Being told we were “too young” always used to piss us off. When someone said that, it either meant they were denying us an opportunity, or dissing us that we were naive or ignorant.

This post is just a reminder that yeah, you millennials are young.

We tweeted this yesterday and the article is worth reading:

Market Risk: Millennial traders who've never seen a downturn https://t.co/CqXWUHIJfD pic.twitter.com/bTxoqkxoyp

— Essay Snark (@EssaySnark) February 8, 2018

Can you say “hubris”?

A kinder way to put it is that it’s just naivety.

Can’t be blamed for being naive.

Back in the old days, when the Internet first happened, there were all these new-fangled dot-com companies like furniture.com and pets.com and Lycos and WebVan and Kozmo and all these others.

Guess what? None of those are around anymore.

When the stock market was soaring to new heights and there were IPOs happening right and left and valuations were totally divorced from fundamentals and everyone was ignoring pesky metrics like revenue and profits in favor of eyeballs (and separately, day trading was just starting as a ‘thing’), many analysts explained all of it by saying that it was a new economy and everything had changed and the old rules did not apply.

Until they did.

The quote from that article from a 29-year-old trader sums it up nicely:

“Find me someone who worked in the era of 15 percent inflation and I’ll talk to them about Bitcoin and the Internet.”

The only time U.S. inflation was anywhere near 15% in the last hundred years was a six-month period in 1980 . Other than that, it was exceptionally high from 1917-1920, when, BTW, the First World War was happening. Sure there are lessons to be had from a 15% inflation era but nobody is saying that those would be relevant today.

In case you’re not a finance type, inflation today is very low. By historical standards, it may even have been a little too low in the past year. Economists debate this. EssaySnark does not know what’s right. We won’t know until the cycle moves along.

What we can share with you though, is that just because there are new innovations with things like bitcoin and virtual currency, or remember CDOs? Those are collateralized debt obligations (one of a class of derivatives) and they are one of the major contributing factors to the 2007-2008 market meltdown. Another shiny object in today’s financial markets is the VIX (volatility index). Just because there’s a new way to make money does not mean that the forces of nature no longer apply.

Be very wary of anyone who ever says, “Yeah, but this time, it’s different.”

It’s different… until it’s not.

When your grandpa is starting to talk about bitcoin or a local government is thinking about an ICO then that’s a very good sign that perhaps it’s seen a peak.

Our personal theory of what’s going on politically at this time is that it’s a pendulum swing. There was a lot of loosening of standards across cultures in the ten years prior to 2016, resulting in massive cultural changes such as acceptance of homosexuality (changes in the military, marriage equality) and a new awareness of diversity (Black Lives Matter, the beginning of destigmatization around transgender). Given how fixed attitudes had been for so long, by comparison, the early 2000s saw tremendous change at an accelerated pace.

The retreat that we’ve witnessed starting in 2016 — first the Brexit vote, then the U.S. election — where people have responded to messages of national retraction and an urge to assert a so-called traditional identity (protectionism, nationalism) — all of this is a to-be-expected swing of the pendulum, a reaction to the swift cultural changes of the preceding years.

You might hold up the #MeToo movement as an exception. Isn’t society now waking up to the abuse of power and how women have suffered in business? Isn’t that a new shift that’s only begun recently? Doesn’t that show that the opening and increasing awareness and greater acceptance that we referenced (gay/transgender/minority) is continuing? Well sure but it has nothing to do with politics. Some claim that #MeToo would not have happened except as a reaction to the current occupant of the White House. We disagree. If his opponent had won the 2016 election, #MeToo would still have happened, and everyone would be saying, “Oh, it’s only happened because she is in office, a female president opened the cultural floodgates and allowed this to occur.”

A president cannot cause a social movement. A president is only a reaction to one.

That does not mean that a president does not affect society.

Last year (2017) saw radical changes in the U.S. to what had been established policy and cultural norms. We are getting desensitized to it and so much is hitting the radar every day that it’s easy not to notice how VERY different things are now. It’s hitting everything from the immigration issue and the daily reports of arrests and deportations, which has affected the entire world when interest in coming to the U.S. has dropped for tourists and students alike. The international application volumes at all educational programs in America have dropped and tourism was down 4%. The current administration is actively dismantling government programs including national parks and monuments, healthcare, consumer financial protections, student lending, individual privacy and tracking, net neutrality, climate and environmental protections… The list goes on and on. The changes to the tax code mean that many nonprofits are very worried that they will see a decrease in donations from individuals starting this year. This is just one example. We could name hundreds.

THERE WILL BE IMPACT FROM ALL OF THESE THINGS.

Change happens slowly. Until it happens fast.

Policy changes tend to filter through society at a snail’s pace and it’s hard for the individual to notice them on a day-to-day basis. If the Department of Urban Housing has its budget slashed, then a middle-class person is not likely to notice it. It takes awhile before the lack of funding for homeless services or low-income rentals is felt on a social scale. Some say that the spike in homelessness caused by the 2008 housing meltdown had only recently been corrected and the trends normalized again, but now homelessness is on the rise in major cities. Look at what’s happening in San Diego or LA or San Francisco.

You say you want to work in tech. You say you want to change the world. Do you know what’s happening on the streets of San Francisco?

If you do not have an awareness of these societal issues then you’re being willfully blind.

Now, at a time when governments all around the world had been artificially propping up markets through monetary policy for over a decade (if that sentence does not make sense to you now, then don’t worry, you’ll learn all about that in bschool!!), when these world economies have FINALLY stabilized and returned to healthy after YEARS of struggling, we get a U.S. government being very, very irresponsible.

The tax cuts stimulated the stock market and sent it soaring to new record highs because yes, they are good for business — but business was doing just fine. Business did not need the boost at this time.

Nobody is paying attention to the fact that the tax cuts have bloated an already-massive government deficit, and the new budget going through Congress is adding more of the same.

These large government changes will have an effect. These are big changes — bigger than any young analyst has seen in his or her lifetime.

Cryptocurrency is not a game-changer. Sure, in the short term, it’s new and different.

But it does not change the realities of the world. Nature likes a balance.

Bitcoin is a variation of the same game (like day-trading was, back in the late ’90s; day-trading only became possible with the internet as a consumer reality). Bitcoin may look like a totally different game, because it’s on a new playing field. But the same rules will assert themselves in that field over time.

Bitcoin isn’t what’s affecting the overall markets today, and daytrading did not cause the collapse in 2000. Those are just two examples where people have made wild amounts of money based on new tech. They are hyped-up phenomena that accompanied a rise of the markets, and some people eventually get burned.

Innovation is good. Adaptation and change are good. The world had swung very far in one direction, so a quick correction to the opposite is natural and normal.

You could say that about the stock market.

You could say that about society as a whole.

The point of all of this is, today is not different.

The rules of nature have not changed.

Please don’t confuse a short-term effect stemming from innovation, or social adaptation, or mutation, with a change in the underlying forces.

What goes up must come down.

A swing to the left will produce a swing to the right.

Whenever markets correct, you’ll get retrospective explanations for what went wrong and what caused it. The flawed thinking that went into the run-up to the peak will be re-examined, and in some cases, smacked down. The reason that “eyeballs” were the valued metric in the first dot-com boom was because it was thought that traffic to a website would allow for eventual monetization. What really ended up happening is that one big player — Google — is the beneficiary. At what cost? Primarily print media. When was the last time you looked at a classified ad? When was the last time you read a physical newspaper? A huge chunk of the advertising dollars that used to get allocated to print advertising has been redirected to the web. It decimated the newspaper industry and many of those traditional properties are barely hanging on, if they still exist at all. It’s very hard to monetize traffic as a publisher on the web. When you’re giving something away for free or selling it for less than it cost you then it’s hard to make money (duh, right? yeah). When we see the modern incarnation of that type of thinking (MoviePass comes to mind) then it rings some alarm bells.

Every market is different though, and there are definitely things today that are unique which make it so hard to know what will happen. There were few people predicting the market collapse in 2007. NYU’s Nouriel Roubini (Twitter ) was one of them. He is incredibly scornful of bitcoin these days. Warren Buffett and Charlie Munger are equally bearish (see interview with Ross Dean DeRue ). These gentlemen have been around a downturn or two.

Are they wrong? This time, maybe it really is different?

Maybe.

But our money is on nature prevailing.

 
 
 
UPDATE 2/26/18: This video from former Dean of Darden talks about similar stuff as we’re touching on in this post.