In some ways similar to the Internet bubble of the late ‘90s, the current market cycle has largely been driven by speculative growth. But unlike the dot-com collapse, the monetary stimulus policies over the past several years have, for a prolonged period of time, unintentionally disadvantaged the kinds of high-quality, financially sound companies that investors have historically favored after a steep decline.
Francis Gannon: From a historical standpoint this has been a unique market, and we all know that every cycle is different. Have you seen cycles like this before in the overall market?
Chuck Royce (Trades, Portfolio): They are all different and they are all similar. I think there are aspects that are similar. Here the strongest parallel is the speculative growth activities that are going on today in the biotech world compared to the Internet part of the end of the ‘90s. It is very parallel. Value underperformed dramatically—we underperformed then, we have underperformed here—and then they tend to reach a peak. Maybe biotech has reached its peak. I would think so. It reached its peak I think in late June.
So we are looking forward to a different period coming up. There was a very strong period after the Internet bubble burst in the spring of 2000 and I am looking forward to a similar, better period for relative performance.
Francis: So one of the more interesting things about this cycle has been the fact that there really was no period of time where better-quality companies were able to take advantage of lower-quality companies, especially coming out of the great recession in ’09. That Darwinist moment didn’t occur. Why do you think it didn’t occur and then what do you think is going to happen going forward?
Chuck: For policy reasons, we came to the conclusion that we must have a very stimulative monetary policy and we did that. And actually, it worked. We had asset inflation and we certainly had monetary inflation.
The companies that were most stressed were able to refinance. We have seen that in the junk bond market, we have seen it in the inferior company who went up five-fold, etc. Our companies, which tended to be much higher quality, were disadvantaged in their ability to somehow take advantage of that moment.
Francis: We have heard anecdotal evidence for a lot of these zombie companies—companies that still need access to the capital markets—that that is changing. High yield are backing up and credit spreads are widening out that is, from our perspective, a positive. How do you think that is going to play out for many of those zombie-like businesses?
Chuck: Yes, I think that phase is over. We had a huge period—6+ years. Junk bonds are already backing up, so I think we are really entering in the next phase. The next five years will be completely different than the last five years.
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