More Money Than Sense: How Monetary & Fiscal Profligacy Fueled the “Alternative” Investments Bubble
Over the last year, and especially over the last few months, financial markets appear to have decoupled from the real economy. Despite the extensive, severe, and structural damage caused by the covid crisis, the gravity-defying stock rally has raged on. With bonds offering no real return, investors flocked to stocks, and according to a recent report from BofA, more money has flowed into equities in just five months than in the last 12 years combined. As a result, valuations have skyrocketed, and even totally worthless companies are trading at 52-week highs. In this pressure cooker environment, it is no wonder that a growing number of investors looked elsewhere for opportunities, leaving behind stocks, conventional markets, and sometimes common sense as well.
"Nothing left to buy”
The phenomenon of ultra-loose monetary policies boosting asset price inflation is certainly nothing new. It’s been increasingly obvious since the last recession, as QE and low interest rates have been the primary fuel of the record-breaking bull market in the US. Now, however, this trend has been supercharged by the covid crisis response that saw extreme monetary interventions combined with unprecedented fiscal support. Also, unlike what we saw during past crises, the tsunami of fresh stimulus cash did not remain contained within the banking system or the corporate world. Direct cash injections like universal stimulus checks or extra unemployment benefits, as well as measures like rent freezes and debt repayment deferments, made sure that the interventions would reach the real economy and provide a cash boost to the average household. This, coupled with a decisive acceleration in the rise of amateur trading, a trend we covered in previous issues of the Digger, quickly translated into higher levels of speculation by smaller retail traders and led to extreme cases like the GameStop saga and the WallStreetBets controversy.
All these developments played an important part in pushing stock valuations to extreme and often nonsensical levels. In doing so, they have also made one thing clear: there is simply too much cash in the system and nothing attractive left to buy with it, at least not in conventional financial markets anyway. It is thus not surprising that this need to put idle cash to work would inevitably lead investors and speculators to explore new possibilities and experiment with different investment vehicles in their hunt for yield.
This hunt set off a surge of interest in new kinds of alternative investments that soon captured and expanded this new class of amateur investors, many of them young, inexperienced, and often financially illiterate. With the help of mainstream media coverage, celebrity endorsements, easy-to-use trading apps and social media hype, this quickly turned into a perfect storm: a new investing mania that resulted in shocking amounts of money being poured into new, exotic, and often totally ludicrous, speculative vehicles.
The collectibles boom
Although collectibles have been entirely legitimate areas of alternative investing for a very long time, they always tended to attract a very specific kind of investor. Of course, these tiny markets had their fair share of speculation, but usually serious collectors had a long-term, buy-and-hold view and they were deeply knowledgeable, often specialized in their own niche, be it luxury watches, classic cars, fine wine or rare books. The dynamics of this corner of the market were radically transformed in recent months. Newcomers to this space have turned collectibles into a hyper speculative, fast moving and highly volatile market, almost reminiscent of the crypto bubble of 2016.
Demand for collectible sneakers truly exploded last year, turning sports shoes into a bona fide asset class. Until recently, the secondary market for vintage or limited-edition sneakers was a negligible niche, part of a pop subculture and it was largely populated by “investors” under 20 and fueled by rappers and social media influencers. The pandemic quickly changed this landscape, however, and brought mainstream attention to the sneakers market. This was in part driven by the huge discounts that panicked manufacturers and resellers offered, facing sudden shop closures and expecting their sales to fall off a cliff. As mainstream demand picked up, online marketplaces saw an unprecedented boom. Prices skyrocketed, while automated algorithms and bots were deployed by speculators to snap up limited edition shoes as soon as they were released.
Secondary sneaker market best-sellers
Source: StockX current culture index 2021
Before long, the “investment case” for sneakers was being taken seriously and reported by the likes of Bloomberg and Forbes. StockX, the largest authentication and resale platform, adopted Wall Street jargon, replacing “buy” and “sell” with “bid” and “ask”, while it also created a hypothetical index fund of 500 sneakers that actually outperformed the S&P 500. GOAT, a StockX competitor, offered storage services to investors for their precious kicks. According to a recent report by Cowen, the North American resale market currently stands at $2 billion, increasing by 20% YoY, while the global sneakers market, largely a duopoly controlled by Nike and Adidas, is worth over $75 billion.
Luxury handbags also saw a dramatic increase in demand. Even before this recent frenzy, certain brands have been known to charge outrageous prices and make their customers wait in line for some of their iconic designs. While such items were already seen as rare and hard to come by, luxury brands further amplified their perceived scarcity by releasing limited editions of their most expensive bags, turning them into reliable cash cows. These could sell for anything between $100K and $400K, while a few of them were even priced in the millions. It was in these peculiar market dynamics of blatant and undisguised supply manipulation that the new wave of retail demand found another outlet. Fractional investment platforms cropped up, offering small amateur “investors” the opportunity to buy and trade shares of handbags that they could never afford to fully own. Trading apps like Rally introduced the concept of “handbag equity”. They filed with the SEC to securitize rare bags and launched “Initial Product Offerings”, allowing ordinary people to enter the space of so-called “investment handbags”. Quite predictably, this also gave rise to speculation and quickly resulted in even more extreme valuations. Still, many largely unsophisticated buyers keep pouring money into this illiquid and highly volatile market, purchasing shares of assets they have no control over.
Among the most surprising additions to the new alternative investments mania was trading cards. The same sports cards that many of us might remember from our childhood made a comeback during the covid lockdowns, or as the president of Panini America, one of the biggest card producers, succinctly put it: “it has been absolutely insane”. Only this time, it is adults who are fueling the demand, and self-described investors at that. New trading platforms emerged and demand surged, with auctions pushing prices to incomprehensible highs. A LeBron James card recently fetched over $1.5 million at auction, while in March, a Kobe Bryant rookie card sold for nearly $1.7 million.
And it’s not just basketball or baseball cards that have taken off. There’s even a boom in Pokémon cards, many of them trading for $10-20K, while it’s not uncommon to find “rare” cards trading for $80-100K. Prices can even top $200k, like the Pikachu Illustrator card, which sold for $233,000. In February, eBay reported a 142% surge in domestic sales for 2020, “selling more than four million more sports, collectible card games and non-sport trading cards in 2020 than in the year before”. Meanwhile, “investment consulting” businesses have also cropped up in this niche, advising clients on managing and expanding their card collections.
The NFT mania
While all this may sound juvenile at best and dangerously harebrained at worst, it is at least still within the bounds of the fathomable. Over the last few months though, this frenzy escalated to a whole new level with the arrival of NFTs on the mainstream investment scene.
An NFT, short for "non-fungible token”, is a digital certificate stored on a blockchain which identifies the owner of the token and guarantees that a specific digital asset is unique. The underlying asset can be any digital file, like a photo, a video, an audio or a text file, and the NFT that’s attached to it is a cross between an ownership title and a certificate of authenticity. However, the important thing to understand in order to fully appreciate the folly of this trend, is that the NFT does not confer any kind of exclusivity rights. All intellectual and creative rights stay with the creator of the file, while copies of the underlying digital asset can be easily and freely reproduced and accessed by the public, without any permission required or any royalties paid to the owner of the NFT.
Search interest in "NFT"
Source: Google Trends data (Dec 2020 – Mar 2021)
Now, nonsensical as this “value proposition” might seem, it hasn’t stopped NFTs from becoming the next big thing in alternative investments. Digital art was the main asset type that prevailed, with designers, painters, photographers and singers all rushing to ride this trend. Online NFT stores, trading platforms and even NFT funds provided the infrastructure for this phenomenon to grow into an actual market, while extensive media coverage fueled mainstream demand for the digital tokens.
Before long, NFTs were selling for hundreds of thousands of dollars, as celebrities, famous crypto investors and even traditional auction houses started entering the race. In March, a digital artist known as “Beeple” made history: an NFT of his work sold for a record $69 million at an auction held by Christie’s, making it the third most valuable artwork ever sold by a living artist, placing Beeple right behind Jeff Koons and David Hockney.
Given the publicity and the stupendous sums involved, it is no surprise that NFTs were used as wrappers for all kinds of “assets”, beyond digital art. A video clip of basketball star LeBron James dunking a basketball sold for $208K. A virtual plot of land in a video game sold for $1.5 million. Jack Dorsey, co-founder of Twitter, sold his first tweet as an NFT for nearly $3 million. One might think this is where this madness reached its peak, but if you spotted the pattern from the other manifestations of the new alternative investments frenzy, you might guess what happened next.
Fractionalized NFTs entered the fray, with online platforms allowing collectors to buy and trade shares of a full NFT. This predictable development helped this trend cross over entirely to the realm of the surreal: You can now buy a fractional ownership title of a digital certificate that confers no actual property rights over an intangible asset of no discernible value.
Inflation by any other name
The sheer absurdity of the alternative investment boom might seem bewildering to a mature and rational investor. To history buffs, it is probably reminiscent of the late stages of the Dutch tulip mania or perhaps more closely akin to John Law’s Mississippi bubble. Overall, it’s tempting to simply laugh it off and dismiss it as yet another confirmation of the old proverb that “a fool and his money are soon parted”. However, embedded in this farcical spectacle is a clear and important signal that no serious investor can afford to ignore.
When there’s too much cash artificially pumped into the system, real assets get more expensive and traditional investments soon become unaffordable. There comes a point where small, amateur investors realize they can’t compete with institutional players and they stand no chance in conventional markets. So, they create their own. They invent new asset classes and new investment vehicles, and they use their own extra cash, generated by fiscal and monetary excesses, to inflate prices. At this stage, it really doesn't matter whether we’re dealing with rotting tulip bulbs, ownership titles to non-existent gold or worthless digital tokens. It always ends the same way: in tears.
You can now buy a fractional ownership title of a digital certificate that confers no actual property rights over an intangible asset of no discernible value.
Unfortunately, these bubbles carry significant risks even for those who don’t participate in them. This ongoing frenzy can be read as a sure sign of danger ahead for the wider economy and for conventional financial markets. It blatantly disproves the claims of politicians and central bankers about the side effects of their aggressive printing and spending operations. Their solemn assurances that inflation fears are alarmist nonsense and that their policies are entirely sustainable certainly seem a lot less credible now that the bubble they created got so big, it actually broke out of stock markets and expanded to new, mostly made-up asset classes. At Global Gold, we have long warned investors of "growing imbalances and moral hazards" as a direct result of "cheap money" and these are the kind of excesses and distortions we have in mind. "Nyan Cat" sold for $590K as an NFT in February
Original creator: Chris Torres
For too long, we’ve been hearing absurd arguments and obvious excuses for limitless spending. Long-standing political goals have been disguised as new economic theories and basic, self-evident concepts like supply and demand have been discredited using pseudoscientific tricks and populist rhetoric. And yet, denying the nature of reality doesn’t actually change it and actions still have consequences. So, next time someone tells you that “deficits don’t matter” and that “inflation is dead”, show them a $600K NFT of an animated Pop-Tart space cat.