Bubbles and pops: The investment thesis in context
This is most likely the last of my blog posts here, at least for a while. Since my previous one, about a year ago, I have increasingly found myself on X (née Twitter) where my occasional drops are trivial in comparison with side conversations that can be had there with a diversity of experts in assorted market fields. These usually start with questions that I pose (though, to be fair, these are sometimes rhetorical), and continue with insightful responses. As the purpose of my blogging habit here was always to crystalize some thoughts and take notes while I’m learning, I find the new approach to be more valuable. If you would like to follow me, here is my X handle, and what follows below is my most recent “tweet” to formalize the transition.
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The equity bubble discussion hinges on the notion of technicals (market supply & demand) far exceeding fundamentals (e.g., this excellent overview by @michaelxpettis https://carnegieendowment.org/china-financial-markets/2021/08/why-the-bezzle-matters-to-the-economy).
But what if the fundamentals aren’t the same fundamentals as before? What if our measure of value (e.g., P/E multiples compared to historic norms) are for some (e.g., the so-called Mag 7, which dominate the market indices) no longer useful in a winner-takes-most environment driven by large, deep, global, and cash-rich digital networks?
Unless their relative dominance should reverse (why? what would cause that?) why do their P/E multiples matter? To estimate some hypothetical payback period that has always been a fiction? To determine competitive positioning as if this is even a question to be settled? To compare these yardsticks to a different time when investor choices and allocations were based on different profiles, analyses and criteria?
The extreme and growing divergence between haves and have-nots in the modern economy has been well documented and discussed. Unless this somehow makes a turn, perhaps we are confusing the phenomenon with a bubble, which isn’t that in any case unless it pops.
On a side note and conversely, all those other equities that haven’t seen the same uplift in the past few years, many if not most of which have actually seen the opposite, are not necessarily undervalued or mispriced. It is the same phenomenon but from the other side.
The markets are always difficult to decipher because the markets are complex and dynamic and contain multitudes of voices that rarely if ever sing in harmony. But the markets are always right.
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Related essays that seem least dated from over the years:
Linear perception, exponential change, and the new value
Extremes of sentiment in markets
Networks 3.0: Defined by digital dimensions
Networks, products and their relativity
Markets and the years ahead: The Investment Thesis
Markets and the years ahead: The Risk Thesis
Sentiment and flows: The investment thesis refined
