The long period of low interest rate fueled a bubble, creating widespread market distortions and irrational valuations
Transcript
| Chris Davis: | Look at this chart on 3000 years of interest rate history. Now we saw this in a book and we can debate the validity of the beginning, but it's such a powerful point that interest rates have never been this low, this long through all of recorded history. Obviously that had enormous, enormous effects and distortions and it was not going to last. It was one of the great bubbles we'll ever see in our careers. Look at what happened with liquidity. Look at this incredible spike up in liquidity that accelerated. You had growing liquidity after the financial crisis and then it went vertical in these last years. Look at the debt exploding. All of those were real drivers of what created this bubble looking backwards. | |
| Danton Goei: | If we drill down to how has that impacted the market? Who's been the beneficiaries? What industries, what sectors, what companies have seen tailwinds or headwinds? If you think about the beneficiaries, it's certainly the highly levered companies. They obviously benefited from this super low interest rate environment, companies with cheap funding and speculative business models, so these are unprofitable companies. There people didn't mind so much that they were unprofitable. That might change in the future. High valuations and certainly for companies that were promising earnings in the future, those type of companies were, the market was much more receptive to those type of companies. Story stocks, again, companies without current earnings or cash generation, but this idea that in the future someday they'll have actual earnings, it fueled a lot of speculation in general, and so that's what we've seen through the market. |
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