The Big Short hedge fund says it thinks we’re headed for a “run-of-the-mill” recession, but what it’s really thinking about is a more serious “paradigm shift.”

Technology and growth-focused stocks have dominated the markets for more than a decade, but a “paradigm shift” is coming as the Federal Reserve raises interest rates to fight inflation, according to Steve Eisman, senior portfolio manager at Neuberger Berman Group. Eisman became famous for his successful betting against subprime mortgages in the run-up to the Great Financial Crisis (GFC) of 2008, which was chronicled in a 2010 book by Michael Lewis. big shortand the subsequent film of the same name, in which a similar character was played by Steve Carell.

“Markets have long paradigm periods where certain groups are in the lead,” hedge fund Bloomberg said in an episode of Odd Lots Podcast Monday. “Sometimes these paradigms change dramatically, and sometimes these paradigms change over time because people don’t give up their paradigms so easily. And I think we’re going through a period again, maybe the same.” Eisman pointed to Thomas Kuhn’s 1962 book, The structure of scientific revolutions, as evidence that markets may be undergoing a gradual but unsustainable paradigm shift.

“When Einstein created his theory of relativity, for example… It’s not like everyone was like, ‘Oh, we were waiting for Einstein, thank God, now we can get rid of Newton.’” It took people a few years to figure out that this is the best theory. I think something similar is happening in the markets,” he said. “Paradigms are so deeply ingrained in people’s brains that sometimes they can’t even imagine there could be anything else.”

George Ball, chairman of Sanders Morris Harris, a Houston-based investment firm, said that after years of growth in tech stocks and cryptocurrencies Luck in December, he also expects a paradigm shift in the markets this year as investors take a more conservative approach.

“I think there is a turning point in the investment and economic era from time to time, and we are in one of those now, after more than a decade of near-zero interest rates,” he said. “Periods of euphoria should be followed by periods of abstinence.”

Old and new

As the Federal Reserve kept interest rates near zero for so many years after the Great Financial Crisis and during the COVID-19 pandemic, technology stocks and growth stocks have outperformed the market as a whole.

Low borrowing costs made it easy for these firms to invest in earnings growth, Eisman said, and the lack of viable alternatives to equities due to low rates meant investors were “essentially paid to take risks” and invested in them. On top of that, according to the hedge fund, many investors suffered from “Amazon disease.” By that, he meant that the success of tech giants like Amazon, some of which were unprofitable for years before their stocks skyrocketed, has led to an era of speculative growth-focused equity investment over the past decade.

“From 2010 to early 2022, if you were a company that didn’t make a profit but had strong revenue growth, people dreamed about it,” Eisman said, arguing that investors were always looking for the next Amazon and often ignored fundamental principles. in progress. . But now that rates are rising, Eisman said he believes earnings growth for many of these firms is now slowing, and a new era is dawning for investors.

He described how former stock market leaders have been overtaken during past market paradigm shifts like the one happening now, noting that financial stocks that did best before 2008 “have done literally nothing before 2020.”

“Call it a decade when the old group of leaders evaporated,” he said.

The hedge fund went on to argue that the rise of growth stocks and technology companies, which were market leaders at the beginning of the year, is an example of how “people don’t give up paradigms lightly.” The tech Nasdaq is up more than 13% year-to-date, and Cathy Wood’s ARK Innovation ETF, which focuses on technology and growth stocks and has led the sector during the pandemic, is up more than 37%. Eisman warned that this could be the “last hurray” for these stocks, but added that it was up to the Federal Reserve.

“[Federal Reserve Chair Jerome] Powell said he’s going to keep raising rates and the big deal is “and he’ll leave it there.” If he leaves them there, I think we’ll have a paradigm shift. If he cuts himself again, we will go back to where we were,” he explained. “I think he’ll leave them there and we’ll have a paradigm shift, but that’s not known at the moment.”

It’s not 2008…

While Michael Berry, another successful hedge fund Big Short, Claiming that stocks have been in the “greatest speculative bubble of all time” since 2021 and predicted the “mother of all crashes,” Eisman doesn’t believe history is repeating itself. He argues that improved regulation in the financial system has created a much safer system.

“I think the years 2000 and 2008 are like post-traumatic stress for some investors,” he said. “There are not many people on planet Earth who truly understand how much the financial structure of the United States and Europe has changed. So they see the markets crash and they say to themselves, “Oh my God, something bad is about to happen.”

And while Berry warned that a “protracted multi-year recession” was likely on the horizon, Eisman said he expected something much milder.

“Something bad could happen, you know, we could have a recession,” he said. “But it seems to me that we will have an old-fashioned run-of-the-mill recession. We won’t have some kind of huge crisis where the system is completely at risk, as happened in 2008.”

This story was originally published on Fortune.com.

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