There are some dangerous parallels between 1999 and current times. We all know that 1999 lead to the “Dot.Com Crash” but what may be developing currently could exceed that recession. In this Mobile Home Park Mastery podcast we’re going to explore the similarities between 1999 and modern times, as well as predict what the impact on the mobile home park industry might be.
Episode 414: 1999 Déjà Vu Transcript
The popular music artist Prince had a very popular song which included the line, "Party like it's 1999." but many people are not old enough to know the meaning behind that song because what he was talking about is the fact that America was just booming. It was all systems go. Everyone was happy. The stock market was rising. Everything was just nothing but rainbows in 1999. But then on March 10th of 2000, everything collapsed. March 10th of 2000 began what is now called the dot com bust. And for those of us old enough to have been adults back in that transition of 1999 to 2000, you may have noticed that right now the US economy looks very, very similar to how it was back in 1999. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're going to talk about the similarities between 1999 and today, what happened during the dot com bust, and then how I envision this could impact the mobile home park industry going forward. So let's first explore what 1999 was all about and the similarities between that period and today. Now, the dot com bust had a terminology that came out in tandem with it that had never been used before.
And the new title was called irrational exuberance. And here's how it tied back to the stock market during that period. When I was in college at Stanford back in the late '70s, early '80s, my textbooks warned me that stocks were overvalued whenever the price to earnings ratio exceeded 10. 10 times earnings was considered healthy. Anything over that was considered raw speculation. Nevertheless, back in 1999, the price to earnings ratio had risen on the US stock market to an average of 40. That was four times what was considered healthy. If you read those early books by Warren Buffett, you will see that Warren was always obsessed with trying to buy things hovering around a 10 PE ratio or lower. Anything beyond 10 was always considered to be risky, speculative, and unhealthy. And what's the price to earnings ratio today, you might ask? That's right, it's about 40. Right now, the stock market is valued as highly as it was back in 1999 before it crashed. Warren Buffett also has another formula, a little more complicated, harder for the average person to derive. So I'll just have to take a leap of faith on it. But it's an algorithm based on GDP to stock valuations.
This has been a big part of his investment philosophy, trust, trying to understand the timing of the market. And right now, that ratio that Buffett tracks is coming in at 200. When's the last time it hit 200 or exceeded that, you guessed it, 1999. So based on both of Buffett's algorithms on valuation, the market right now is horribly overvalued. And that's probably why Buffett has been selling stocks as hard as he humanly can. He has for several years now. He right now has more treasury holdings at Berkshire Hathaway than the federal government has. Now he's only earning in all those T bills an average of 4%. And this is a guy who is lifetime return at Berkshire Hathaway averaged 19.8%. 4% is not really helping his legacy much. Yet he refuses to spend the money in the stock market. Why? Because he knows it's horribly overvalued. The last thing he wants to do is to die within his waning years, having lost, who knows what, a quarter or a half of all of Berkshire Hathaway's holdings to a stock market collapse. So he's voting for the fact that it's horribly overvalued with his actual performance in dollars.
He's cashing out of stocks. Also in 1999, they saw the fed funds rate skyrocket from 3% to 6%. It doubled in simply five years. You think that's bad? We've all been watching. Since 2022, the Fed raised the rates from 0.25 to over four. Much worse setup than what they had in 1999. And finally, the big thing that fueled all of this insanity, all this irrational exuberance back in 1999 was the advent of the Internet, something we all now use every day. But for those of you who weren't there in 1999, almost all of those dot coms that people used back then have all vanished. Things like Ask Jeeves and various others. People were opening dot coms like crazy because people were so dumb back then. You could open a dot com for just any old item like tablelamp.com and someone would buy the domain from you for like a million dollars gain, even though you had no customers, no product, and no revenue. That's how irrational it was. It was the craziest moment, perhaps, since the Dutch tulip bulb bubble of the 1600s, where people put huge value on tulip bulbs. At one point they were sending 2,500 gilders.
This is back in the 1600s, for a single tulip bulb because they thought they could sell it for more to another idiot the next day. Right now, what has replaced the dot com bubble is the AI bubble. Everyone is all about AI and how AI is going to cut out all these people and going to do wonderful things. But none of us actually materialized. It's all thought, kind of like dot com was. But what happened to America after 3-10-2000? What happened when the dot com bust hit? Here's what happened. The fed funds rate dropped from 6% to 1%. Fannie Mae rates fell from 8.22% to 3.3%. We had a full blown recession in the US and it was a terrible one. And by Q3 of 2000, we saw a GDP decline of 30%. Can you imagine having GDP at negative 30? That's what it hit.
And we also saw massive unemployment, the jobless rate jumping from 3.9% to nearly double that. And that was based on what tranche of the economy you looked at. Some areas were even worse, particularly with younger workers. So here's what will happen if 1999 repeats itself. Here will be my projections, my predictions if the dot com bust happens again. This time perhaps called the AI bust. Number one, you'll have stocks entering another period which was called back in the year 2000, the lost decade, because following the dot com bust from about 2000 to 2010, stocks went up. Not at all.
You can look it up for yourself. Go to stock market historical chart on Google, and you will see the lost decade. You'll also see the lost double decade. From the 60s all the way to the 80s, the stock market didn't go up at all. 30 years between those two occurrences of stocks not advancing one iota. I think that's what you'll see again. Number two, you'll see the FED drop the rate significantly, because in every recession since 1950, the normal playbook where the recession hits is for the FED to drop rates by 3 points. Now Obama took it down even more than that during the Great Recession, but three has been the average. And a three point drop by the Fed would have a huge impact particularly on 10 year treasuries and therefore on mortgage rates. Mortgage rates in my opinion could go down to as low as the threes and even for one minute might even cross the line into the two point nines or something in that category. A huge, huge decrease from where interest rates are right now on mobile home park mortgages. And you're also going to have massive unemployment. But it's mostly going to be in those high end jobs, just like you're seeing now all these layoffs you're seeing at Amazon and different places.
If you notice, those aren't workers, it's middle level management. That's where they see AI really coming into play to remove people, is the people who just basically sell thinking, but not the people actually doing the tasks at hand. UPS's layoff isn't drivers, it's middle management. So what happens when you lose all those middle management jobs?
Interest rates go down a whole lot. Stocks go down the toilet for maybe a decade. A couple things will occur. Number one, a huge demand for affordable housing that goes right into the wheelhouse of the mobile home park industry. Lower mortgage rates. Again, perfect for mobile home park owners. And yet we escape a lot of the carnage because it will be the higher end wage earners and their housing that was really impacted. There's $400,000 single family homes, the 2,000 a month class A apartments, that's who will be hammered. But mobile home park owners, being the dollar tree of housing, should get along just fine. Now, I may be wrong, and maybe we're not like 1999, maybe we're forging some new era in economics. But I warn you, if you look at America historically in the world, you see it is always run on cycles. There have always been very predictable cycles with very predictable units of measurement for when you've reached the summit of the mountain and you're about to go down and we're already there. This is Frank Rolfe with the Mobile Home Park Mastery podcast. Hope you enjoyed this. Talk to you again soon.