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What Happens When the Music Stops?

Economic booms don’t last forever. Will this boom end like 1998 or 2008?
May 21, 2021
What Happens When the Music Stops?
(Alex Kryuchin / Shutterstock)

At age 43, I have lived through a lot of change, perhaps more than any other generation American history. Just a quick tour through the low-lights:

  • The fall of the Soviet Union.
  • The September 11 attacks.
  • The dotcom bubble of 1998, which was as close to a traditional bubble as we’ve seen in our lifetime.
  • The greatest financial crisis since the Great Depression (from late 2008 / early 2009 until, really, 2012.
  • The advent of social media, the internet, cell phones, and mobile computing.
  • The first global pandemic in 100 years.

And yet . . . plus ça change.

Not just in geopolitical terms—there are lurking enemies in every age, both at home and abroad—but also in economics. Yesterday’s mortgage-backed securities are today’s supply-chain finance fund at Credit Suisse that fueled Greensill Capital—both examples of people failing to assess counterparty risk.

So maybe nothing that we’re seeing in the macroeconomy today is new. Maybe we’ve seen it all before.

But the question is: When have we seen it before? Are we in a 2008 or 1928 like moment—where banks are passing out leverage like its candy and the whole world is about to get screwed?

Or are we in a more normal moment, like 1998, where you could throw a dart at a board in the dotcom boom, and win. At least for a little while, until the bubble popped.

Let’s talk about the really bad scenario, first.

Everything on Wall Street—and maybe even life in general—is sales. There is a multi-billion dollar industry to offer advice on sales and salesmanship but virtually none of it focuses on selling through the power of confusion.

The 2008-2009 period was almost entirely about selling confusion. The derivatives of derivatives of . . . derivatives were financial products that even the guys who created them may have not fully understood.

What this meant is that if you had investments and were a financial professional, then 2008-2009 made a permanent impression on how you view risk. Especially if you do leveraged buyouts for a living. (Which is what I do.)

So when I see Credit Suisse loan a ton of money to Greensill Capital—which had essentially one counter party—I can’t help but think about tranches of subprime mortgage back-securities.

The Big Short (2015) - Margot Robbie in a Bubble Bath Scene (1/10) | Movieclips

The Great Recession of 2008 was fundamentally about two things:

  • Levered illiquid products, that were poorly understood, which blew up and in turn
  • Led to a lack of trust across the board, which spilled over into “the real economy”

When the weird derivatives started to blow up, everyone questioned everything and headed for the exits. The illiquid primer, so to speak, is critical to understanding 2008/2009. Banks couldn’t just dispose of weird derivates the way you can just, say, sell your Coca-Cola stock if you are not feeling it.

So when the rating agencies, which were viewed as the Voice of God, turned out to be wrong, people thought, “Wow. Is . . . everything wrong?”

Greensill and Credit Suisse’s supply chain finance fund sure looks like 2008/2009. They were doing all sorts of confusing prestidigitation with counterparty risks.

There are other concerns. The spectacular failure of Bill Hwang’s Archegos Capital is notable. But Archegos is pretty vanilla stuff—just margin lending on equities. Granted, margin-lending on equities is what gave us the Great Depression. It is worth noting that in addition to causing enormous pain in the real economy, the record high for the Dow on September 3, 1929 of 381 was not revisited until 1954. 25 years of “dead money” for those who bought that day. But until we start seeing a Bill Hwang a week—or individual investors get overexposed on margin to the point of forced liquidation of liquid things like stocks and bonds—then I think the Great Depression is off the table.

And until we see myriad Greensill Capitals, then we are probably not looking at the Great Recession. So 1928 and the 2008-2009 period both seem unlikely. (For right now.)

That’s the good news.


The bad news is that today feels a lot like 1998-1999, with tech (and now crypto) pumping the bubble. Again.

When you’re thinking about historical parallels, it’s important to try to put yourself in that moment.

So here are some greatest hits from the ‘90s tech boom:

  • “Some say that the internet is so revolutionary that the usual rules of valuing a stock like revenue and earnings no longer apply,” said one CNBC anchor.
  • Between 1990 and 2000, 4,700 new companies went public through the IPO process. There are now over 5,000 cryptocurrencies that get created by an ICO--an initial coin offering.
  • E-loan debuted at $2 billion valuation on its IPO. It is now a subsidiary of Banco Popular of Puerto Rico, acquired for $300 million in 2005.

And now? Some loon on Morning Brew’s podcast said this verbatim: “Three years ago, it would take $10 million from VC, licenses, and filings with regulatory authorities. Now with etherium you can start a fintech company in 36 to 72 hours and be processing billions of dollars in transactions.”

That same guy was on the show to pump NFTs, and used terms like “the NFT community” as if it were, you know, an ethnicity.

Sounds a lot like 1995-1998 to me.

So is this it? Is this the top of the market? I have no idea. Runaway trains are just that—they runaway and they only stop, well, when they stop. But, it’s at least worth the time to pause and consider—have we seen this movie before? And if so, how did it end?

An awful lot of academics spend their lives writing on bubbles. My own theory on bubbles, is that they are not the result of a “mania.” There are no animal spirits taking over convincing people that a tulip is worth a house in the creation of some sort of group insanity. Though, it is worth noting that the head of the central bank of the Netherlands did say in 2013 that bitcoin was worse than tulipmania when bitcoin was…$50…as of this writing it is…$50,000.

No. My theory is that people know they’re living in a bubble. But either they give in to FOMO or they think they’re so smart that they get in anyway, figuring they can get out before the crash. The bubble happens because people believe there will always a bigger fool right in the waiting to buy at a higher price than they did. (I know dogecoin is ridiculous but everyone seems to be buying it and there’s someone dumber than me to buy it at a later date.)

So that’s the question before us now: Is the 12-year economic boom we’re riding that is without historical precedent a calamity waiting to happen, because the entire edifice is leveraged to hell and back? Or just an ordinary situation where people have talked themselves into believing that This Time Is Different?

One way is painful. The other way is dangerous. Neither way is good.

R. Marshall Brandt

R. Marshall Brandt is the managing partner of Annapurna Capital Management, LLC.