I've Got a Bad Feeling About This

May 21, 2021

“Okay Boomer.”  It’s said with derision.  It’s said with sarcasm, flippantly and dismissively.  What you know is dated, what your experience has taught you is inapplicable.  You don’t know what I know, and you for sure don’t see what I see.  It stems from many things, the normal youthful disdain for the prior generations, but it’s also an increasing byproduct of our culture’s reverence for youth and the adoption of technologies that caters to them, amplifying their discourse (both good and bad).    

Every voice should be heard, every opinion matters.  That’s what our egalitarian social media platforms offer.  Yet, in an effort to increase eyeballs and screen time, algorithms then funnel those like-minded individuals into echo chambers, distilling and concentrating the group think.  Eventually only the most strident views are heard.  What begins as memes and digital snarkiness, morphs into outright cynicism and contempt.  This happens with the most contentious of issues, politics, climate change, income inequality, the stock market, the crypto market, and the most mundane, home baking. Hell hath no fury than a cupcake scorned on social media.  All cupcakes matter, even if yours looks nasty on Instagram.        

We bring this up because we live in a world where we’ve unleashed an unprecedented and historic amount of liquidity, and that liquidity begets an unprecedented and historic amount of half-baked financial ideas. Whether its meme coins, SPACs, or growth tech stocks, none of it seems remotely . . . sensible. Raise the question about whether any of this makes sense, and you’ll receive sympathetic nods, a subtle message that we just don’t get it. Worse, we get a shoulder shrug because that really means we’re all looking to see who’s the greater fool.

Then again, it’s not like many who should know, don’t know.  It’s more like we’re all following Charles Prince’s playbook who, as the former CEO of Citigroup, said right before the Great Financial Crisis . . .    

“When the music stops, in terms of liquidity, things will be complicated.  But as long as the music is playing, you’ve got to get up and dance.”

Keep Dancing

In a financial world where fund managers are sliced and diced, slotted into narrowly defined silos so they can fit the imprimatur of institutional money, what else can they do?  Stop dancing?  Even more laughably, change styles?  If you’ve been tangoing, and suddenly decide to pop and lock, you’ll be straying from your mandate, which means watching your investors and AUM waltz away.  

Moreover, why would you even think of investing any differently?  TMT has worked for over a decade and technology now dominates the investment landscape thanks to a flywheel-like business model, falling interest rates, technological adoption, and globalization.  Yet, when tech stocks are now being pitched on a multiple of revenue basis as opposed to profit, shouldn’t we at least pause? 

It wasn’t like this a few years ago.  We’re old enough to remember.  In the historical texts of the mid-2010s, we find examples of fund managers touting stocks that are bargains because their multiples on FCF / EBIT / etc. can rerate.  It all seems so quaint today.  Those goalposts have moved higher-up the income statement, and are now situated near the revenue line. Today, we value how much more stuff you’ll do in the future, not how much you’ll make. 

Hold My Beer . . . We’ve Done This Before

We shouldn’t be surprised though because we’ve done this before.  History seems to always rhyme because people are always . . . people.  As Sun Microsystem’s CEO Scott McNealy once said in 2002 about the company’s stock being valued at a price to sales ratio of 10x at the peak of the dotcom bubble . . . 

“At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?” 

Okay Boomer. 

You just don’t see it.  You don’t understand.  Real economy stocks, value stocks, heck even “valuations,” what good are they?  Buffett / Munger, those guys are so out of touch with their outdated ideas about finances, trade, debt and currency.  Dude, they think crypto is a scam. No . . . it stands for Simple Cool Automatic Money (CRYPTO: SCAM).  Have fun staying poor.  

Experience is regarded as a handicap now, a word that translates to being mentally calcified in the old ways of doing/thinking.  What could you know about bitcoin, blockchain, MMT, space exploration, SPACs, etc.  Just your basic premise that scarcity and value are somehow intertwined fail hopelessly in the face of “MOAR”.  We YOLO’d earlier, and now we’ve got diamond hands.  Now that we’ve lived, we’re HODL-ing for immortality.  

I’ve Got a Bad Feeling About This

So here we are, surrounded by rampant liquidity being deployed by a generation of investors who are myopically focused on the moment. A generation of professional money managers who have come of age understanding the intricacies of TMT, TAMS, ARPUs, and SAAS, but given nary a thought about the macro backdrop, excessive liquidity, commodities, inflation and interest rates. A generation of retail investors that have doubled or tripled their wealth on tech stocks, crypto coins, SPACS, etc., but lack the experience to know that those gains were possible only because of the current environment of easy money. The same device used to reinforce current thinking could also expose them to a wealth of knowledge and experience from investors that have come before. Investors that have seen this before, and investors that have survived this before. Sadly those investors wouldn’t even land on their feeds since the algorithms aren’t programmed that way.

Ah well, contrarian opinions have no place in each of our own little bubbles. To say otherwise means we’re just doubters and haters.

Whatever you say . . . Boomer.