Is it time to start worrying about the next bubble?
The New York Times' Ruchir Sharma thinks so: The stock market has been steadily improving for years now, and historically speaking we're due for another crash. The latest market run-up has relied on tech stocks to a disturbing degree. And as much as the financial world loves its investment booms, it also fears its love for them: The narrative of irrational exuberance followed by a crash is deeply woven into the Wall Street psyche.
But here's the thing: It's hard to actually identify any concrete mechanism that could precipitate the next bust. There aren't any debt bubbles comparable to the pre-2008 housing extravaganza. And the average price-to-earnings ratio for tech stocks today is a mere 18. As Sharma himself admits, it was 50 at the height of the dot-com boom.
Sharma lists three ways the next crash could happen: Tech sector earnings start falling short of projections, the government finally gets serious about antitrust enforcement, and the Federal Reserve hikes interest rates. Let's take these in that order.
There's no real reason to think the revenue of companies like Apple, Google, Facebook, Amazon, and so forth will suddenly see their revenues collapse the way Pets.com did. By now, we know their business models work. As I wrote the other day, there are several ways we could explain Silicon Valley's stock market dominance: Maybe productivity and job creation have all shifted to big cities. Or maybe these companies are the new monopoly powers in the American economy. Neither explanation is particular encouraging for ordinary workers. But both explanations suggest these companies' revenue streams will remain strong.
You could tell a very similar monopoly power story about the airline industry and Boeing specifically, which also played a big role in the latest stock market runup. The other sector that's really dominating the markets is health care: That industry is looking at a future of booming consumer demand for expensive treatments, most of which will be provided by a poorly-paid labor pool. Again: bad news for workers, but great news for future corporate revenues.
This all makes Sharma's next possibility — a government antitrust crackdown on Silicon Valley — particularly ironic. If it happens, it will be because government regulators decided the status quo — where powerful corporations have the leverage to extract enormous amounts of money from customers and workers alike — is bad and needs to change. If they did that, it would certainly put a big dent in the stock markets' future. But it would be a regulatory choice, driven by a decision that the social fabric needs reform. It wouldn't be because there was anything overhyped about the companies' fundamentals.
Then there's the Federal Reserve and interest rates. Right now, the Fed is trying to balance the need for more job creation — which requires low interest rates — against the need to fight inflation — which requires high interest rates. If it does decide to hike interest rates, that would suddenly make it harder for people to pay off all sorts of debt, particularly auto loan debt and college debt.
But neither of those debt buildups are anything close to the scale of the mortgage market just before the Great Recession. If the Fed hikes interest rates, it could knock the stock market off its run. It will definitely be painful for a lot of low-income people trying to pay off the aforementioned obligations. But again, this would be regulators weighing various risks in the economy and then making a judgment call, not a result of "irrational exuberance." And it wouldn't be an existential threat to the economy the way the housing collapse was.
Now, a lot of this might seem a bit confusing. But the thing to remember is that the stock market just doesn't tell you much that's useful about the health of the underlying economy.
Of course, if you're a well-heeled investor, the underlying economy doesn't matter to you: You care about predicting the stock market so you can move your money around for the best return. Whether a downturn happened because corporate America screwed up, or because regulators decided corporate America needed some discipline, doesn't make much difference to you. And let's be honest: Well-heeled investors are a big audience for The New York Times and most of the business and financial press.
But the underlying economy is what most Americans really care about: jobs, wages, and livelihoods. They fear busts in the stock market because they fear those lead to wider recessions. In which case, why a bubble bursts matters enormously.
Most of the time when bubbles pop, the rest of the economy barely notices. So if regulators need to rain on the stock markets' parade to help out the rest of society, they should go ahead and do so. It's only in rare instances, when financial bubbles actually influence economic fundamentals, that a stock market crash can lead to a wider recession. And as 2008 showed, when bubbles do get entangled with market fundamentals, that's also a sign the government needs to step in with drastic reforms of how the economy as a whole operates.
In the past, it's taken major collapses and crises like the Great Recession and Great Depression to force such reforms. That's a pretty terrible way to go about things, but at least it signals to the rich and powerful that there are consequences for widespread inequality and economic exploitation.
But what if outsized corporate profits, soaring inequality, monopoly power, low wages, moribund job markets, and a stagnant economy can actually go on forever without causing an investment frenzy or an economy-killing debt bubble? Then policymakers may well decide that things are going great and if it ain't broke, why fix it?
That's what should really scare us.