The Price of Everything; the Value of Nothing

Sometimes one does not like being right. Still and all, I have been warning of the high level of risk in our markets. Not just in the stock market, but also in the crypto market. 

Obviously, and it does need saying, the opinions I communicated about the state of the markets were not mine. I found them by reading certain savvy market players. And by that I mean, in general, cranky old guys. When looking for market advice, you should never, ever trust the word of hot young traders. Cranky old guys are more rational, less emotional and more experienced.

So, last October, with Bitcoin selling at something like $61,000, I reported a New York Magazine story, to the effect that a certain number of cranky old guys thought that Bitcoin was a bubble. If you had taken heed of their warnings you would not today be holding onto Bitcoin, selling at $22,500.

Not a bad call, from New York Magazine.

And then, three or so weeks ago, with the market rallying off a rather serious decline I found two cranky old guys who were saying that you should not believe the rally. Again, far too many people were thrilling to the rally. Not enough understood that the rally was  fake out, a ruse to dupe the gullible. That is, like any bear market, the goal is to sucker in as many people as possible, the better to take their money.

Now, as the housing market and the job market seem to be impervious to the damage wrought on the stock market, a series of new reports, via Ed Morrissey, suggest that housing and jobs are also about to crater. Stay tuned.

Considering how well New York Magazine did with the Bitcoin bubble, I will offer up, this morning an article by one Michelle Celarier. Her subject-- how did so many people miss the signs that markets were overheating, to the point that they had gone into bubble stage. She does not just address stocks and cryptocurrency, but also real estate, NFTs and art.

Her conclusion, if I may summarize it in an Oscar Wilde phrase, is that the markets go into bubbles when everyone knows the price of everything and the value of nothing. As you may know, Wilde offered up that phrase to describe cynics. I find it perfectly apt as a description of market bubbles. 

No one has any sense of value. Ergo, they bid up prices with wild abandon, not knowing what they are bidding on. One needs to mention that in the world of monetary theory certain people believe firmly that fiat currency, the kind that America has excelled at producing, has no real value. Such people hold that the only currency that has real value is gold-- or better, commodity based currencies.

Anyway, Celarier says it well:

More than ten years of a bull market, a flood of money from the Federal Reserve, and a new world of technology in everything from money to cars and even art made the future seem limitless. Only now are some people finding out — many of them for the first time — that the laws of the market have not been repealed. Inflation, the war in Ukraine, and rising interest rates are pummeling the markets, and no one knows when it will end.

Here is one example, from the world of what are called non-fungible tokens:

Then there is the NFT craze. At Anthony Scaramucci’s SkyBridge Capital SALT convention last September, former hedge-fund manager and current crypto kingpin — though one recently humbled by big losses — Michael Novogratz brought up Jeff Koons’s goofy Balloon Dog sculptures to explain the economic rationale of NFTs, digital tokens on a blockchain that act like a certificate of ownership. “Why is the Balloon Dog worth $30 million? Because we say it is. We’re doing the same thing with NFTs,” said Novogratz, the CEO of Galaxy Investment Partners, a crypto investment firm.

One has to admit, it’s an excellent description of those who participate in market bubbles. Value is what they say it is. Value is what some suckers will pay for it. As I said, these people have no understanding of value, but they have a great sense of price. 

While the Koons Balloon Dog comparison might not be completely insane, it’s also a classic example of the kind of thinking that tends to happen at a market top — smart people trying, at some level, to convince themselves that a thing that is clearly way overvalued might actually be undervalued. Read about any bubble in history and this kind of logic becomes commonplace. In the cold, hard light of late May 2022, however, it seems clear enough: A mass-produced cartoon jpeg is not, in fact, a Koons.

And if it were, that would hardly be much better.

I will pass over meme stocks and SPACs-- other signs of a financial bubble.

And then there was the ultimate capitulation, by one James Chanos, one of Wall Street’s permabears, a famed short seller who, in January changed the name of his fund-- just in time to lose more money.

Then, in January, Jim Chanos — who famously called the demise of Enron 20 years ago and has repeatedly referred to the past several years as “the golden age of fraud” — changed his fund’s name from Kynikos Associates to Chanos & Co., quietly shutting down several of his funds and consolidating others.

So, Chanos rid himself of the name Kynikos-- Greek for cynic-- and shut down some of his short funds. If only he had been more cynical for only a bit longer. And yet, he still holds some considerable short positions, so Celarier is not worried for him.