I Just Can't Escape This Life, Part II

I just can't escape this life, part II... Today's Digest is more philosophical than financial... Real estate that doesn't exist – and yet, it's selling for millions of dollars... 'Like buying land in Manhattan 250 years ago'... What is the 'metaverse'?... An opportunity with $1 trillion potential... The problems with digital real estate... Mike Barrett's brand-new guide to '10x' opportunities...

We'll begin today's Digest with a warning...

What you're about to read is more philosophical than financial.

I (Dan Ferris) started writing today with a focus on finance in my head. Honestly, I did... My goal in the Digest is always to share the information you need to become a better investor.

If I can't do that, then I'm just wasting all of our time.

But this time, things got quickly out of hand... That's because, before long, I found myself contemplating the meaning of an entire universe that doesn't really exist.

Let me explain...

In Friday's Digest, I detailed why I felt like Michael Corleone, the Mafia don of The Godfather trilogy...

In The Godfather Part III, Corleone is frustrated by his unsuccessful attempts to leave the mob and become a legitimate businessman. That's when he says one of the greatest movie quotes of all time... "Just when I thought I was out, they pull me back in."

Every time I think I'm done writing in the Digest about insane, speculative financial market activity and other excesses, some new data or story comes out that is too crazy to ignore.

I'm trying to get with the times. I'm trying to get out of the bearish life... But I just can't overcome my revulsion to the fact that we're living through perhaps the most gigantic asset bubble in the history of mankind.

I feel like comedian Lily Tomlin, who once said, "No matter how cynical I get, it's never enough to keep up."

We've covered many excesses from both the art and business worlds over the past couple of years...

As I summed up in the November 2 Digest...

It started back in December 2019 with the $120,000 banana duct-taped to a wall. Then, in March of this year, an artist known as "Beeple" made $69 million at auction for a digital-only collage of 5,000 images – thanks to the non-fungible token ("NFT") craze.

And more recently, I've covered a pair of "invisible" pieces of artwork... In June, an Italian artist got paid $18,000 for a 25-square-foot box of nothingness. And finally, a month ago, I told you all about a Danish artist who took $84,000 in cash and ran in exchange for a piece called, well... "Take the Money and Run."

Of course, the insanity hasn't just been isolated to the art world... For example, in the October 22 Digest, we discussed Digital World Acquisition (DWAC).

That's the special purpose acquisition company ("SPAC") planning to buy former President Donald Trump's social media company... You know, the company that has no products yet but is currently valued at more than $2 billion in the stock market. (Perhaps a lot of folks read my rant, though... The still-to-be-created company was valued at $3.4 billion just 11 days ago.)

I spent the rest of that Digest discussing a 2,000-pound, 14.5-inch Tungsten cube that was minted solely to create a NFT that included the right to visit and touch the cube once a year. The NFT sold that week for about $247,000 worth of Ethereum cryptocurrency tokens.

In what I view as a positive sign for our collective sanity, DWAC is trading about 70% below its insane "meme stock" intraday high of $175 per share in late October. Trump's non-existent social media platform is now valued at a mere $1.9 billion ($51.07 per share).

Putting it altogether... we've watched in awe in recent years as big money has changed hands for weird art objects, art objects that don't exist, at least one business that doesn't exist (yet?), and the right to visit a 2,000-pound metal cube once a year.

Though it's all irresistibly weird and excessive, it's not really surprising... After all, we're living in a period when folks are chasing stocks "to the moon" just because someone else told them to on the Internet.

With that series of growing-ever-weirder Digests under my belt, I thought I was done with the business of writing about things that don't exist but sell for large sums of money.

But just when I thought I was out, they pulled me back in yet again with...

Real estate that doesn't exist.

Yes, I'm serious... Folks are shelling out real money – millions of dollars, in fact – for property that they can't live on, rent to someone else, or even visit. Here's how the Wall Street Journal reported the latest big transaction in non-existent real estate last week...

Republic Realm, a firm that develops real estate in the metaverse, said it paid $4.3 million for land in the world Sandbox, the biggest virtual real-estate sale publicized to date, according to the company and to data from the website NonFungible.com, which tracks digital land sales.

Republic Realm bought the digital land from video-game company Atari SA and the two firms said they plan to partner on the development of some of the properties.

That deal broke the record from just one week earlier... A subsidiary of Canadian investment firm Tokens.com paid about $2.5 million for digital land in Decentraland's Fashion District.

Paying millions of dollars for the equivalent of a piece of land in a video game is more than enough to pull me back in.

But before we go any further, I guess we should try to figure out what the 'metaverse' is...

Right now, the metaverse is like a giant virtual reality video game. (If you're interested, Sandbox's web address is Sandbox.game and Decentraland is at Decentraland.org.)

It's really just a different way of accessing the Internet – except that, instead of simply using it through your computer or phone with apps and websites, you go a step further and enter the metaverse by putting on a virtual reality headset. And instead of opening a browser, you just log into a virtual, immersive world like Sandbox or Decentraland.

Once you put the headset on – with the headphones covering your ears and a screen that takes over your entire visual field – you find yourself in a world that has everything the regular Internet has... It features shopping, entertainment, gambling, informational sites, games, news, social media – except that it's mostly in game form at this point.

In the metaverse, you can turn around 360 degrees and see what's around you – just like you can in the real world. However, there's a distinct difference between the two...

In the real world, you use real estate by occupying it... You live in your house. You drive to the place where you work and stay there for several hours each day.

In the metaverse, you don't occupy the real estate... Your avatar does.

An avatar is a character you create to represent you in the metaverse. It could be a likeness of you – or it can be some person, animal, or other object that bears no resemblance to you. It's you as an animated video-game character.

Though gaming is the most popular use of the metaverse right now, the future is supposedly bright...

It's the reason why Facebook changed its name to Meta Platforms (FB) back in October... At the time, Meta Platforms CEO Mark Zuckerberg referred to the metaverse as "the next frontier just like social networking was when we got started."

And crypto-investment firm Grayscale believes the future of the metaverse involves a lot of money... It said in a report in late November that a $1 trillion annual revenue opportunity exists in the businesses of advertising, digital events, e-commerce, and hardware.

The current digital land boom is an attempt of digital-land developers and other types of software developers to establish a foothold to exploit that trillion-dollar opportunity. Andrew Kiguel, the CEO of Tokens.com, told the Journal that buying digital land today "is like buying land in Manhattan 250 years ago, as the city is being built."

He's sort of like one of our country's Founding Fathers, I guess.

But there's one, teensy-weensy, little problem with digital real estate...

Comedian Dave Chappelle made a great point about this problem recently, when he said he didn't care what people were saying about him on Twitter... "because Twitter is not a real place."

It's. Not. Real.

Now, I can already hear the objections from the keyboard cowboys... "Yes, Dan, it's not a real place, but that's the whole point – it's a virtual place."

OK, fine... I acknowledge that land and other objects in the metaverse do exist – if only as electrons and images. So yes, it's technically incorrect for me to say that Republic Realm's new $4.3 million plot of digital land doesn't exist. It exists in the virtual world of Sandbox. It exists as surely as any object in any video game does.

But I'm still comfortable saying it's not a real place. That's because unlike real-world real estate, which is a great store of value... the value of digital real estate can go to zero.

Suppose one day Sandbox just isn't seen as a cool virtual world anymore... People will stop using it.

Now, suppose enough people stop using the virtual world that it goes out of business and ceases to exist... It's like when the evil Galactic Empire in the Star Wars films obliterated an entire planet.

All that lovely digital real estate that's garnering million-dollar valuations today would no longer exist.

Like metaverse real estate, real-world property can be subject to changing tastes...

For example, vacation destinations can rise and fall in popularity over time. When that happens, real estate values in those areas change, too.

Political changes can also make a popular destination off-limits to millions of potential visitors and the money they would've spent... Think of the differences in Cuba between the early 1950s and after the communists took over.

But Earth, no matter its shortcomings, is real... Short of incurring the wrath of Darth Vader, we don't seem to be in danger of our planet ceasing to exist. (Keep your global warming apocalypse fantasies to yourself... You know nothing about climate.)

Even calling it virtual land or virtual real estate seems like an attempt to convince buyers that it has any of the characteristics of its real-world counterparts. And that's misleading...

I can stand on real land. I can smell it. I can fall on it and feel the thud. I have to make sure none of it sticks to my shoes when I come back into the house.

You can't do any of that with virtual land. And even if virtual reality advances enough to simulate all of those experiences in a lifelike way in the future, the potential for virtual land to disappear forever still exists.

Another potential hiccup with digital real estate is that it's bought and sold with cryptocurrency...

While the deals we've discussed so far today are shared in U.S. dollars for the majority to understand, they were actually completed using cryptos. And cryptos are notoriously volatile, of course...

A plot of digital land might maintain its value of, say, five bitcoin no matter what happens. But the price of bitcoin could fall 27% over the course of several hours for no apparent reason (as it did last Friday).

Let's suppose the value of your digital real estate is unlikely ever to go to zero. That's nice, but it doesn't mean your investment is safe... The fact that you can only sell it for crypto means you're fully exposed to the volatility that comes with these assets.

When the U.S. dollar weakens, asset prices tend to rise to compensate for the reduced buying power. But no one knows how this type of situation will work in the metaverse...

If Ethereum's value crashes, will the value of Republic Realm's digital land necessarily rise in terms of Ethereum? Or will it fall because it'll demonstrate that buying and selling things with crypto in the metaverse is simply not like buying and selling in the real world?

Trying to make predictions based on economic theory – plenty of which doesn't even work in the real world – or by lessons learned from real-world experience might steer you horribly wrong in the gamified world of the metaverse. At the very least, if you participate in the metaverse by spending crypto you purchased with real money... be prepared for boom-and-bust dynamics on a double dose of steroids.

In the real world, a volatile currency could be a sign that the political system is unstable... It also might be a great buying opportunity.

In the metaverse, where cryptos are the only currency, crazy volatility should be expected as normal. And the harsh reality is that it will likely mean "game over" or at least "game seriously impaired" more often than in the real world.

There are thousands of cryptocurrencies in the world today... Nobody knows which ones will be around 10 years from now – or what that world will even look like.

Ultimately, it seems like hanging out in the metaverse is like volunteering to enter the 'Matrix' with actor Keanu Reeves...

In the 1999 science-fiction movie The Matrix, humanity is unwittingly trapped in a virtual reality simulation after an apocalyptic war in which machines took over the world.

But I don't worry that humans will wind up stuck in a Matrix-like dystopia by entering the metaverse. That's not because it can't happen, though... It's because the Matrix is already engrained in us.

Our evolutionary advantage over other animals isn't great strength. It's not fleet-footedness. And it's not the ability to fly, a hard coating of natural armor, or any other type of highly specialized adaptation to the local environment found in the animal kingdom.

Our advantage is the ability of our big brains to conjure up that which doesn't exist and then bring it about in some form or another... That enables us to adapt to every environment on Earth.

In short, we're always making stuff up that doesn't really exist. That's the human way...

Money itself is totally made up, for example.

That's why I never tell you to sell all your stocks, no matter how bearish I get. Our wonderful imaginations have created – and will continue to enrich our lives by creating – vast sums of wealth.

The metaverse could very well be the beginning of massive wealth creation. Perhaps one day at some point in the future, Grayscale will be correct... Maybe we'll eventually see trillions of dollars' worth of transactions occurring in this virtual world each year.

Only time will tell.

And yet, for all our creativity, what do people actually do in the metaverse?

They do all the same stuff they do in the real world... They mostly play video games and acquire more stuff. So as you can see, our great imaginations seem to have their limits.

As for me, the rise of the metaverse means I could easily wind up like Michael Corleone...

For the rest of my career, I could be stuck writing about people paying ridiculous sums of money for all kinds of things that don't exist.

Corleone enters the story in the first Godfather film as a young World War II hero, dressed in his U.S. Marine Corps uniform. And as my brother, a retired lieutenant colonel in the Marines, always says, "Once a Marine, always a Marine."

Once a gangster, always a gangster.

Once a value-minded investor wary of speculative insanity, always a value-minded investor wary of speculative insanity.

I'll never get out of this life, but that's OK... Unlike Corleone, I don't really want out.

New 52-week highs (as of 12/6/21): Apple (AAPL), AbbVie (ABBV), General Mills (GIS), W.W. Grainger (GWW), Home Depot (HD), iShares U.S. Home Construction Fund (ITB), Lennar (LEN), Lynas Rare Earths (LYSDY), NVR (NVR), and Procter & Gamble (PG).

The mailbag is quiet today, but we'd love to hear from you. As always, we welcome your thoughts, comments, and observations on the markets at feedback@stansberryresearch.com. Remember, we can't provide individual investment advice... but we read every note that we receive.

Good investing,

Dan Ferris
Eagle Point, Oregon
December 7, 2021

P.S. I can't let this Digest end without highlighting the hard work of my closest colleague...

A decade ago, I posted a "help wanted" ad. I was looking for an assistant to help me find winning stocks. One of the responses caught my attention...

It was from a guy named Mike Barrett.

Before long, Mike handed me a stock that went on to rise 628%, my best recommendation ever. And since then, Mike has continually handed me one 100% stock idea after another... by looking for the kind of stocks most people have no clue exist.

This week, for the first time ever, Mike is finally stepping forward to share his unique strategy with the public... He's also revealing his No. 1 recommendation for 2022.

I'm not sure I've been this excited about a single stock since the 628% winner that Mike handed me when I first hired him. He believes this company has 10-bagger potential... and from everything I've seen, I must agree.

Until this Friday only, we're sharing the full details right here.