It’s the Weirdest Time in History for Finance
What to know about bubbles in cryptos, meme stocks, and NFTs.
What to know about bubbles in cryptos, meme stocks, and NFTs.
Two days after Halloween, there were more costumes than usual in New York’s Times Square. Outside Jimmy Buffett’s Margaritaville restaurant, one man wore a mirrored face shield and knit beanie to resemble a CryptoPunk pixelated character. A vehicle transformed to look like a cockroach made from junk played a slow-speed rap about “stacks of cash” to market a digital art gallery. A cowboy crooner in underpants, himself as familiar as a pretzel stand to regular passersby, had been commissioned by a man and woman in matching onesies to sing about their holographic worm.
This was NFT.NYC, a conference promoting nonfungible tokens, which signify ownership of digital assets and can be flipped by profit-seekers. The zaniness of the attendees felt strained, but that of their virtual source material can hardly be overstated. Finance the world over is weirder now than it has ever been. A decade of near-zero interest rates has fueled a bubble of bubbles across assets real and virtual. But not everything is overpriced, and savers needn’t despair or pile into fun-house speculations.
Step back for a moment from individual reports of wild price gains for odd things, and take in the scope of it all. Just this year, NFT auctions have ended with US$11.8 million paid for a CryptoPunk, $24.4 million for a collection of cartoon apes, and $69 million for a large assortment of drawings from a digital artist known as Beeple. These are not framed, one-of-a-kind pieces, but rather tokens proclaiming ownership of digital images that are copied freely across the internet.
That is nothing compared with cryptocurrency, an asset class younger than the iPhone. It is closing in on $3 trillion in market value, equal to about a quarter of the world’s mined gold, or the money supply of the United Kingdom. Dogecoin, a dog-themed, unlimited-supply parody crypto, is valued at $35 billion. It was eclipsed by Shiba Inu, a dog-themed parody of Dogecoin, which was worth $40 billion this past week—until it tumbled 20% on Thursday. In comparison, Hershey (ticker: HSY), the 127-year-old chocolate maker with operations in 85 countries, has a market value of $36 billion.
In meme stocks, GameStop (GME) and AMC Entertainment Holdings (AMC) at different points this year were up more than 20-fold. In special-purpose acquisition companies, or SPACs, Digital World Acquisition (DWAC) rose 15-fold after announcing that it would merge with Trump Media & Technology, whose best-known work is a slide deck of vague intentions to compete with Twitter, Facebook, Amazon.com, Apple, Walt Disney, and Netflix.
What can compare with all of this? Not Dutch tulips selling for as much as houses in the 17th century. That was a cosmopolitan folly, not, as was misreported many years later, a ruinous mania, as University of Southern California historian Anne Goldgar has shown. The South Sea bubble comes a bit closer, but it featured a stock that gained tenfold in 1720 and set off a rush of dubious new offerings, which is nothing that the trend-chasers on Reddit haven’t seen.
Dot-com stocks in the late 1990s? That was a frenzy, sure, but it was directionally correct, if a couple of decades early, before some of the best companies had blossomed. Japan in the 1980s? America’s Roaring ’20s? OK, those were doozies, and the economic aftermath was profound. But judging solely on weirdness, it’s unclear that credit-driven run-ups in stocks and real estate beat today’s run on virtual smiley faces, ironic stocks, and funny money.
This isn’t a valuation screed—not solely, at least. The world doesn’t need another asset-allocation traditionalist carrying on about Bitcoin not having cash flows. This is a hopeful note for ordinary savers and investors who no longer recognize their surroundings—who see abstract things selling for startling prices and wonder, on one hand, whether that’s dangerous for stocks, bonds, and traditional money, and, on the other, whether it’s too late to grab a stake in some new, fun, potential moon rocket.
Crypto assets don’t seem for now to present the sort of systemic risk that took down banks, or threatened to, during past crashes. “We could have another 1929 event, but the question is, who is it going to affect?” says Amy Lynch, a former financial regulator and founder of FrontLine Compliance, which advises money managers. “As long as the major financial players are actually not offering their own crypto exchanges and cryptocurrency trading platforms, then we are quote-unquote safe from the systemic risk.” To Lynch’s point, a fast-gaining cryptocurrency themed after the Netflix series Squid Game collapsed to zero this past week in an apparent swindle. Only its unlucky holders were harmed.
Last month, Mastercard (MA) said that it would make it easier for merchants and banks to offer crypto services. But it will do so at arm’s length. Newly listed Bakkt Holdings (BKKT) will handle the plumbing.
Strategists who disagree sharply on crypto can nonetheless agree that stocks still make sense. David Kelly, chief global strategist for J.P. Morgan Asset Management, calls crypto a “cult masquerading as a currency,” and attributes its gains and other rampant asset inflation to the world’s central banks. “They’ve no business keeping long-term interest rates this low for this long,” he says. But he’s not altogether put off by stocks at current valuations.
Kelly says the top 10 stocks in the S&P 500 index trade at about 30 times forward earnings estimates, which is “too high,” but that the rest of the index trades at 20 times, “and that’s OK given where interest rates are.” And he reckons that shares in the rest of the world are 30% cheaper than those in the U.S.
Liz Young, head of investment strategy at SoFi Technologies (SOFI), a provider of smartphone-centric financial services, including crypto trading through a partnership with Coinbase Global (COIN), says that stocks should always be part of a long-term growth portfolio. Bonds no longer offer enough downside protection to offset stock risk, so investors should consider adding alternatives, and that can include crypto, she says.
With 8,800 cryptocurrencies to choose among, she views a shakeout as possible. “You don’t really know that you’re in a bubble until after it bursts, right?” she says. “So, then we look back at it and say, ‘Oh, 8,800 coins was an indication, or this many SPACs and NFTs.’ ” But Young says she expects crypto to endure as an asset class.
Crypto’s ever-evolving technology is easier to make sense of than its pricing. Bitcoin was conceived as a store of value and payment system existing outside the purview of central banks, with limited supply. Ethereum, the No. 2 crypto, is these things, plus more of a platform for new products, like NFTs. Both are viewed by critics as restrictive and slow for everyday transactions, and it takes shocking amounts of electricity to create new coins.
Two other top-10 cryptos, Polkadot and Cardano, were created by Ethereum co-founders, and are designed to address these shortcomings. Polkadot founder Gavin Wood tells Barron’s that his ambition is to create a foundational technology for the world’s financial system. Jeff Pollack, chief financial officer at IOHK, the company behind Cardano, says he can envision poor countries that lack a robust banking infrastructure adopting decentralized finance to level the field.
Neither can fully explain what makes Polkadot, up 500% this year, worth $60 billion, or Cardano, up 1,000%, worth $68 billion, but that is a question for buyers, not builders. Both seem less than thrilled by the run-up in parody coins distracting from their work. “I do get kind of exasperated,” says Wood. Pollack says, “I don’t like the projects that delegitimize the legitimate projects.”
For nonfungible tokens, as with crypto, it’s unclear how potential usefulness relates to pricing. The technology could provide artists with new ways to make money from their work, and power trading in unique, virtual objects within videogames or other online worlds. Hot Wheels is launching NFT Garage, packs of virtual cars with random rareness that can be sold for crypto or cash. Dolce & Gabbana recently auctioned a nine-piece collection of garments and crowns intended for museum display, with corresponding NFTs—a “way for the metaverse and the universe to coexist,” it said.
Jefferies, the investment bank, expects NFTs to reach $25 billion in value in the “very near term.” The global market for physical collectibles is pegged at $370 billion.
Some investors in digital assets have developed novel ideas on risk. “If you talk to people in the crypto space, and you tell them that you’re 100% invested in Bitcoin, they think that you’re super-risk-averse,” observes SoFi’s Young. “It’s like the boomer coin.”
That isn’t far off from what we heard from Ranae Arnette, 33, who was in Times Square this past week to promote a prelaunch NFT marketplace called Snow Crash. Her personal portfolio consists of stock options for “daily plays” and cryptocurrency for long-term investment, but only a little Bitcoin. “It’s not going to give you the same return as if I were to invest in Shiba, which is like five decimals less than a penny,” she says.
Arnette was down $1,500 for the day, but had made $5,600 the day before, “so it doesn’t even feel like a loss,” she says. She learned about investing from podcasts and YouTube videos while stuck at home in the early days of the pandemic.
“I remember the first time that I opened my Robinhood app and I had made my paycheck in a day—in the first, like, 10 minutes of the stock market,” she says. “And I kind of just remember sitting at my desk at home with my computer in front of me, like, should I quit?” She went on to teach her mother, sister, brother, and friends to trade.
There is a temptation among seasoned investors to moralize about risk-taking in meme assets, and to expect a comeuppance at any moment for those who trade them. But another view is simply that digital natives have developed a way to monetize their ability to spot chat-room trends faster than the rest of us. It might be weird finance, but the same could be said of endless national budget deficits, years of negative real interest rates, and six-figure college degrees that lead to low-paying jobs.
And there is surely a path from meme-flipping to long-term savings.
This reporter, when in his early 20s, made a tidy little profit in a four-cent stock of such low quality that when it soared past $1, then died, one major newspaper called it “Nasdaq’s Billion Dollar Absurdity.” He didn’t turn to off-track betting or slots next. He backpacked through cheap countries until his winnings ran out, and has spent the decades since as a boring but content plunker of regular savings into the broad stock and bond markets.
And today, any promised comeuppance might take a while. J.P. Morgan’s Kelly expects only a gradual rise in interest rates, beginning late next year, with perhaps years more of silly asset pricing. FrontLine Compliance’s Lynch says that new regulations could dampen some of the excitement in crypto and bring down prices, but also that rule makers are “not going to move fast enough, I guarantee you that.”
What to do? Buy something preposterous, by all means. A bubble like this is not to be missed. But spend entertainment funds, not investment capital. And while tastes vary, consider not using terms like “correlation” to justify the purchase. Wall Street has always been prone to physics envy and over-mathematization, but in truth, it has only a rough idea of how stocks behave, and those are four centuries old. Let’s all agree to skip the regression analysis on five-year-old cryptocoins.
Don’t confuse a quick success with a strategy. When it came to momentum trading, even the author of the laws of physical momentum was no Newton, shall we say. Sir Isaac sold his South Sea holdings for a profit, and then jumped back in and took a bath. And don’t imagine that everyone else is getting rich from meme assets. Winners blab, and losers clam up, skewing perception.
Crypto dabblers should track tips on Twitter and the WallStreetBets forum on Reddit—buzz is everything for such assets. Crypto skeptics should brace for the angry mob when sharing their views. That is standard bubble stuff. For those who can’t decide whether to stick a toe in, there are always crypto-adjacent stocks with plenty of risk, like Coinbase, an exchange platform, and publicly traded companies that set computer rigs to work in “mining” digital coins: Marathon Digital Holdings (MARA), Riot Blockchain (RIOT), and Hut 8 Mining (HUT), to name a few.
Above all, keep return expectations low—both for crypto flings and for nest eggs invested in more mundane assets. BofA Securities estimates that the S&P 500, not counting dividends, is now priced for 0.5% annual price declines over the next decade. The 10-year Treasury yield is percentage points below the latest reading on inflation.
One place to search for good deals is within cyclical stock sectors. They can boom and fizzle, but tend to perform in line with the market over time, and now they are cheaper compared with the market than they have been 91% of the time since 1945, according to James Paulsen, chief investment strategist at The Leuthold Group. Think materials, industrials, financials, and consumer-discretionary stocks and exchange-traded funds.
BofA says reinvested dividends could make the difference between positive and negative returns over the next decade. Goldman Sachs expects S&P 500 payments to rise by 5% a year over that stretch. Boring? Consider: Regular cash payments to shareholders were the breakthrough that centuries ago allowed joint venture companies to begin operating in perpetuity, instead of dissolving after each trip to split the profits. Dividends gave rise to stocks, not the other way around. They are at least as innovative as ape NFTs. Buy iShares Core Dividend Growth ETF (DGRO), yielding just over 2%, and tell your friends you’re a fintech investor.
Resist financial nihilism. We suspect that stocks and even bonds will compare well with Shiba Inu long term, and we are confident they will outdo Squid Game crypto this quarter. But this era of easy gains in nearly everything is probably close to winding down.
Reprinted by permission of Barron’s. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: November 6, 2021.
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
Competitive pressure and creativity have made Chinese-designed and -built electric cars formidable competitors
China rocked the auto world twice this year. First, its electric vehicles stunned Western rivals at the Shanghai auto show with their quality, features and price. Then came reports that in the first quarter of 2023 it dethroned Japan as the world’s largest auto exporter.
How is China in contention to lead the world’s most lucrative and prestigious consumer goods market, one long dominated by American, European, Japanese and South Korean nameplates? The answer is a unique combination of industrial policy, protectionism and homegrown competitive dynamism. Western policy makers and business leaders are better prepared for the first two than the third.
Start with industrial policy—the use of government resources to help favoured sectors. China has practiced industrial policy for decades. While it’s finding increased favour even in the U.S., the concept remains controversial. Governments have a poor record of identifying winning technologies and often end up subsidising inferior and wasteful capacity, including in China.
But in the case of EVs, Chinese industrial policy had a couple of things going for it. First, governments around the world saw climate change as an enduring threat that would require decade-long interventions to transition away from fossil fuels. China bet correctly that in transportation, the transition would favour electric vehicles.
In 2009, China started handing out generous subsidies to buyers of EVs. Public procurement of taxis and buses was targeted to electric vehicles, rechargers were subsidised, and provincial governments stumped up capital for lithium mining and refining for EV batteries. In 2020 NIO, at the time an aspiring challenger to Tesla, avoided bankruptcy thanks to a government-led bailout.
While industrial policy guaranteed a demand for EVs, protectionism ensured those EVs would be made in China, by Chinese companies. To qualify for subsidies, cars had to be domestically made, although foreign brands did qualify. They also had to have batteries made by Chinese companies, giving Chinese national champions like Contemporary Amperex Technology and BYD an advantage over then-market leaders from Japan and South Korea.
To sell in China, foreign automakers had to abide by conditions intended to upgrade the local industry’s skills. State-owned Guangzhou Automobile Group developed the manufacturing know-how necessary to become a player in EVs thanks to joint ventures with Toyota and Honda, said Gregor Sebastian, an analyst at Germany’s Mercator Institute for China Studies.
Despite all that government support, sales of EVs remained weak until 2019, when China let Tesla open a wholly owned factory in Shanghai. “It took this catalyst…to boost interest and increase the level of competitiveness of the local Chinese makers,” said Tu Le, managing director of Sino Auto Insights, a research service specialising in the Chinese auto industry.
Back in 2011 Pony Ma, the founder of Tencent, explained what set Chinese capitalism apart from its American counterpart. “In America, when you bring an idea to market you usually have several months before competition pops up, allowing you to capture significant market share,” he said, according to Fast Company, a technology magazine. “In China, you can have hundreds of competitors within the first hours of going live. Ideas are not important in China—execution is.”
Thanks to that competition and focus on execution, the EV industry went from a niche industrial-policy project to a sprawling ecosystem of predominantly private companies. Much of this happened below the Western radar while China was cut off from the world because of Covid-19 restrictions.
When Western auto executives flew in for April’s Shanghai auto show, “they saw a sea of green plates, a sea of Chinese brands,” said Le, referring to the green license plates assigned to clean-energy vehicles in China. “They hear the sounds of the door closing, sit inside and look at the quality of the materials, the fabric or the plastic on the console, that’s the other holy s— moment—they’ve caught up to us.”
Manufacturers of gasoline cars are product-oriented, whereas EV manufacturers, like tech companies, are user-oriented, Le said. Chinese EVs feature at least two, often three, display screens, one suitable for watching movies from the back seat, multiple lidars (laser-based sensors) for driver assistance, and even a microphone for karaoke (quickly copied by Tesla). Meanwhile, Chinese suppliers such as CATL have gone from laggard to leader.
Chinese dominance of EVs isn’t preordained. The low barriers to entry exploited by Chinese brands also open the door to future non-Chinese competitors. Nor does China’s success in EVs necessarily translate to other sectors where industrial policy matters less and creativity, privacy and deeply woven technological capability—such as software, cloud computing and semiconductors—matter more.
Still, the threat to Western auto market share posed by Chinese EVs is one for which Western policy makers have no obvious answer. “You can shut off your own market and to a certain extent that will shield production for your domestic needs,” said Sebastian. “The question really is, what are you going to do for the global south, countries that are still very happily trading with China?”
Western companies themselves are likely to respond by deepening their presence in China—not to sell cars, but for proximity to the most sophisticated customers and suppliers. Jörg Wuttke, the past president of the European Union Chamber of Commerce in China, calls China a “fitness centre.” Even as conditions there become steadily more difficult, Western multinationals “have to be there. It keeps you fit.”
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual