage assumed nothing would go wrong. In fact, people would often state how home values have never lost significant money for a long period of time. And that you can’t create land – so real estate has true value. There were tranches of mortgage debt rated AAA by agencies. What was there to worry about? Sure the debt was enormous, but all looked good. Until it didn’t. It was only in the aftermath that the problems were seen clearly.
Uncertainty – Our Current Situation
We are presently experiencing massive stimulus, and uncertainty. The deficit and national debt have skyrocketed. Interest rates are at/near zero, and are expected to remain there for many years. We are still unclear how COVID will be resolved, but few believe another lockdown will happen. We know a lot more about the virus. We have therapies and perhaps even a vaccine on the horizon. There is so much money out there that when things start to turn, there could be a lot of pent up demand and a lot of spending power. There is cash on the sidelines that could propel markets a lot higher should things turn out positive.
On the flip side, our debt is significant and it is only going to rise from here. Obtaining any balanced budget is not on the horizon anytime soon, let alone actually paying down some of the debt. Both political parties are intent on more stimulus; it’s just a question of who benefits from it and in what form. Will the stimulus be enough? Too much? Effective? With interest rates so low, we aren’t paying the price for debt at this time. But as we saw with past crises, what gets us in trouble is projecting that the current status will continue without a “reversion to the mean” or a day of reckoning.
No one really knows how this will unfold, despite all the confident forecasts. It is possible we get favorable circumstances and grow out of this while keeping the debt manageable. It is also possible we experience additional headwinds and things don’t recover very well – with a significant debt to boot. Those are just two of many possible outcomes.
How Will We Miss It?
At some point in the future, we will look back and wonder how we missed something so obvious. And that is the power of hindsight. With more information and future outcome known, our brains will put together the correct story. It will seem so obvious. But that is only in hindsight. We are in an interesting time because we truly don’t know what the future holds. There are cases, reasons, evidence and justifications for many different outcomes. But don’t worry, the present day will all make sense at some time in the future. We will wonder how we missed it.
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