I helped cover deal mania in the 1980s as a young journalist at Businessweek. The leveraged buyout boom was financed by junk bonds, and many of us wondered if these debt-driven deals were a bubble.
One memorable interview I had was with Nobel laureate Kenneth Arrow, who had done some calculations during the 1960s conglomerate wave. He concluded that for the mergers and acquisition frenzy to pay off for investors, two plus two must equal five.
The kicker, he dryly added, is it took investors another three years to decide his math was right. In other words, even if the 1980s deal mania was unmoored from the fundamentals it might take years before the boom went bust (which was the case).
I recalled our conversation while reporting on the current froth in the markets. Thoughtful market observers are exploring whether the speculative embrace of risky assets signals that investors are starting to take leave of their senses once again.
Cryptocurrencies. Meme stocks. Alternative investments. And, most important, the mind-boggling stupendous investments in artificial intelligence.
AI is critical because bubbles often emerge during periods of major innovations. Massive investments accelerate technological transformations, and excessive exuberance among investors is part of the process.
That’s cold comfort for investors who find themselves with large losses (at least on paper) when enthusiasm cools.
Financial history offers some guidance for those saving for retirement.
