Yesterday, I pointed out that Dogecoin now has a larger market cap than Kinross Gold (NYSE:KGC), the tweet received a lot of attention:
Kinross is the 5th largest publicly traded gold producer. KGC trades at roughly 8x earnings and has a price/book ratio of 1.57. Kinross also pays a dividend (1.65%) that is higher than the 10-year note yield.
I pointed out the absurdity of the Dogecoin/Kinross relative valuation because it illustrates that we are living in a world where traditional methods of financial market valuation have been tossed out the window. The market is rewarding concepts like "Metcalfe's Law", which basically states that the value of a network increases exponentially as its user base grows.
Therefore, it's all about user base and engagement. Not about earnings, earnings growth, dividends etc.
In fact, nothing could be less attractive to the current market herd than the concept of building a mine, employing people to drive trucks and operate heavy equipment, and extracting gold or some other metal from the earth. This is "old fashioned" and involves much too much actual work.
It's much better to simply create a cryptocurrency with a story behind it, and then use all sorts of social media marketing techniques in order to build a user base so that you can start talking about Metcalfe's Law.
Value is based upon perception. It is not something tangible. There are many recent examples of valuations becoming completely unhinged from reality (Gamestop, AMC, and some would even argue Tesla).
I would argue the market valuations in February 2021 are largely based upon attention spans. Let me explain. Kinross is generating more than US$1 billion in net income per year currently, it is paying a dividend to its shareholders, and it has a plan to increase production in the coming years. This makes KGC shares attractive from a traditional valuation standpoint, and shareholders can probably expect 10%-20% annual returns over the next several years from holding KGC shares. Of course, there will be ups and downs over the next several years, but it is reasonable to expect that over a 5-year investment horizon KGC should return an average annual return of 10%, maybe more.
The problem is that this is 'boring'.
That's all it's going to make me?
In crypto we are seeing coins go up 10% a day, sometimes in an hour. In Gamestop (NYSE:GME) we witnessed a 15,000% return in a month. Why would I bother with something than only produces a 10% return in a year?
I'm sure you can see what i'm getting at here. In the pandemic lockdown, no jobs, market environment of 2020-2021 we are seeing a bubble of epic proportions being blown. As Stan Druckenmiller aptly stated, this is the "wildest cocktail" he's ever seen.
Let's summarize what this wildest cocktail actually consists of:
• Extremely accommodative monetary policy from central banks (ZIRP, QE, etc.).
• Large fiscal stimulus programs from governments including direct deposits into taxpayer bank accounts.
• A raging pandemic that has shifted how the world operates and forced most people to work from home.
• A growing mistrust in governments and the traditional financial/banking system.
• An exponential increase in the number of conspiracy theories being perpetuated, largely through the use of social media. The net result in all this is a parabolic increase in mass delusions ("Trump won", "The pandemic is a hoax", various forms of financial misinformation including reddit etc.).
• Bitcoin and crypto have gone mainstream with dozens of financial institutions (banks, hedge funds, etc.) now investing in, and using cryptocurrency. This has given a level of validation to the entire space, despite the fact that it has a seedy underbelly.
• The human attention span has never been shorter - we want to be entertained, and we want instant gratification.
• In recent history, it has been much more lucrative for young people (under age 40) to speculate in markets than to hold a job or do anything productive.
• A "Robinhood generation" of market participants has been created. Finance is becoming increasingly democratized and everyone believes that they can, and should be, an investor and market speculator.
I could go on, including citing numerous specific examples from my day to day life. However, I think you get the point.
Many market participants seem to be practicing a "Thelma & Louise Approach" to the markets with the understanding that the biggest gains tend to occur at the very end of a bull market cycle.
We are indeed living in the "wildest cocktail" ever seen, and it is resting on an increasingly shaky foundation. I want to conclude by pointing out a few things that really caught my attention in the last week, including a quote from Howard Marks:
A quote from Dallas Fed President Kaplan: “I’m very concerned and watching excess risk-taking and excess imbalances, particularly in the non-bank financial sector,”
A research note from Citi this morning:
The key money shot in the Citi note is the notion that "bubbles occur when price rises, rather than deterring investors, lead to more money coming in...." - this is exactly what we are witnessing today.
And a quote from Howard Marks that is probably my favorite:
"What's the greatest source of investment risk? Does it come from negative economic developments? Corporate events that fall short of forecasts? Companies whose products become uncompetitive? Earnings declines? Low creditworthiness? No, it comes when asset prices attain excessively high levels as a result of some new, intoxicating investment rationale that can't be justified on the basis of fundamentals, and that causes unreasonably high valuations to be assigned. And when are these prices reached? When risk aversion and caution evaporate and risk tolerance and optimism take over. This condition is the investor's greatest enemy."
Ex-Citi CEO Chuck Prince's famous quote circa 2007 couldn't be more apropos today:
“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.”
I'm still dancing, but i'm dancing a little slower and i've positioned myself at the door with one foot out of the building....
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