Personal Finance Topics / Macroeconomic Trends and Risks
No. of Recommendations: 12
If you lived through the .com crash and the 2008/08 financial crisis, you will no doubt recognise patterns in the financial markets today (Meme stocks, crypto treasury companies raising capital, huge capex going into AI as the future cash gushers are built.)
What was your personal recollection of the .com crash?
Can you remember what it was like in the months leading up to March 2000 (businesses valued at multiple to sales; cash burn; mergers; helpers; IPOs popping 50% on day one; young people with knowledge of how these new businesses would dominate the world; experts on cnbc).
And importantly, what triggered the beginning of the collapse (Greenspan signalling higher rates, leading to concerns about the ability of loss making .coms to pay higher interest; funding drying up and then insolvency for companies like pets.com; share prices declining and declining until eventually the Nasdaq dropped 80%)?
What was your recollection? Do you sense any of that today? Unknowable but if you had to bet, what might trigger the next proper crash, that might enable Berkshire to deploy large amounts of its war chest?
No. of Recommendations: 0
*07/08
No. of Recommendations: 6
Level 3 speculation rampant among several Berkshire devotees
No. of Recommendations: 2
"Unknowable but if you had to bet, what might trigger the next proper crash"
While there are catalysts that can be pointed to as triggering the crashes in '74 (oil) and '08 (subprime mortgages), my interpretation of the cause of crashes in 1929 and 2000 is basically that P/Es just got too high. With the Shiller CAPE presently at 38, a large correction is plausible at any time, without a specific trigger. JMHO
No. of Recommendations: 3
I remember back in 1999 when a spirited BRK fan wanted Warren to be more like David Weatherell and to get out there and champion BRK's stock so it would perform more like CMGI, Weatherell's company.
Thankfully, BRK's stock did not perform like CMGI.
SD
No. of Recommendations: 12
Yes, I was a young investor (and tech worker) in the .com crash - this doesn't feel anything like that time frame IMO. You now have companies like MSFT and GOOG (and others) printing money at a scale that back then would have been unconceivable.
The amount of money chasing AI and the MEME stocks is "not nothing"; but its definitely on the margin relative the profits being raked in by established companies. The IPO market is nothing like it was back then; today to go public you need a minimum of $100M in sales (ARR) and be profitable (or at least have a path to profitability). If anything the private equity market is where some of the froth is - but its nothing like where the public markets were back in 1999/2000.
Is the S&P-500 above historical valuation levels? Yes, for sure. Could it drop 30% in the short term; absolutely, but a 50% drop with a 10 year bounce-back seems unlikely.
tecmo
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No. of Recommendations: 10
100% agree. I, too, remember that period vividly: Concept stocks with no revenues soared, daily IPOs with no revenues tripled on day 1. That’s not at all the case today.
The stocks leading this market are businesses performing extraordinary TODAY. Unlike the leaders then —these tech cash generating machines are delivering on the football field NOW leading to adjustments on the scoreboard. Back then, the scoreboard lit up before any plays were even
called on the field. These stratospheric stock moves we see now generally FOLLOW freshly reported RESULTS (like this AM: Meta) not solely wild speculation on future results ala 1999.
Money is attracted to Facebook, Microsoft, and Google based on extraordinary present economic operating FUNDAMENTALS. Sure, the rise in the stocks may be quite excessive. The sustainably of NVIDIA or Facebook results is what many of us surely question. Thats not 1999: There were no results to sustain lol. Except in the case of CISCO which HAD results but was so overpriced it literally discounted 25 years of the future. It’s price then, even, far exceeded present big tech valuations—I believe it was 100+ X earnings as a mega cap.
Theses mega tech stocks may certainly be overpriced. But they are moving on news they’re actually generating more cash each quarter than even the massive sums forecast by cheery analysts. That’s fundamentals. That’s anti-1999.
No. of Recommendations: 3
Agree the Mag 7 doesn’t compare to .com
However, caution is warranted perhaps.
The AI capex is not going through the P&L accounts, or operating cashflow and is being depreciated over quite long time frames. See Meta’s cash burn.
Also see Microsoft’s declining margins.
The other side of this AI capex are Nvida’s revenues. What if it all slows down.
Tesla is not generating significant cashflows and looks quite vulnerable for a variety of reasons. Certainly you have to believe in a lot of future promises to go right to justify 90% of the company. Probably the black sheep of the Mag 7.
Alphabet’s search dominance is evolving with the introduction of AI. Might be good, might not.
Amazon is doing well but it’s expensive for a retailer.
Apple is a strong company but has not been able to grow much of late and looks more like a large cash cow.
I agree it’s not like some kind of super bubble that drops 80%, but it is an expensive group and hard to see good returns from here, given the changing competitive landscape of AI and the huge capex.
The crypto and in particular the crypto treasury companies raising money to buy more and more crypto, does however look very much like an unsustainable bubble that will burst in dramatic fashion.
Private equity also looks shaky with its internal valuations and struggles to sell on assets after having stripped them bare.
I guess it all continues for as long as inflation stays under control and interest rates stay reasonable. We will find out in due course.
Berkshire cash pile is an incredible amount of fire power if the wheels come off.
No. of Recommendations: 4
>>Agree the Mag 7 doesn’t compare to .com
However, caution is warranted perhaps.
The AI capex is not going through the P&L accounts, or operating cashflow and is being depreciated over quite long time frames. See Meta’s cash burn.
Also see Microsoft’s declining margins.<<
Couldn't agree more. Great points. Caution is extremely warranted. The better comparison is the Nifty 50 of the 70s. Which is today a Nifty 7 version. Many of those Nifty 50 stocks were good businesses for decades. But the stock investments collectively in that era were clunkers for a long time. The extent to which AI extrapolations are a significant part of THESE valuations today adds even more fundamental risk going forward.
No. of Recommendations: 0
The better comparison is the Nifty 50 of the 70s. Which is today a Nifty 7 version. Many of those Nifty 50 stocks were good businesses for decades. But the stock investments collectively in that era were clunkers for a long time.
Which is why you can't simply buy and hold the "top N" stocks.
This is where & why you have to periodically run them through a momentum or relative strength filter.
No. of Recommendations: 1
tripled on day 1. That’s not at all the case today.
This is kind of funny ... because an IPO did indeed triple today! 🤣
No. of Recommendations: 1
Heck, Idunno…
Sometimes I think a difference between now and 1999 isn't the presence of fundamentals—it's the valuation attached to them. The market is pricing these stocks not just on current cash flow but on the assumption of endless, exponential growth. That's a huge bet on the future which is exactly what made 1999 so fragile.
Again, Idunno
Grateful Always,
PaulnKC
No. of Recommendations: 3
Crypto is an X factor. If it collapses, as it may, it’ll do some damage. Banks starting to get sucked in, too. Liquidity crisis good for BRK?
abromber
No. of Recommendations: 4
"If it collapses, as it may, it’ll do some damage."
Nothing to add.
SA
