Like the 1990s, But Better

• The current economic situation parallels the late 1990s dotcom bull market, driven by disruptive AI technology, government deficit spending, and investor fear.
• Major bull markets require disruptive technology, funding, and investor fear; today, AI and government spending fulfill these conditions.
• Unlike the 1990s, today we benefit from both government deficits and private bank credit, creating an ideal environment for growth.
• Despite short-term seasonal weakness, the long-term trend is bullish, presenting buying opportunities in a potentially massive technology bull market.

In this piece, we argue our working-hypothesis that the current economic/market situation is similar to (and, perhaps, better than) the late 1990s “dotcom” bull market.

All major bull markets require three conditions:

• A disruptive technology,
• Funding (money) to release the real-resources, and
• Fear (incredulity) in the herd of investors.

In the 1990s, there was:

• The new communication technology of the internet,
• Bank-credit funding of the economy, and
• Fear (incredulity) in the herd. (Greenspan’s infamous “irrational exuberance” comment in 1996 personified the belief that the top was near, after which the market climbed 100% over the next three years.)

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Now, we have:

• A disruptive technology (artificial intelligence), the impact of which could rival the invention of computers,
• The investing-herd is terrified of inflation, the Federal Government “debt”, recession, “over-valuation” of the stock market, and the very AI technology that will drive the economy forward.
• And most importantly, government fund-flows (deficit-spending) that can release the technology into the economy. [Note: in the 1990s, Clinton had a budget surplus, which means funds were removed from the economy on a net-basis (private-deficit) and had to be compensated for with private bank credit].

In the late 90s, it was the communication [internet] and biological [DNA] technologies. Today, it is powerful AI technologies that allow us to talk to our machines, and which are capable of reading and organizing everything ever written.

That remarkable capability has both confused and scared investors. They are scared that AI tools will take over the World and even perhaps even destroy it. At the same time, they are also fearful that the stock market is over-valued and might even be in a bubble. This ‘wall-of-worry’ is an ingredient of primary bull markets.

During the late 90s, all the money driving the economy was being created as private bank-credit because Clinton was producing budget-surpluses (which are private-sector deficits) that had to be compensated for with bank credit. Today, we have the benefit of both Government deficits and bank-credit funding the release of real-resources.

The chart below, shows the government budget (blue-line) producing ever-increasing surpluses between 1996 and 2000, and the household debt payments (red-line) increasing at the same time. By the year 2000, the Fed’s rate hikes made it impossible to maintain the private debt, forcing assets to be sold, which led to the bear market.

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Today, we have near-record government deficits (private-sector surpluses), and near-record low household debt payments, and the Fed is about to embark on a rate-cutting operation which will make bank-credit more affordable. In other words, we have the best of both worlds: high net-spending by the government, and lots of room for private bank credit to grow. In fact, a new credit cycle is just beginning (chart below).

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The patterns of SPX price, SPX yield, and interest rates are all very similar to the 1990s (black boxes below).

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While the long term primary trend is very bullish, shorter-term we are in a seasonally weak period of the year (September/October). This should provide investors with buying opportunities and a chance to benefit from what is likely to be a massive technology bull market that could surpass the 1990s tech rally.

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