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Three Things I Think I Think – Bubbles, Bernie & the Recliners

Here are some things I think I am thinking about:

1) Is there another stock market bubble? 

Over the course of the last 6 or 7 years I have consistently shot down the idea that there is a stock market bubble (see here and here for example). My view of a bubble is pretty simple. It is when the price of an instrument becomes unsustainably detached from its fundamentals creating the risk of a very significant price decline (50%+). So, I was pretty interested in this chart going around Twitter this week showing a bubble in the “Disruptors” (basically, big tech). Hmmm. I’m not so sure about this.

(Source: Merrill Lynch)

The first problem with this chart is that it’s basically a handful of cherry picked instruments. The FANG stocks are just 5 entities and the DJECOM index is only 16 entities which will often overlap with FANG. So we’re talking about a pretty small subset of the stock market. The bigger problem with the tech bubble argument is that these large companies are legitimately dominating the tech world. While tech was 27% of S&P 500 earnings in 2008 they are now 41% of earnings. Tech is one of the industries that came out of the financial crisis much stronger. This is even more true of big tech. In other words, there is a real underlying fundamentally strong trend going on here and that explains the huge growth in tech stocks.

All that said, I do think there’s some frothiness in the current market. Nasdaq 100 earnings have grown at a 13.5% rate over the last 10 years while the index has averaged an 18% return. So you could argue that the market has higher expectations of future earnings than the underlying instruments could provide. But I hesitate to use the term bubble because the underlying fundamentals are actually strong and could remain quite strong. That said, I wouldn’t be shocked if big tech fell 25% from here and digested some of the recent big gains over the coming years. So, the stock market looks frothy, but not bubbly.

2) Will Bernie be Good for the Stock Market? 

Nir Kaissar had a nice piece about Bernie Sanders and how he might be good for the stock market. The basic argument is that Bernie would blow out the deficit which would add to corporate profits and bolster the stock market. It’s an interesting premise, but I don’t think I see this playing out like that.

My main problem with this view is that Bernie is extremely divisive, even within his own party. I don’t think there’s a chance he gets half of what he wants because the current Senate won’t pass a single bill of his. So I think the argument is a non-starter given the current state of affairs. It’s also why I think this country deeply needs someone more moderate than Trump or Bernie. The whole purpose of our government structure was to force collaboration and bi-partisanship. Not this winner take all mentality where you divide and conquer.

3) Attack of the Seat Recliners

There was a viral video going around the other day from a woman who reclined her seat on a plane leading the man behind her to shake her seat for the entirety of the flight. This issue seems to really divide people and I am not sure why. To me, it is indicative of a broader problem where we struggle to benchmark our reality. I often talk about this when I talk about our living standards and how they’ve boomed yet people don’t realize it because there’s no reasonable way to benchmark what we mean by “living standards”.

Flights are a good example. Flying is literally amazing. And whenever I see people complaining about flights I always think back to this Louie CK video where he describes flying:

“Everything is amazing right now, and nobody’s happy…I was on an airplane and there was high speed internet. That’s the newest thing I know that exists. And I’m sitting there and they go ‘open up your laptops you can go on the internet,’ and it’s fast, and I’m watching YouTube clips, I’m in an airplane! And then it breaks down, and they apologize that the internet’s not working, and the guy next to me goes ‘ugh, this is bullshit.’ Like how quickly the world owes him something he knew existed only like 10 seconds ago! Flying is the worst one because people come back from flights and they’re telling you their story, and it’s like a horror story. They act like their flight was a cattle car in the 40s in Germany. They’re like, ‘it was the worst day of my life! First of all, we didn’t board for like 20 minutes and then they made us sit there on the runway for 40 minutes! We had to sit there!’ Oh really? What happened next? Did you FLY in the AIR incredibly like a BIRD? Did you partake in the miracle of human flight, you non-contributing zero?! … You’re sitting in a chair in the SKY! Here’s the thing: people say there’s delays. Delays? Really? New York to California in 5 hours. That used to take 30 years! And a bunch of you would die on the way there, and have babies… you’d be a whole different group of people by the time you got there. Now, you watch a movie, you take a dump, and you’re home!”

That sums up this situation perfectly. You have a person, in a leather chair watching TV on his personal supercomputer partaking in the miracle of human flight and he’s upset because the person in front of him reclined their chair 3 inches. I don’t get it. You paid for a seat that has certain functions. You get to use those functions. And if those functions marginally decrease the comfort of someone else then that’s too bad. I mean, I don’t like it when I am sleeping on a flight and the person next to me turns on their light or leaves their window shade open. But I am not going to start violently shaking this person because I realize that flying is literally amazing. And while it’s imperfect and often uncomfortable it is still amazing. I mean, Leonardo da Vinci would have died to fly on a plane just once. But people today take it entirely for granted because they have such an unrealistic benchmark for their living standards.¹

Anyhow, that’s all I’ve got you today. If you have complaints about my view on seat reclining please send them to edward.bastian@delta.com.

¹ – I generally check the person behind me. If it’s a small person or a child then there’s a 100% chance of recline. If that person is large then I typically ask if it’s okay to recline. So, there’s more gray area here than I am implying, but in general, I think people who are against reclining are overreacting.