By Cali Money Man:
We all go along with bubbles, much like in a hypnotist’s act. Wall Street research reports are especially so: readers’ willing and eager participation is required if they’re to maintain the charade. The remarkable aspect of the Goldman Sachs and Morgan Stanley reports on Tesla is not the fantasy element or the optimism. These are routine. It’s their magnitude that astonishes me.
Human characteristics are omnipresent, everywhere and always. It’s their variation in magnitude that creates the ever-changing pageant of history. The GS and MS reports on Tesla show this at peak intensity, just like during the last days of the tech bubble. What’s astonishing is that the audience still cooperates with this willingly and eagerly, even now, fourteen years after the tech bubble burst.
I talk to people in our industry about this: investment bankers, portfolio managers, salespeople. The consensus is that this is normal. Investors will endlessly ride the bubble, get hurt by its bursting, then lick their wounds, and after a while, get excited again and believe once more in these endless riches and ride the next cycle. Bubbles are a consensual hallucination. With Wall Street profiting from fees – many kinds of fees, at every step.
However, as we zoom up in the third bubble in 15 years, I wonder if that’s true.
How might investors react – and the financial services industry change – if the S&P 500 fell to 1,000 (level of February 1998) or 900 (the level of June 1997). That’s three rides on the roller-coaster, with low nominal returns (zero or less after inflation and taxes). Many things might cause this extreme event: a severe global recession, a spike in interest rates (i.e., monetary destabilization), a reversion of profit margins and P/E ratios to their long-term means.
Maybe, just maybe, after the third time on the rollercoaster in 15 years, investors might finally force structural change on the industry. It’s a tail scenario, an interesting thought experiment. Because our new normal is not the only new normal possible. By Cali Money Man.