We have a New Fever
While the coronavirus is fading and vaccines are here, markets have shifted from despondency to mania in some segments. Thankfully large cap equities and international equities (which represent the bulk of assets) are reasonably priced (relative to rates) but there is an immense amount of speculative froth in small/microcap and crypto currencies. Currently, anything that sounds “futuristic” to retail investors (cannabis companies, 3D printing, artificial meat, solar panels, etc) is priced like it will be the next Tesla. What’s remarkable is not that people are optimistic about the future, but that they have pivoted from companies which are expensive (but actually generating revenue - ex. Beyond Meat) to companies which are just names which represent ideas (ex. Neat Meat - a pink sheets company worth $4.5Bn). These companies might as well be trading cards. Value is no longer derived from future cash flows but the desire to own something before someone else. There are also some isolated, but egregious examples in the tech sector with many companies selling for 30-100x revenues (many were bid up as part of a “work from home” basket of stocks and caught a second wind with the recent surge of retail money).
The general reaction isn’t as illogical as the prices. People have been prevented from working, have nothing to do, and are trading in their free time. Platforms like Robinhood and the ability to trade small amount of capital without fees, have democratized the landscape a bit, and have ushered in a new class of investors who throw caution to the wind. Because they are likely younger, they are willing to risk it all because the capital they have is both discretionary and easily replaceable. A thousand dollars won’t change the course of their lives but a lottery like payout could. It’s also a confluence of different groups of people. The first big influx after the pandemic was a migration of those who participated in sports betting and who were prevented from doing so (Barstool spots promotes Davey Day Trader). You also have other groups of retail investors led by social platforms like Wall St Bets (options & short squeeze - this was pre-pandemic), Chamath Palihapitiva (SPACs) and Elon Musk (Crypto, tech stocks and his own company). Each success story has encouraged a new swath of people to think the risks are worth the rewards.
This is also also aided by a very favorable macro backdrop. Savings rates are higher due to fiscal stimulus (and limited opportunities for people to spend their money), equity momentum has been picking up for a year, we have been conditioned to “buy the dip” for the last decade, trading is now free and we are on the cusp of reopening with a host of vaccines (even Russia’s appears to work). There are plenty of reasons to be optimistic about the future: especially with more stimulus on the way (and very easy monetary policy). Many people see this as a one way bet for the short run.
The last leg however, feels much more like FOMO, inspired by the truly extraordinary gains from Reddit users, Bitcoin early adopters and Tesla fanboys (reporters are also probably partly to blame as I am sure these stories are as close to clickbait as they can print). However, given the sheer number of individual names that are rising, and the and increasingly large market caps of the companies (prior investments were more concentrated - Bitcoin/Tesla/Single stocks), it’s going to be much harder to keep passing the buck. It feels like many are already all in and it’s not clear where the next round of speculators are going to come from. However given the solid macro back drop, easy monetary/fiscal policy, it will take prices this ridiculous to really cause an exodus from equity markets. For that reason I think the broader market likely grinds higher but shorting a big basket of the most egregious names seems like a good hedge against any short term dips. My bet is on mean reversion, and relatively quickly. The next round of stimulus may offer one last push higher but I suspect we start to see cautionary tales rather than stories of untold riches.