The Nasdaq has increased tenfold between the beginning of 2009 and the end of 2021, the S&P 500 a little more than five-fold. It was difficult to imagine, when the Fed started its ultra monetary stimulus (followed more or less belatedly by its various counterparts in the developed economies) that the world would go from one crisis management policy to another for more than a decade. The method of massive monetary stimulus has become, over the years, monolithic, inflating huge bubbles.
With the surge in inflation, these same central banks are suddenly being blamed, whereas the factors are, on this particular issue, more varied, starting with the global logistical chaos, aggravated by the war in Ukraine in the midst of a pandemic. If one can discuss endlessly the causes of the current inflation, the situation is clearer as far as the markets are concerned. Before inflation recently brought the demise of ultra-expansionary monetary policies, the major central banks guaranteed the surge in capital markets with a mountain of liquidity, supposedly to support the financing conditions of the real economy. A few years ago, fanciful economic theories emerged according to which central banks were supposed to use unlimited quantitative easing to target a certain level of GDP… In reality, these flows were mainly directed towards the financial and real estate sectors.
Liquidity Has Pushed the “Growth” Logic to the Extreme
Technology stocks have unsurprisingly overreacted in one direction, for a long time, and now in the other. These are typically so-called growth stocks, whose prices are overly dependent on the presumed expansion of business, in times of euphoria, with little concern for current profitability. It is quite normal for technology investors to be forward-looking, especially in a period of industrial revolution like ours. But this logic is pushed to the extreme in bubbles, to the point of losing touch with reality, as was the case with the internet bubble at the turn of the century. In recent years, it is monetary action most notably that has radically distorted market representations and the relation to time in the evaluation of asset prices.
The panic linked to the pandemic led to a reaction equal to the shock caused by the confinements, both monetary and fiscal. The markets then entered a parallel dimension where the notion of valuation was almost ridiculed. At the very beginning of the pandemic, the Nasdaq lost about a quarter of its value, and then doubled as a result of the rebound and, more importantly, the massive stimulus policies. The crypto bubble, with its countless shades of Ponzi schemes, from NFTs to collateral-free “stablecoins”, was simply the last straw ….
The Real Economy Is Weaker than When the Dot-Com Bubble Burst
The bubbles we are experiencing are intimately linked to the quasi-permanent crisis monetary policy, and the surge in inflation is very heavily neutralizing this arsenal of stimulus, despite the prospects of recession, which are becoming clearer. At the time of the dot com bubble, as spectacular as it was when it burst, interest rates were much higher, inflation was under control, the world economy was less unbalanced, real estate was at levels much more in line with household incomes. And Europe was not at war…
The combination of bubbles all over the world and monetary tightening (doomed, in the face of inflation, to aggravate market corrections and the dynamics of recession), creates a more formidable situation than two decades ago. The environment of zero interest rates – largely negative in real terms – and of mountains of liquidity, over time, has precipitated the most explosive trends in our financial model.
The Good Old Notions of Valuation Are Coming Back into Play
The dividend yield of S&P 500 companies is below 1.5%, while the 10-year yield on US government bonds is around 2.8%. With the prospect of a recession and central banks neutralized by inflation, we are moving away from a logic based on corporate growth expectations (and the inflation of bubbles). The good old notions of valuation (and yield) are starting to come back into play. The situation is simply more extreme for technology companies, because of their propensity, which is legitimate in this area, to focus on future prospects. Moreover, the monetary environment, as much as it has allowed the survival of zombie companies, has also shaped the technology sector, with the excesses we have seen in recent years, from Elon Musk’s stock market blows to the most dubious crypto constructions. However, we are indeed in a period of industrial and technological revolution, especially with the expansion of artificial intelligence in all its forms. The market correction, as severe as it is, can also be an opportunity to rethink our technological development, and its financing, in the long term.
This piece was originally published as an interview by Atlantico in French.