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The Voice of the Market- The Millennial Perspective

Those who cannot remember the past are condemned to repeat it.” – George Santayana

Current investors must be at least 60 years old to have been of working age during a sustained bond bear market. The vast majority of investment professionals have only worked in an environment where yields generally decline and bond prices increase. For those with this perspective, the bond market has been very rewarding and seemingly risk-free and easy to trade.

Investors in Europe are buying bonds with negative yields, guaranteeing some loss of principal unless bond yields become even more negative. The U.S. Treasury 30-year bond carries a current yield to maturity of 2.00%, which implies negative real returns when adjusted for expected inflation unless yields continue to fall. From the perspective of most bond investors, yields only fall, so there’s not much of a reason for concern with the current dynamics.

We wonder how much of this complacent behavior is due to the positive experience of those investors and traders driving the bond markets. It is worth exploring how the viewpoint of a leading investor archetype(s) can influence the mindset of financial markets at large.


The millennial generation was born between the years 1981 and 1996, putting them currently between the ages of 23 and 38. Like all generations, millennials have unique outlooks and opinions based on their life experiences.

Millennials represent less than 25% of the total U.S. population, but they are over 40% of the working-age population defined as ages 25 to 65. Millennials are quickly becoming the generation that drives consumer, economic, market, and political decision making. Older millennials are in their prime spending years and quickly moving up corporate ladders, and they are taking leading roles in government. In many cases, millennials are the dominant leaders in emerging technologies such as artificial intelligence, social media, and alternative energy.

Their rise is exaggerated due to the disproportionately large baby boomer generation that is reaching retirement age and witnessing their consumer, economic, and political impact diminishing. An additional boost to millennials’ influence is their comfort with social media and technology. They are digital natives. They created Facebook, Twitter, Snapchat, Instagram, and are the most active voices on these platforms. Their opinions are amplified like no other generation and will only get louder in the years to come.

Given millennial’s rising influence over national opinion, we examine their experiences so we can better appreciate their economic and market perspectives.

Millennial Economics

In this section, we focus on the millennial experience with recessions. It is usually these trying economic experiences that stand foremost in our memories and play an important role in forming our economic behaviors. As an extreme example, anyone alive during the Great Depression is generally fiscally conservative and not willing to take outsized risks in the markets, despite the fact that they were likely children when the Depression struck.

The table below shows the number of recessions experienced by population groupings and the number of recessions experienced by those groupings when they were working adults, defined as 25 or older.

Data Courtesy US Census Bureau – Millennial Generation 1981-1996

About two-thirds of the Millennials, highlighted in beige, have only experienced one recession as an adult, the financial crisis of 2008. The recession of 1990/91 occurred when the oldest millennial was nine years old. More Millennials are likely to remember the recession of 2001, but they were only between the ages of 5 and 20.

Unlike most prior recessions, the recession of 2008 was borne out of a banking and real-estate crisis. Typically, recessions occur due to an excessive buildup in inventories that cause a slowing of new orders and layoffs. While the market volatility of the Financial Crisis was disturbing, the economic decline was not as severe when viewed through the lens of peak to trough GDP decline. As shown in the table below, the difference between the cycle peak GDP growth and the cycle trough GDP growth during the most recent recession was only the eighth largest difference of the last ten recessions.

Data Courtesy St. Louis Federal Reserve

One of the reasons the 2008 experience was not more economically challenging was the massive fiscal and monetary stimulus provided by the federal government and Federal Reserve, respectively. In many ways, these actions were unprecedented. When the troubles in the banking sector were arrested, consumer and business confidence rose quickly, helping the economy and the financial markets. Although it took time for the fear to subside, it set the path for a smooth decade of uninterrupted economic growth. A decade later, with the expansion now the longest since at least the Civil War, the financial crisis is a fleeting memory for many.

The market crisis of 2008 was harsh, but it did not last long. It is largely blamed on poor banking practices and real-estate speculation issues that have been supposedly fixed. Most Millennials likely believe the experience was a black swan event not likely to be repeated. One could argue there’s a large contingent of non-millennials who feel likewise.  Given the effectiveness of fiscal and monetary policy to reverse the effects of the crisis,  Millennials might also believe that recessions can be avoided, or greatly curtailed. 

Half of the millennial generation were teenagers during the financial crisis and have few if any, memories of the economic hardships of the era. The oldest of the Millennials were only in their early to mid-20s at the time and are not likely to be as financially scarred as older generations. In the words of Nassim Taleb, they had little skin in the game.

No one in the millennial generation has experienced a classical recession, which the Federal Reserve is not as effective at stopping. With only one recession under their belt, and minimal harm occurring as a result of their relatively young age, recession naivete is to be expected from the millennial generation.

Millennial Financial Markets

As stated earlier, the dot com bust, steep equity market decline, and the ensuing recession of 2001 occurred when the millennial generation was very young.

The financial crisis of 2008-2009 occurred when millennials were between the ages of 12 and 27. More than half of them were teenagers with little to no investing experience during the crisis. Some older Millennials may have been trading and investing, but at the time they were not very experienced, and the large majority had little money to lose. 

What is likely more memorable for the vast majority of the generation is the sharp rebound in markets following the crisis and the ease in executing a passive buy and hold strategy that has worked ever since.  

Millennial investors are not unlike bond traders under the age of 60 – they only know one direction, and that is up. They have been rewarded for following the herd, ignoring the warnings raised by excessive valuations, and dismissing the concerns of those that have experienced recessions and lasting market downturns.

Are they ready for 2001?

The next recession and market decline are more likely to be traditional in character, i.e. based on economic factors and not a crisis in the financial sector. Current equity valuations argue that a recession could result in a 50% or greater decline, similar to what occurred in  2008 and 2001. The difference, however, may be that the amount of time required to recover losses will be vastly different from 2008-2009. The two most comparable instances were 1929 and 2001 when valuations were as stretched as they are today. It took the S&P 500 over 20 years to recover from 1929. Likewise, the tech-laden NASDAQ needed 15 years to set new record highs after the early 2000’s dot com bust.

Those that were prepared, and had experienced numerous recessions were able to protect their wealth during the last two downturns. Some investors even prospered. Those that believed the popular narrative that prices would move onward and upward forever paid dearly.

Today, the narrative is increasingly driven by those that have never really experienced a recession or sharp market decline. Is this the perspective you should follow?


 “Those who cannot remember the past are condemned to repeat it.

We would add, “those who remember the past are more likely to avoid it.”

The millennial generation has a lot going for it, but in the case of markets and economics, it has lived in an environment coddled by monetary policy. Massive amounts of monetary stimulus have warped markets and created a dangerous mindset for those with a short time perspective.

If you fall into this camp, you may want to befriend a 60-year old bond trader, and let them explain what a bear market is.

Facebook Follow-up: Looking At Two Other Tech Darlings

Well, that was fast.

I published an article on Monday wondering about Facebook’s valuation, and on Thursday Facebook dropped around 20% in the wake of its Q2 earnings report, putting in the worst day for a stock in market history on value lost (nearly $120 billion) basis. The report showed robust 42% revenue growth, but that number was below expectations, and, more importantly, the online social media firm warned about future revenue weakness. Facebook will have to hire more personnel to police the “bots” posting on its site, and that will cut into the firm’s prodigious margins.

In my article, I “reverse engineered” a discounted cash flow model to show that the market was assuming 6% free cash flow growth and more than 12% revenue growth for the next decade. Today’s market price for Facebook assumes a 4% FCF growth rate – a 33% reduction from yesterday’s price.

So how do other tech giants look these days? Are they all poised to tumble like Facebook? Some are and some aren’t.


Alphabet is often compared to Facebook. Both companies are in the online advertising business along with the ancillary business of finding out as much information about, and invading the private lives of, consumers as much as possible.

It turns out, the market is making almost the same set of assumptions it was about Facebook before its drop. The free cash flow growth rate that allows a model to arrive at today’s current stock price as the fair value for the business is 6.5% — just a bit over the 6% rate that Facebook’s stock price assumed before it’s crash.

As I said in my previous article, I haven’t studied the online advertising market, so I don’t have an opinion on whether Alphabet can grow this much. Alphabet turns a little more than 20% of its revenue into free cash flow. That makes it around half as efficient in this regard as Facebook, though Facebook’s ratio may well shrink in the future based on its need to pay more people to police its platform.

Alphabet is involved in more diverse array of business than Facebook is. Its Android operating system is in many of the world’s mobile phones. Its Internet browser, Chrome, is popular, and its subsidiary Waymo, is involved in the development of self-driving cars, though Facebook has also made efforts at driverless cars.

Growth isn’t easy to predict for companies like Facebook and Google, and the similarities implied by doing these reverse discounted cash flow models may indicate that analysts and investors, up until Thursday, had picked nearly the same growth number for both companies out of convenience.

None of this means Google is the next technology stock to tumble though. Future quarters may disappoint investors the way Facebook’s recent quarter did, but they may just as well impress the market. Everyone now will have to persuade themselves whether the optimism baked into Alphabet’s price is justified. For at least the two days of trading this week after Facebook’s stumble, it seems they have.


Speaking of driverless cars, Steve Eisman, a manager profiled in Michael Lewis’s The Big Short, thinks another popular technology company, Tesla, isn’t doing enough to make inroads in that area. Indeed, the electric car maker has burned through more than $8 billion in cash over the last four years, $4 billion last year alone. It shows no signs of being able to generate positive cash flow.

Its current market capitalization of around $50 billion assumes one scenario (shown below) whereby it somehow produces $1.7 billion in free cash flow next year and grows that number by 5% annually for the next decade. This would be nothing short of miraculous for a company that has lost so much cash already. Perhaps it’s unwise to count Elon Musk out, but investors should think hard before sinking money into an enterprise that hasn’t been able to generate free cash flow for so long. Second thoughts are especially in order for those contemplating buying shares given Tesla’s nearly $10 billion debt load and the nearly $0.50 billion interest payments it made last year.


It’s hard to know if Facebook’s (and now Twitter’s) problems represent the technology sector’s comeuppance. Facebook produced more than $17 billion of free cash flow last year, and it’s still a healthy company even if investors are re-thinking past assumptions about its growth and profitability. Not all of today’s technology firms have as unlikely a road to success and to posting the profits that justify their stock prices as Tesla.

Is Facebook Worth Its Current Price?

All assets are worth the present value of their future cash flows. Even if you haven’t been to business school and heard this financial theory, you probably have some intuitive sense that if you buy a piece of real estate as an investment, you know that the income that property produces relative to the price you’re paying for it is important.

The problem with a “discounted cash flow” approach (forecasting future cash flows and applying a discount rate to them to arrive at a present value) is that people rarely know what future cash flows will be, and nobody knows how to discount them properly to arrive at a present value. Regarding discounting, Warren Buffett likes to apply the rate on the 30-year U.S. Treasury. Others like to apply a discount rate as a “hurdle rate” that reflects the return they’d like the investment to deliver – say, 10%. As Buffett’s sidekick, Charlie Munger, says, valuing an asset isn’t supposed to be easy. And that makes sense since skill at valuation is lucrative.

But instead of estimating cash flows and applying a discount rate to see what an asset is worth, sometimes it can be useful to understand what future cash flows the market is anticipating by awarding a stock its current price. When you back into, or reverse engineer, the future cash flow assumptions the market is making, you can sometimes decide if Mr. Market is off his meds or not.

(Discounting a cash flow is the opposite of compounding it the way you might do a compounded interest calculation. It involves dividing the cash flow by your chosen interest rate for each year in the future the cash flow occurs. So an assumed $100 payment next year discounted at 10% is worth around $91 today. An assumed $100 payment in five years is worth $62 today, or $100/(1.1^5).)

So what future cash flows is the current ~$600 billion market capitalization of Facebook anticipating, and are those future cash flows achievable? Let’s try to find out.

From 2013 through 2017, Facebook’s revenue has grown remarkably from under $8 billion to more than $40 billion. Also, free cash flow, as Morningstar calculates it has gone from under $3 billion to nearly $17.5 billion over the same time. That’s around a 55% compounded annualized growth rate.

It turns out that if Facebook can grow its free cash flow by 6% annually for the next decade, and then we assume its return on invested capital equals its cost of capital after that (meaning it loses it competitive advantage), we arrive at a present value roughly equal to its current $600 billion market capitalization, using a 10% discount rate.

Facebook has converted $0.40 of every $1.00 in revenue into free cash flow over the past few years. Assuming that prodigious profitability continues, Facebook would have to increase its revenues by more than 12% annually for the next decade to justify the current stock price. Its 5-year revenue growth rate, according to Morningstar is 20%. A drop-off is inevitable, but it’s difficult to know how much of a drop-off to expect. How mature is Facebook? That’s a big question for an analyst.

To put that revenue growth in perspective, compounding its current $40 billion revenue by 12% annually (not quite enough to get to 6% FCF growth at the current 40% conversion rate of revenue to FCF) would result in more than $120 billion in revenue in 2027. That’s more than Google’s $110 billion in revenue and a little more than half of Apple’s $229 billion in revenue. Can Facebook achieve that revenue growth? That’s another tough question for an analyst.

Facebook’s business model is an advertising one, and I haven’t said anything about the online advertising market. An analyst would have to know how big it is, how much of it Google owns, or whether Facebooks can, or needs to, capture some of Google’s share to justify its current price. At first blush though, growing revenue by 12% or more for the next decade seems like a tall order. Since I don’t know the online advertising market, I can’t say it’s impossible though. Also, one needs to make a judgment about whether Facebook will suffer from competition. Will another platform make inroads into Facebook’s business, or does it benefit from a kind of network effect whereby enough people are already on Facebook that others have to join to be involved in social media?

But this is the type of analysis you have to do if you’re going to invest in a stock – and it’s not even the bare minimum since I haven’t looked at the online advertising market. Buying shares of Facebook because your friends and neighbors own it or because you just think “it’s going up” isn’t really an investment rationale.

We could have done a sensitivity analysis, adjusting discount rates and the growth trajectory instead of just assuming an even 6% free cash flow growth every year. We also could have adjusted margins in the future — will the same amount of revenue become free cash flow in the future? Still, this simple step gives us some idea of what the market is forecasting for Facebook. I wouldn’t short Facebook, but you have to be optimistic to invest at this price.