Planet of the Apes

“Collective fear stimulates herd instinct, and tends to produce ferocity toward those who are not regarded as members of the herd” – Bertrand Russell

Financial nihilism. The term was coined by Demetri Kofinas, a brilliant mind, and host of the podcast, Hidden Forces https://hiddenforces.io. He uses it to describe the current state of affairs in segments of the investing world.  Nihilism is most commonly described as “extreme skepticism maintaining that nothing in the world has a real existence.” Apply a liberal dose of finance, shake vigorously, and voila.

This concept goes a long way in explaining the speculative behavior that we are witnessing in real time, both in the financial and real estate markets.

In the year 2000, internet and technology stocks were clearly overvalued. Although savvy investors had reduced or eliminated holdings of these stocks before the crash, very few fully appreciated the impact that the meltdown in these stocks would have on the overall market.

In 2007, it was real estate’s turn to be wildly mispriced. With the explosion of “easy money” (thank you, Federal Reserve) speculative buying drove real estate prices to heights that, for anyone paying attention, were clearly unsustainable. Again, very few foresaw the systemic risk to the financial system that this represented.

Fast forward to 2021. Not only do stock prices look lofty, but real estate is following along in lock-step. Low interest rates certainly have had a lot to do with this, but interest rates have been low for quite a long time. There are clearly additional forces in play. According to Demetri, financial nihilism “describes a philosophy that treats objects of speculation as though they were inherently worthless. It embraces the view that reality is entirely subjective, and that value is no longer determined or ascertained through some objective measurement, but exists independent of price. It is in fact, price. The price of something is the thing.”

This certainly helps explain the recent phenomenon of non-fungible tokens (NFT’s). Why would someone pay hundreds of thousands, or in some cases millions of dollars to “own” the digital source code of a picture that anyone can view on the internet for free?

It may also explain the meteoric rise of cryptocurrencies (in both price and number). How does one calculate the value of something that is not widely accepted as a medium of exchange?

It also adds context to yet another peculiarity, “meme stocks”. A meme is defined as “an element of a culture or system of behavior that may be considered to be passed from one individual to another by nongenetic means, especially imitation.” In the digital world, it has come to mean a funny picture, or serious idea that “goes viral.” Meme stocks are those with prices that have been driven up well beyond any rational valuation process by people that communicate and coordinate via social media sites like Reddit.

If one believes that price is value, there is no need to go through the complicated process of determining it.

Case in point. Gamestop.

For the benefit of those who have not heard my comments on Gamestop, it is a company that got run over by the internet. Once a thriving business (think Blockbuster for gamers) it lost its footing, seemingly overnight. The availability of high-speed internet meant that games could be purchased and “streamed” over the internet, eliminating the need to trudge out in knee deep snow to the Gamestop store to buy a game. When the reality of this took hold, the stock plummeted to well under $6 and languished there…until an enterprising number of young people got together on social media. These “apes”, as they are derogatorily referred to by the professionals (the “suits”), saw an opportunity to stick it to the pros who had been placing bets that the stock price would likely go to zero as the company was headed to bankruptcy. By convincing each other, in large numbers, to buy the stock the apes forced the suits to “cover” their short positions, requiring them to buy the stock back at higher prices. Convinced they were right about the prospects for the company, and not wanting to give up, the pros continued to bet that the stock would fall, and the apes pressed on, pushing the price to what had been inconceivable heights, topping out at nearly $355 per share. It has since fallen back to under $200 – all while losing $111 million from operations last year. When price equals value, nothing else matters.

I believe that we are in the midst of a significant cultural shift, particularly among our younger population. They have just endured over a year of lockdowns, masking, social unrest, lost wages (or jobs), and are questioning everything – including our economic system. They have realized, much like their grandparents of the 1960’s, that they have a voice, albeit a digital one, that must be heard. If one has lost faith in the system, then YOLO (You Only Live Once), becomes a rallying cry. It is such for large numbers of disillusioned youth.

What does this mean for financial markets? In the short term, it clearly means more volatility and more inexplicable prices. Does it mean that price discovery is dead? I think not.

I distinctly remember at the beginning of this century (now I feel old) that objective measures of valuation for the stock market were at unprecedented levels. Many suggested that those “old” measures of value were obsolete in the new digital age. That companies could grow earnings to the sky along with their prices. On a similar line of reasoning, on October 16, 1929, Irving Fisher, a pre-eminent economist and Yale professor infamously famously proclaimed “that stocks have reached what looks like a permanently high plateau.” In each and every case of previous speculative mania price discovery eventually matters, and price is ultimately tethered to some rational measurement of the underlying value of an object.

There’s an old saying in poker – if you look around the table and can’t see the sucker, you’re it. Some of the apes will recognize the futility of their efforts against the well-funded, well-informed and well-seasoned suits, and leave with some of their chips. Many, however, will be left staring at an empty table in front of them wondering what just happened. It will be a painful, and expensive lesson for the unprepared.