When we experience loss or disappointment, we are told to look on the bright side, find the light at the end of the tunnel, or consider a cloud’s silver lining.
As we emerge from the global pandemic, the worry for many people is not that the economy is bad (it’s not), it’s that the stock market is too good. In this environment, it is natural to be fearful, or at least cautious as we await the expected reckoning. But, perhaps there is a silver lining to all this good news.
Naturally, when things seem to be too good to be true, they usually are. As we saw with dot-com stocks and the great real estate recession, investments that outrun their fundamentals tend to come back to earth. Today, due to a torrent of government cash and low borrowing costs, most asset classes, be they real or digital, are being bid up by zealous investors, professional and amateur alike.
Mini-bubbles abound, driven by investors who, bored with stocks and bonds, are chasing the next bit-coin phenomenon. As a result, we are seeing head-scratching prices being paid for an assortment of esoteric investments by those hoping for even higher valuations down the road. In addition to meme-stocks like AMC and Game Stop being promoted on Reddit and traded on the platform Robinhood, there are all sorts of assets finding willing speculators. The frenzy has spilled over to both the risky and the wacky.
SPACs for instance, which are a type of company that can legitimately be described as “carrying-on an undertaking of great advantage but no-one to know what it is” (a description of the South Sea Bubble of 1720) have made up 50% of the IPO market in 2020. Even more shocking, according to Renaissance Capital, since 2015 the averagereturn on SPACs have been -9.6% with a median loss of -29.1%. Other asset classes seeing speculative mania include alternative cryptocurrencies, collectibles like trading cards and sneakers, and now a new phenomenon we should all start to become familiar with – NFTs (which have even made it to an SNL skit).
NFTs, which stand for nonfungible tokens, have taken off in music, art, and sports. The digital tokens convey ownership in a digital item like a video, image, or song. Blockchain technology ensures authenticity, which gives the item value — at least in the eyes of the person buying it. Some liken NFTs to digital trading cards. Skeptics consider NFTs among the most questionable of assets since an NFT image can be endlessly copied and shared. Still, enough people are convinced of the value of authenticated tokens that they have dovetailed with another market-propelling phenomenon, FOMO, or “fear of missing out.”
In February, Christie’s sold a digital artwork by artist Mike Winkelmann, known as Beeple, for $69.3 million positioning him “among the top three most valuable living artists,” according to the auction house. The purchaser was a cryptocurrency entrepreneur. Until October, the most Beeple had ever sold a print for was $100.
Are investors on the crazy train heading straight off the magic mountain? In the short term, possibly so as there are always winners and losers in an environment such as this. However as suggested earlier, there may be a silver lining for which trains are a good analogy.
The Panic of 1873 was a major global economic depression that ended rapid rail expansion in the United States. Investors and banks who had poured billions into this technology went bankrupt by the thousands. Yet, despite the financial devastation, the tracks and rails had been laid. Soon, New York financier J.P. Morgan began orchestrating reorganizations and consolidations of the railroad in all parts of the United States. Eventually, the national railway network allowed the US to rapidly industrialize and soon surpass Europe to become the largest economy in the world.
What does today’s technology froth tell us? Like with the railroads, many of today’s speculators who hope to get out before the music stops could experience precipitous losses. Like with the dot-com bubble, certain sectors could see major losses while reasonably-priced investments remain generally stable.
The silver lining could be another technologically-driven leap forward for the economy and society. Sure, stocks like Tesla, Zoom, and DocuSign are incredibly expensive. Yet even if more recent investors lose money on these stocks in a correction, and SPACs collapse by the dozen, we will be left with a plethora of groundbreaking innovations. Today’s massive investment boom will bequeath us a more electrified auto industry, automated banking system, efficient workspaces, and more resilient population through telehealth and various bio-tech innovations.
This silver lining could be hard to put together at first, but we see it all around us. Innovation is quickly electrifying the auto industry including the famously un-green Hummer monster truck. The developed world vaccinated hundreds of millions of people from a deadly virus in just over a year, something considered impossible no more than 6 months ago. Productivity amongst many businesses went up while workers were able to stay at home with their kids. Self-guided rockets casually fly to the space station and then land themselves for refueling, with Mars in sight. We have robots that can go on a hike with you and carry your picnic basket. All these things that seemed a fantasy of the future have been developed and expanded upon during this pandemic. Using crisis for creation is taking hope and making it real.
Because technology tends to accelerate progress, the benefits of these groundbreaking technologies, structures, and systems will be realized much faster than the train, the car, or the internet. Furthermore, we will see entirely new industries, needed skill sets, and eager people ready to accomplish the future. In-fact, we believe the biggest challenge will be for us to be able to absorb all this change and information. We may not be the Jetsons yet, but the future we are building is one to be hopeful for, personally, globally, and financially. Longwave is here to pair that hope with patience and guidance.
Warmly,
All of us at Longwave
