Guest post by Ted Lamade, Managing Director at The Carnegie Institution for Science
I recently experienced two very different Sundays. The first was a modern-day version of Planes, Trains, and Automobiles as I attempted to navigate my way home from a trip to the Midwest. The second consisted of a 5am wakeup thanks to my younger son, a lunch that was disliked by both boys, and an afternoon driving my older son field-to-field as he officially entered youth sports mania. Yet as different as these days were, they paled in comparison to the things I read/watched.
On that first Sunday, I picked up a Wall Street Journal for the flight home. One of the cover articles was titled “The Social Media Stars Who Move Markets” and profiled a number of “investing influencers”. This group of twenty-somethings with little-to-no investment experience have managed to attract massive audiences and earn millions by doling out investment advice on TikTock, Twitter, and YouTube. The unifying mantra among all of them? Be bullish. Always. It is all they’ve known.
The following Sunday was the twentieth anniversary of the September 11th attacks. Unsurprisingly, this day was filled with remembrances and reflections of that day. Articles covered how 9/11 had shaped America for more than two decades and created a vulnerability not felt in generations. Yet it also highlighted the bravery displayed by many, most notably a 60 Minutes profile of the New York City Firefighters who charged up the towers.
The contrast between the two Sundays was stark, yet makes perfect sense. Given September 11th occurred more than two decades ago, the country is now split between those who “experienced it” and those who have just heard or read about it. For those who lived and/or worked through it, 9/11 kicked off a very difficult decade, especially when you consider the subsequent dot.com bust and Great Financial Crisis. For younger Americans, these events barely represent a blip on their radars. The result is a generational divide centered around the tension between experiencing and learning.
Experienced versus Educated
You can read thousands of books about the Civil War, but you will never truly know what it felt like to be a Union soldier on top of Little Round Top. You can study the Cold War, but you will never fully understand it unless you watched Nikita Krushchev bang his shoe on the desk at the United Nations. You can read about market crashes, recessions, and depressions, but you cannot fully grasp them unless you have invested through one. Unsurprisingly, those who live through moments like these often emerge more risk averse, while those who do not tend to be unphased, or in some cases even more emboldened. Look no further than the 1970’s and the years that followed.
In 1978, Stan Druckenmiller became the youngest director of research at Pittsburgh National Bank at just 25 years old. While Druckenmiller would go on to become one of the most successful investors of all time, he was a relative unknown at the time.
After receiving this promotion just one year into the job, Druckenmiller asked his boss why he was elevated over numerous more senior colleagues. He recalled his boss replying,
“For the same reason they send 18-year-olds to war. You’re too dumb, too young, and too inexperienced not to know to charge. We around here have been in a bear market since 1968. I think a big secular bull market is coming. We’ve all got scars. We’re not going to be able to pull the trigger. So I need a young, inexperienced guy to go in there and lead the charge.”
The 1970’s were a brutal decade for the country and the economy. Inflation was rampant, the U.S. dollar lost half its value, oil shortages were widespread, the Vietnam War divided Americans, and the stock market produced a negative real return. There were plenty of brief equity rallies, but nearly everyone who put money to work during these years had been burned. As a result, this decade caused an entire generation of investors to become risk averse. Yet something else happened during the 1970’s that doesn’t get enough attention. It created a massive opportunity.
As Druckenmiller’s boss highlighted, when a generation becomes scarred by past experiences it also opens the door for hungry, risk-seeking, and entrepreneurial young men and women. Luckily, several of them them took advantage during this period; from Druckenmiller to Bill Gates, Steve Jobs, Richard Branson, Sandy Lerner, Howard Schultz, Indra Nooyi, Jamie Dimon, Oprah Winfrey, Michael Moritz, Doug Leonne, and Paul Tudor Jones, among countless others. All were born in the mid-1950s, entered the early parts of their careers in the late-1970s, and started to have a material impact shortly thereafter. Coincidence? I doubt it.
Over the next twenty years (1980-2000), young entrepreneurs, business leaders, and investors helped lead the country through one of the longest economic expansions and secular bull markets in history. They leveraged the infrastructure built in 1960’s and 1970’s (semiconductors, personal computers, automation, digitization, and the earliest stages of the internet) to launch their businesses in the 1980’s and scale them through the 1990’s. There were certainly bumps along the way, including a recession in both the early 80’s and 90’s as well as Black Monday in ‘87, but each proved to be relatively minor speed bumps within a secular market expansion.
Given this backdrop, it begs the question — could we be witnessing a similar pattern today? After the most difficult economic stretch since the 1970’s, the country faced a very similar situation in the late 2000’s. After two deep recessions and a near meltdown of the financial system, another door had opened, and a new generation of unscathed and risk-seeking people once again took advantage.
Today’s Set Up
Why does this happen? Why do some of the most innovative ideas get funded and companies get started during the darkest of days? It seems counterintuitive, but these are often the ideal times to be an entrepreneur or join a startup. The fact is that when the economy is doing poorly, established firms are typically eliminating investments, slashing jobs, reducing compensation, and cutting back on new hires. As a result, the competition for projects is falling, the opportunity cost of going out on your own is low, and the competition to hire talented colleagues is even lower.
This happened in the 1970’s/early 1980s when established firms like General Motors, Ford, AT&T, IBM, Proctor & Gamble, Dupont, and many of the banks pulled in their reins, while Microsoft, Apple, Versace, Activision, Whole Foods, Starbucks, Bloomberg, Tudor, Dell, Adobe, Cisco, Blackstone, and Sequoia all got their starts.
Fast forward to the late 2000’s when Goldman Sachs, Bank of America, Cisco, Marriott, McKinsey, Citigroup, Johnson & Johnson, AIG, and countless “big box retailers” were the ones dialing back, while the likes of AirBnB, Square, 23andMe, Stripe, Shopify, Slack, NuBank, Zoom, Twilio, Moderna, WhatsApp, and Andreessen Horowitz emerged. All were founded after 2006, and most in 2008 or later. The bottom line is that recessions plant the seeds for future economic growth.
What it all Means
So, you may be thinking, “That’s sounds plausible, but it is all in the past. How about what lies ahead?” Three things stand out:
State of the Job Market: If it is more appealing to launch startups and easier to hire talented people during difficult economic times, is it less appealing and more difficult to do so amid an economic expansion and raging bull market? Typically yes, especially when larger companies are generating record profits, hiring hand-over-fist, and paying out generous compensation packages? Yet, while starting a new company and hiring capable teams may still be a challenge, it may not be quite as difficult as in years past. There are several reasons, but one that stands is that venture capital and growth equity firms have been raising massive funds, which are increasingly being used to recruit top talent to join their portfolio companies. The result is that smaller companies are as well positioned as they have ever been to thrive at this stage of a cycle.
Risk….Location, Location, Location: My gut reaction to Millennials and Gen Z’ers chasing jobs in startups and providing investment advice on Tik Tock, Twitter, and YouTube was that it had to be a sign of a top in the market and/or a bubble. On second thought though, isn’t that what younger generations should be doing? Shouldn’t they be the ones taking outsized risks and making bold investments given their youth? If so, could this actually be considered a material positive, especially when the older generations are scarred and more defensively positioned? I would argue absolutely. They are the ones who have the time and earnings potential to recover from any losses they may experience. Said another way, risk today may actually be located in the right hands, which has not been the case in numerous other past cycles.
Secular Bull Market: If risk is in the right hands, capital is flowing into venture capital and startups built off prior technologies, and challenging periods tend to be followed by longer sustained expansions, could we be in the midst of a secular bull market today? As you can see in the chart below, it was certainly true following the 1970s and World War II, and may be true as we look ahead. As with all things though, time will tell.
JP Morgan Guide to the Markets