We're Living in the 'Age of the Emperor'
Just when we thought it couldn't get crazier... The most egregious example of speculative excess in the art world... $18,000 for 'air and spirit'... Signing up to get nothing in the financial realm... Ignorance is not a valid excuse... We're living in the 'Age of the Emperor'... A little extra advice this week, free of charge...
For more than a year, I (Dan Ferris) have been chronicling financial-market excesses in the Digest...
I've talked about overvalued stocks like electric-car maker Tesla (TSLA) and movie-theater chain AMC Entertainment (AMC)... overvalued exchange-traded funds like ARK Investment Management's portfolio... the insane story of the $100 million deli in New Jersey, which I called "the most egregious example of speculative excess in the financial markets today"... and on many occasions, the overvalued stock and bond markets as a whole.
Just last Friday, in fact, I discussed the mania in various types of "garbage stocks" this year... and how it finally appears to have peaked.
And of course, I've noted that a parallel mania exists right now in the art world. For the past year and a half, collectors have been paying outrageous prices for some truly weird works...
First, a banana duct-taped to a wall sold for $120,000 in Miami back in December 2019. Then, this past March, an artist known as "Beeple" sold a non-fungible token ("NFT") of his work – a digital-only collage of 5,000 images – for $69 million at auction.
Through all of this, I figured we'd seen it all. It couldn't possibly get crazier.
Boy, was I wrong.
Like the $100 million deli, we now have the most egregious example of speculative excess in the art world...
In nearly 60 years of living, I've never seen anything like it. The world just keeps getting zanier.
The latest example occurred last month in Milan, Italy... Auction house Art-Rite sold a piece of work by Italian artist Salvatore Garau titled Io sono (Italian for "I am") for $18,000.
Now, before I go any further, I know what you're probably thinking... With Beeple's NFT going for $69 million, how does a mere $18,000 sale qualify as egregious excess?
The answer is simple... because Io sono doesn't actually exist.
It's "invisible art." It's not there. The buyer got a whole lot of nothing for his $18,000.
Instead, Garau issued a certificate of authenticity to the buyer (like the banana-and-duct-tape piece). The artist – and his piece of paper "verifying" it – said Io sono is a sculpture that consists of a 25-square-foot space and that light and climate control are optional.
You can't sell a certificate of authenticity for something that doesn't exist without concocting a fantastic story...
Garau put together a great one. As he told one Spanish news outlet...
You don't see it, but it exists. It is made of air and spirit.
The vacuum is nothing more than a space full of energy, and even if we empty it and there is nothing left, according to the Heisenberg uncertainty principle, that "nothing" has a weight. Therefore, it has energy that is condensed and transformed into particles, that is, into us.
I'm no physicist... But I'm going to guess that any other empty space on the planet fits that description. The only difference, of course, is that those other pockets of nothingness don't go for $18,000 and come with a fancy piece of paper signed by Salvatore Garau.
And Garau topped his story off with a "mic drop" moment that's hard to counter...
After all, don't we shape a God we've never seen?
Let's not make the mistake of thinking this invisibility stuff is anything new, though...
An invisible piece of clothing is at the core of one of the most often-referenced folk tales – "The Emperor's New Clothes" by Danish author Hans Christian Andersen. As the story goes...
Two rogues, calling themselves weavers... gave out that they knew how to weave stuffs of the most beautiful colors and elaborate patterns, the clothes manufactured from which should have the wonderful property of remaining invisible to everyone who was unfit for the office he held, or who was extraordinarily simple in character.
That sounds a lot like when Garau tells us simply, "You don't see it but it exists." It's as if he read the folk tale, immediately identified with the two phony weavers, and thought...
Hey, that sounds like a great idea! I think I'll try it!
If this sort of thing only took place in the art world, it would be mildly amusing. And really, who cares if some zillionaire lights money on fire by buying some ridiculous work of art?
But the problem is... it's not just art.
Art is the flag of culture. And its excesses are frequently preceded by those in the financial realm, given as it is to stoke the fires of greed.
'Nothing' has been on sale in the financial markets for much of the past decade...
The most obvious example is negative-yielding sovereign debt. According to Bloomberg, $13.3 trillion of this debt is circulating around the world these days. Take a look...
Roughly $10 trillion of the total is the sovereign debt of countries like Japan, Germany, Switzerland, and France. (Nearly all the rest is corporate debt.) This is supposed to be the second-safest debt in the world, behind only the debt of the U.S. government.
When you buy a bond trading at a negative yield, it means you're guaranteed to get less in principal and interest at maturity than you paid for it in the first place.
In other words, you're guaranteed to lose money. You're signing up to get nothing.
Now, for most of these bonds, the total loss at maturity is less than 1%. So you might say that a loss of less than 1% is not good, but you don't get "nothing" for your money... You still get more than 99% of your original investment back.
That's technically true. But remember, a bond is an investment... When you buy bonds, you're risking capital to earn a positive return – not a zero (or negative) return.
Bonds are supposed to be the "smart money"... It's where savvy investors go to get a much safer return than the stock market. And for a $13 trillion swath of the bond market, that supposedly safer return is a little less than zero today... Nothing. Nada. Zip.
Sure, the $18,000 plunked down for invisible art is gone for good. But so is any hope of getting a return once you buy a negative-yielding bond.
And in both cases... You are paying to own the asset. It is not paying you.
The Securities Industry and Financial Markets Association's 2020 Fact Book puts the value of the global bond market at $105.9 trillion. So negative-yielding debt – a guarantee to receive a little less than nothing for putting capital at risk – accounts for 12.5% of a massive global market.
Nothing has become an acceptable return for many investors around the world... So I'm not stretching the bounds of credibility too far to call the exchange of currency for nothing a powerful cultural force today.
And it's not just bonds, either.
The rational expectation for stocks is a negative average return over the next 10 to 12 years...
That's according to the work of economist John Hussman, who we quote often in this regard.
Hussman regularly publishes five valuation metrics for the S&P 500 Index that have correlated highly negatively with the benchmark index's subsequent 10- to 12-year returns over the past several decades.
In other words, when these metrics have been high in the past, the S&P 500's subsequent returns have been low... And when they've been low, the returns have been high.
The thing is... these valuation metrics are higher than they've ever been lately. And one of Hussman's return models suggests the S&P 500 is currently priced to return a 7% loss per year, on average, for the next decade.
Of course, if you've invested for long, you know how these things normally play out...
The market doesn't simply tick down 7% each year for a decade. It falls 50% or more in a great washout that generally lasts somewhere between six months and two years. And it winds up being foolish not to start buying hand-over-fist at some point along the way.
Admittedly, that's an emotionally painful and financially unrewarding thing to do in the short term as the bear market completes its task of bringing us all back to reality. But in the end, this is the exact type of buying opportunity we want – when market excesses have disappeared.
Another well-known bubble watcher and market 'bear,' who we've quoted before, chimed in on Tuesday...
In a Bloomberg interview, GMO's Jeremy Grantham talked about his asset-management firm's study of 330 bubbles across all asset classes. As Grantham succinctly put it...
The last 12 months have been a classic finale to an 11-year bull market.
And he cited plenty of data to make his point during the interview, ultimately concluding...
The great bubbles by scale and significance... all accelerated late in the game and had psychological measures that could not be missed by ordinary investors. (Economists are a different matter.)
The data, like today, is always clear, just uncommercial and inconvenient for the investment industry and often psychologically impossible to see for many individuals.
In other words, all of us "ordinary investors" ought to be like the child in "The Emperor's New Clothes" who innocently blurts out that the emperor is naked. That emboldened others to say so... eventually making it impossible for the emperor himself to avoid admitting the truth.
We can all see the truth. Our only remaining task is to acknowledge it and act accordingly.
But the great herd of investors just can't do it...
The herd is like the courtiers and other sycophantic hangers-on around the emperor. They're all scared of his ire and eager to gain his favor, prompting them to proclaim the surpassing beauty of his non-existent clothes.
They're too vested in continuing the charade to notice that doing so is an unsustainable state of affairs.
Of course, you could ultimately argue that by buying the big indexes today, most investors are simply oblivious to the decent probability that they're paying for average annual returns over the next several years of zero or less.
I would agree with you on that point... But I also believe that most folks older than age 40 or so have no excuse for not being more aware of it. They've already seen this whole episode play out twice since their late teens or early 20s. Ignorance is not a valid excuse.
And in some cases today, investors seem to know they're paying something in exchange for nothing...
A great example is the cryptocurrency known as Dogecoin.
As Grantham noted in the Bloomberg interview...
Dogecoin was created as a joke to make fun of cryptocurrencies being worthless, and not only has it taken off, but it's such a success that second-level joke cryptocurrencies making fun of Dogecoin have gone to multibillion-dollar valuations.
An unabashed ode to the culture of nothingness has wound up with a massive valuation... Dogecoin's market cap peaked on May 7 at $88 billion and still sits above $32 billion today.
Its value has crashed over the past six weeks. But even so, that's still a whole lotta nothin'.
Getting nothing for something is a standard feature of speculative financial manias like the current one...
It usually takes the form of fraud, with investors being duped into paying for something and getting nothing.
And indeed, as I explained in the December 11, 2020 Digest, famed short seller Jim Chanos has called the current era "the golden age of fraud."
But with fraud, investors don't know they're getting nothing...
I'm talking about knowing you're getting nothing and paying up anyway. Everybody who buys negative-yielding bonds and invisible art knows up front they're paying real money for a whole lot of nothing. And everybody who buys Dogecoin certainly ought to know it, too.
There's no fraud going on in these instances at all. Folks are saying, "Hey, sign me up. I want nothing and I'll pay real money for it!" Nothing is the new something.
From a certain twisted viewpoint, it's almost beautiful...
Rather than committing a fraudulent act and having to live with the constant fear of getting caught, the current zeitgeist has made a perfectly acceptable proposition... The would-be fraudster can offer absolutely nothing and still charge a premium price.
We're living in the 'Age of the Emperor'...
The markets for investments, art, and cryptocurrencies have gone whole hog into the invisible-clothing business. How long will it be before an online invisible-clothing store launches? Or maybe an online invisible-art gallery will come along first?
Stepping back to look at the forest of bizarre trees that has grown up around us over the past decade or so, we must now ask ourselves... How the heck did we get here?
Grantham seems to agree with me on the answer to that question. As the Bloomberg interviewer noted, Grantham identified very low interest rates as a primary culprit four years ago...
Stock prices are held up by abnormal profit margins, which in turn are produced mainly by lower real rates... What, we might ask, will it take to break this chain? Any answer, I think, must start with an increase in real rates.
I'd expect to hear that response from almost any long-term, value-oriented, cycle-aware investor... Such investors know that the values of stocks and bonds are based on the cash flow they generate to investors throughout the life of the investments.
So these folks are always assessing new stock and bond investments against the backdrop of so-called "risk free" rates. That's essentially the amount of money you would get paid to hold the highest-quality, lowest-risk (perceived risk, at least) government bonds.
The 10-year U.S. Treasury note is a common benchmark... It currently yields about 1.49%.
And I don't usually trust the government's inflation numbers, because even though the so-called official statistics typically say inflation isn't happening on a large scale... I'm always paying more for important stuff like food, clothing, shelter, and fuel.
But even the Bureau of Labor Statistics' Consumer Price Index ("CPI") recently rose 5% for the year ending in May 2021... If the CPI rises even half that much over the next 12 months, the real return on the 10-year Treasury will still be well into negative territory.
That's what stocks are competing with for new investment dollars right now... That's why low interest rates result in higher valuations for stocks. And it's not hard to see how low interest rates encourage investors to tolerate greater levels of risk for lower returns.
It's perverse...
As equity valuations rise, investors should be more cautious and less willing to buy. But the exact opposite happens in a speculative mania...
The higher the market goes, the more investors are willing to pay up for less. That is, until the day the market crashes... and these investors are forced to exit not only with zero return, but in many cases, with less capital than they started with.
I'll leave you with one final example of investors ponying up something for nothing today...
It comes from a recent blog post by SentimenTrader.com founder Jason Goepfert.
In the post, Goepfert points out that the ratio of money-losing companies issuing new equity to money-making equity issuers has now exceeded the peaks it hit during the dot-com and housing bubbles. From the blog post...
According to Bloomberg data, there have been 254 profitable companies issuing secondary or add-on shares over the past 12 months. But there have been 748 unprofitable companies doing the same, for a net differential of more than 500 companies.
Goepfert admits that the total market value of these equity-issuing, money-losing stocks is insignificant – at roughly 0.1% of all U.S. stocks. But as he explains...
That's not really the point. It's not about the amount of issuance; it's about a market environment that allows this to happen.
I agree. It's yet another sign of the "market environment" we're all living in...
It's exactly what you would expect in a world where an empty space sells for $18,000. It's exactly what you would expect in a world where securities guaranteed to lose you money make up 12.5% of their massive market. It's exactly what you would expect in a world where a crypto joke is now worth tens of billions of dollars. And it's exactly what you would expect in a world where stocks are priced to see average annual losses for a decade.
What advice could I possibly provide on how to handle such a market environment?
This is usually the part of my Friday Digests where I rehash my "be truly diversified" mantra. I remind you to focus on a portfolio that includes varying allocations of four core elements – stocks and bonds, plenty of cash, gold and silver, and a little bitcoin.
But instead, this week, I'll give you a little something extra – totally free of charge, too...
As you can see, it's more "air and spirit" than actual advice. But I'm told that it comes with a potential value of $18,000. That might be the highest-returning advice you get all year.
New 52-week highs (as of 6/24/21): Asana (ASAN), American Express (AXP), CBOE Global Markets (CBOE), Cintas (CTAS), Dropbox (DBX), iShares MSCI Brazil Capped Fund (EWZ), Facebook (FB), Formula One Group (FWONA), Alphabet (GOOGL), Intuit (INTU), Nuveen Preferred Securities Income Fund (JPS), Microsoft (MSFT), Motorola Solutions (MSI), Cloudflare (NET), Invesco S&P 500 BuyWrite Fund (PBP), ResMed (RMD), ProShares Ultra Technology Fund (ROM), Sea Limited (SE), S&P Global (SPGI), ProShares Ultra S&P 500 Fund (SSO), Smith & Wesson Brands (SWBI), ProShares Ultra Semiconductors Fund (USD), and Vanguard S&P 500 Fund (VOO).
In today's mailbag, feedback on yesterday's Digest about bitcoin's recent sell-off. What's on your mind? As always, you can tell us at feedback@stansberryresearch.com.
"The drop in Bitcoin price is great. Here we have Blockchain technology, which appears to be anathema to totalitarian regimes. China until just now did 65% of the world's crypto mining, with the U.S. a distant second at 7%. In one fell swoop, China has shut down a lucrative industry, it has shuttered itself from new blockchain development, literally the next iteration of the Internet, and to boot it has encouraged some of its best and brightest software people to seek opportunities abroad. What's not to like about that?
"And best yet, it gives us one more chance to buy while crypto prices are still somewhat reasonable." – Paid-up subscriber David D.
Good investing,
Dan Ferris
Eagle Point, Oregon
June 25, 2021