Tech and growth-focused stocks have dominated the market for over a decade, but the “paradigm shift” came as the Federal Reserve raised interest rates to fight inflation, according to Steve Eisman, senior portfolio manager at Neuberger Berman Group. Eisman became famous for his successful bet against subprime mortgages during the Great Financial Crisis (GFC) of 2008, described in Michael Lewis’ 2010 book, “The Big Short“And the next movie with the same name, where the same character as him is played by Steve Carell.
“The market has a long paradigm where certain groups are the leaders,” the hedge funder said Bloomberg in the episode of the “Strange Many” podcast there. “Sometimes the paradigm changes a lot, and sometimes the paradigm changes over time, because people don’t give up the paradigm easily. And I think we’re going through a period, maybe like that again. Eisman pointed to Thomas Kuhn’s 1962 book, “The Structure of Scientific Revolutions,” as evidence that markets can undergo gradual, but unstable, paradigm shifts.
“When Einstein created the theory of relativity, for example … It’s not like everyone said, ‘Oh, we’ve been waiting for Einstein, thank God, now we can get rid of Newton.’ It took years for people to realize that this is a better theory. I think that’s how it works in the market,” he said. “The paradigm is so ingrained in the human brain that it’s impossible to imagine, sometimes something else.”
After years of rising tech stocks and cryptocurrencies, George Ball, chairman of Sanders Morris Harris, a Houston-based investment firm, told me. fortune in December he also expects a paradigm shift in the market this year as investors take a more conservative approach.
“I think that sometimes we need to change the investment and economic age, and we’re in one of those now after over a decade of near-zero interest rates,” he said. “A period of euphoria must be followed by a period of abstinence.”
The old and the new
With the Federal Reserve holding interest rates near zero for years after the Great Financial Crisis and during the COVID-19 pandemic, technology and growth stocks outperformed the overall market.
The low cost of debt allows these companies to invest quickly and have no alternative to equity because low rates mean investors “are getting paid to take risks” and invest, Eisman said. In addition, many investors are suffering from “Amazon disease,” according to hedge funds. This means that the success of tech giants like Amazon – some of which were unprofitable for years before their shares soared – led to an era of speculative investment in growth-oriented stocks over the past decade.
“From 2010 to the beginning of 2022, if you are a company with no income but strong revenue growth, people are dreaming,” said Eisman, arguing that investors are always looking for the next Amazon, and often ignore the bottom line in the process. . But now, with rates rising, Eisman said he believes revenue growth at many of these companies is slowing and a new era is coming for investors.
He describes how the former leaders of the stock market performed during the paradigm shift of the past market as it is happening now, noting that the financial stocks that performed better before 2008, “literally did nothing until 2020.”
“It’s been twelve years where the old leadership group has evaporated,” he said.
Hedge funders continue to argue that the rise in stocks and technology stocks that were market leaders to start the year is an example of “people not easily giving up their paradigms.” The tech-heavy Nasdaq is up more than 13% year to date, and Cathie Wood’s ARK Innovation ETF — which focuses on technology and growth stocks and has been a bellwether for the sector during the pandemic — is up more than 37%. Eisman warned that this could be the “last hurrah” for the stock, but added that it depends on the Federal Reserve.
“[Federal Reserve Chair Jerome] Powell has said that he will continue to raise rates, and the key phrase is, ‘and he will leave them alone.’ If they leave them there, I will have a paradigm shift. If they cut it again, we will go back to that place,” he explained. “I think they’re going to leave him there and we’re going to have a paradigm shift, but we can’t tell right now.”
This isn’t 2008…
When Michael Burry, another hedge funder was made famous by his success “The Big Short,” saying that stocks are in the “biggest speculative bubble of all time” from 2021 and predicting the “mother of all crashes,” Eisman does not believe that history has repeated itself. Better regulation of the financial system has created a safer system , he said.
“I think 2000 and 2008 for some investors like PTSD,” he said. “Not many people on Planet Earth really understand that the financial structure of the United States and Europe has changed. So they see the markets going down and they say, ‘Oh my God, something bad is going to happen.'”
And while Burry has warned that a “multi-year recession” could be on the way, Eisman said he expects something milder.
“Something bad could happen, you know, we could have a recession,” he said. “But my feeling is that we’re going to have an old recession. We’re not going to have a really big crisis where the system is at risk, which is what happened in ’08.
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