Tulips, Anyone? America's Late Stage Pandemic Bubble-Upon-Bubble Behavior

"Someday This Will All Be Yours" by Nancy Ohanian

Two of my closest friends have a son, pictured below, working for a huge tech firm in the Wall Street area-- except his work is 100% remote now. So he suddenly packed up and moved from his Lower Manhattan condo to a remote house east of Seattle in Sedro Woolley, where he knew no one but is now nearer to mountain trails he likes to bike on and close to places for kayaking and skiing. Turns out, for his generation, that isn't as much an anomaly as it might sound to someone from my generation.

This morning, a report from NPR by Adedayo Akala noted that "In the early days of the pandemic, many people escaped crammed apartments in crowded cities to airy suburbs and more open locales to escape the deadly disease. And as remote work became an option for many, people suddenly felt that they had more freedom to choose where they lived and they no longer had to be tethered to where their employers were located. And just like that, 2020 made moving a reality for millions of Americans. Some... moved in with their parents to be around family and even save on rent. For others, it finally gave them the excuse to give serious attention to pre-pandemic pipe dreams, such as moving to distant locations across the country in pursuit of a better lifestyle and a cheaper cost of living. Indeed, 33% of people who moved during the pandemic did so for financial reasons, according to a study conducted by Pew Research Center... The moves were most dramatic in the largest, most expensive, and most densely populated cities, like New York, Chicago, San Francisco and Los Angeles."

Millions of American families barely got by during the pandemic. Homelessness looks like it's grown gigantically in Los Angeles and spread from Skid Row to everywhere in town, as though the politicians want everyone to confront it daily so that they will do something about it. But the other side of that coin is about growing financial reserves for the other America-- along with the kind of pent-up demand that is predicted by some to be about to send America down the road to a huge financial doom. Gary Shilling, a financial analyst, investment advisor and author of The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation, says that the boom will be a mirage. Hold this thought, the words of warning he began his Bloomberg OpEd with: "One of the primary rules of investing is don’t get carried away by the madness of crowds. Still, markets are signaling that many investors are ignoring that rule."

Asset prices suggest that many believe most everyone will be vaccinated against Covid-19 by mid-year, or at least herd immunity will be achieved by then. So homebound-weary consumers will burst forth and spend the 11.4% jump in personal income they received from the December federal stimulus bill, to say nothing of their chunk of the $1.9 trillion relief and stimulus package.

Despite the recent wobble in technology-related stocks that depend on ultra-low interest rates to discount future earnings into high current valuations, stocks have mostly soared in response, especially those sensitive to changes in the economy. The jump in long-term Treasury note and bond yields is in anticipation of rapid economic growth, credit demand and much faster inflation that the Federal Reserve will be slow to confront.

Forecasts of 6% to 8% growth in real gross domestic product this year are common, but where will it come from? Not from plant and equipment outlays, which remain subdued by business uncertainty and excess capacity. Real capital spending has risen at only a 1.6% annual rate since 2007. Housing has been strong, but residential construction is just 3.7% of GDP. Besides, rising mortgage rates are curbing mortgage purchase applications, which fell 19.4% in February, according to the Mortgage Bankers Association.

...[T]he economy’s fate is in the hands of consumers who account for 69% of GDP, and they may continue to not spend government stimulus money freely, but, instead, save most of it for rainy days. According to the Federal Reserve Bank of New York, consumers saved 71% of the government money they received a year ago while spending 18% on essentials, just 8% on nonessentials and 3% for donations. The layoffs due to the pandemic were a shock to many households that were financially unprepared. Fed surveys found 16% of millennials and 12% of Americans overall wouldn’t be able to come up with $400 for an emergency.

That exercise was repeated with the year-end stimulus money. That $900 billion included $600 for those with incomes below $75,000. Even though lower- and middle-income Americans typically save little, they did so again. Some 82% of the increase in after-tax income was saved, pushing the household saving rate from 13.4% in December to 20.5% in January.

Americans are using their savings to build assets and reduce debt, a long-term trend that was already well underway. Back in the 1960s and 1970s, household debt averaged 60% of after-tax income. That debt includes home mortgages, auto and credit card loans as well as student loans. But starting in the early 1980s, free-spending and big-borrowing consumers pushed that ratio to 134% in 2007. The rate began to fall with the financial crisis and has nosedived recently. Nevertheless, at a recent 92.% in last year’s third quarter, it’s still a long way from the 60% norm, and I’m a believer in reversions of long-term trends.

This pattern implies that most of the pending stimulus bill money also will be saved and used to further reduce debt and build contingency assets. Any discretionary spending will no doubt be concentrated on services like restaurant meals and travel as cooped-up consumers leave home. Stay-at-home households have already loaded up on goods ranging from exercise equipment to cooking gear to vehicles used to avoid close proximity on public transportation. As I noted in January, unlike goods, services are consumed when purchased so there’s no inventory to rebuild. Also, people may eat out more frequently but probably not every night.

...Monetary and fiscal stimulus, however, has spawned rampant asset inflation. As a result, with stocks in the stratosphere and rampant speculations like GameStop, IPOs, SPACs and electric vehicles, there’s no room for economic disappointments later this year. Even a twitch by the Fed in response might touch off an agonizing reappraisal.

Over the weekend, a NY Times venture capital reporter, Erin Griffith, wrote about today's crazy market frenzies: From Crypto Art To Trading Cards, Investment Manias Abound. It seems more like a story about gambling than about investing-- but what do I know?

"This past week," she began, "a trading card featuring the quarterback Tom Brady sold for a record $1.3 million. The total value of the cryptocurrency Bitcoin hit $1 trillion. And Christie’s sold a digital artwork by an artist known as Beeple for $69.3 million after bids started at just $100. These seemingly singular events were all connected, part of a series of manias that have gripped the financial world. For months, professional and everyday investors have pushed up the prices of stocks and real estate. Now the frenzy has spilled over into the riskiest-- and in some cases, wackiest-- assets, including digital ephemera and media, cryptocurrencies, collectibles like trading cards and even sneakers."

A friend of mine still in the music biz, told me this year was the first time since CDs originally overtook vinyl that vinyl has once again outsold CDs. I'm glad I held onto my vinyl collection. Maybe I can sell it... and if I live to be 110 maybe CDs will come back to and I can sell them!

The surges have been driven by a unique set of conditions. Even as millions were laid off in the pandemic, many people’s bank accounts flourished, flush from stimulus checks and government cash infusions into the economy. But while people accumulated more money, traditional investments like stocks and bonds became less attractive.

So many got creative and, bored in the pandemic, took on more risk. Often, they were egged on by online communities on Reddit and Discord, where the next big investments were hotly debated. They also turned to tech tools like the trading app Robinhood and the cryptocurrency platform Coinbase, which allowed them to buy and trade different items with the click of a button.

That has now led to mini-bubbles across a wide variety of esoteric categories, making once-obscure acronyms like SPACs and NFTs practically as ubiquitous as the S&P. It has also fed ferocious demand for this week’s public listings of companies like the gaming site Roblox and the South Korean e-commerce company Coupang, as well as for shares of the video game retailer GameStop and other so-called “meme” stocks.

“It’s just a pent-up cycle where the money has nowhere to go, so it’s doing stupid things,” said Howard Lindzon, an investor, entrepreneur and market commentator.

The manias, which have erupted at a time of deep economic pain, have introduced a large amount of risk to many investors. Some people have already racked up staggering losses on Robinhood, which has been accused of encouraging gambling-like behavior. Other assets, like Bitcoin, are volatile, while sneakers and NFTs are so new and hyped-up that it is difficult to know what they will be worth over time.

...Much of this investment momentum began last year, after the coronavirus spread and the global economy went into free fall. In response, the United States slashed interest rates, bought government bonds and passed stimulus packages. Germany, Brazil, Japan and other countries took similar actions.

Those moves had a twofold effect of increasing the amount of money in the global financial system while also encouraging people to spend. Deposits in U.S. bank accounts hit $16.45 trillion last month, more than $3 trillion above the level in January 2020, according to Federal Reserve data. The interest rate set by the Federal Reserve has been near zero since last March.

Low interest rates made traditional investments like bonds less attractive, while stocks, which have risen for a decade, became even more expensive. That was when more people started investing in nontraditional assets.

With NFTs, the hysteria escalated quickly. Last month, an NFT GIF of Nyan Cat, which shows an animated flying cat with a Pop-Tart body, sold for roughly $580,000. Other artists, including Grimes and Steve Aoki, began reaping millions of dollars from their digital artwork. Then on Thursday, Beeple, whose real name is Mike Winkelmann, sold his “Everydays — The First 5000 Days” NFT for a stunning $69.3 million.

Slava Rubin, founder of Vincent, a start-up that helps people find investments in alternative assets such as wine, collectibles and litigation finance, said his site has attracted tens of thousands of users. Last month, he said, interest in NFTs jumped by 44 percent and collectibles by 33 percent, making them the fastest-growing categories on the site.

“The public is really leaning into these new ways of thinking about how to invest, whether it’s for pure profit, a hobby or based on nostalgia and interest,” he said.

This month, the electronic musician 3lau made $11.7 million selling NFTs related to one of his previously released albums. Buyers not only received the digital tokens representing the authentic version of the album, but also got access to new music and a limited edition vinyl copy.

3lau, whose real name is Justin Blau, said he was “blown away” by the price and how it showed support for the new market. “People are excited about storing value in a medium that gives them emotional value,” he said.

Investors have also gravitated to SPACs, which are “special purpose acquisition companies.” Many have thrown money at these financial vehicles, which trade on the public market, even though they are shell companies with no operations. Instead, their creators promise shareholders that they will find a private company to merge with, effectively taking the company public.

SPACs have been so plentiful this year that they outnumber new listings from real companies by nearly four to one, according to Renaissance Capital, which tracks public listings. Some investment firms have rolled out three or four new SPACs at a time, while celebrities and sports stars including Shaquille O’Neal, Serena Williams, Colin Kaepernick and Ciara have formed their own.

Often, the SPACs merge with companies that have never made a dollar. Two electric air taxi companies that do not expect any revenue for years-- Joby Aviation and Archer Aviation-- announced SPAC deals last month that valued them at $6.6 billion and $3.8 billion respectively.

Sneaker reselling has also exploded. On StockX, a marketplace comparable to eBay where people buy and sell sneakers and other collectibles, shoe sales in January were nearly double that of a year ago, said Scott Cutler, the company’s chief executive. That growth was helped by the sale of a famous style of Nike Dunks-- the SB Low Staple NYC Pigeon-- for a record $33,400 that month.

Younger generations want to invest in things that are culturally relevant and financially sound, Mr. Cutler said, and sneakers are “actually a far more stable investment than you may assume.”

Trading card sales have taken off, too. The price of mint condition cards on StockX jumped to an average $775 in January from $280 a year ago. This week’s $1.3 million sale of the Tom Brady card-- one of 100 of its kind from his rookie season-- followed a similar Brady card going for $555,988 in January.

Predicting when and how the party will end is anyone’s guess. Some anticipate that wide vaccine distribution and a return to normal life post-pandemic will bring about a Roaring Twenties-style era of prosperity. While that decade ended in a devastating crash, the euphoria lasted years.

That period was “pretty wild” and led to “pretty rapid technological change,” said Laura Veldkamp, a finance professor at Columbia Business School. “And there was lots of money to be made.”

My old comrade going back many decades, Jeff Gold is the world's foremost expert and buy and seller of rock'n'roll memorabilia. After reading the Times story, he noted that during the pandemic his own collectibles business has been excellent, and "a lot of people have been buying top of the market things for higher prices than ever. Middle and low market stuff has been doing about the same. But overall I think there are a lot of people, myself included, I’ve been looking for something to buy to make themselves feel better for even a moment... Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. Instead of buying that Beeple artwork, for almost the same amount someone could instead buy all of the four most expensive estates in Hawaii offered by Sotheby’s. I think that would be a better long-term investment." I think he's right. But I'm old.

If anyone wants to buy this painting by Depeche Mode lead singer Dave Gahan, 100% of the money will go to help elect North Carolina progressive Erica Smith to the U.S. Senate. The story of the painting is amazing. Bidding starts at $100,000.