Things that happen in manias

 This is a funny story.  When we have this sort of buoyancy in markets all sorts of securities trade at absurd valuations.  David Einhorn apparently featured, in his letter, a business with $35k in revenue and no real assets, that has $100m valuation.

Hometown International, NJ deli owner, worth millions in stock (cnbc.com)

I recognize that sometimes this sort of valuation is possible in markets that trade infrequently and in which a few shareholders control most of the shares, ensuring that funny bids or asks or unusual trades of de minims shares can then be extrapolated over a large, but illiquid share count to arrive at confusing valuations.

A better, albeit perhaps less extreme examples is ELLH, which deserves a longer discussion.  I believe it might be the worst equity security I have found, certainly in the diversified holdco space.  You deserve a full accounting of this one, not because you will want to invest, but because it is a poster child for what really happens with many of these "triumph of hope over experience" firms; the holdco with small tangible asset base, but laden with huge NOLs from an operating business - often discontinued - operations, leaving management with the challenge of lacking an operating base that can actually earn the profits that enable those assets to be used before they expire, and few strategic options for doing so.  Indeed, I believe that the NOLs may cause management to behave in foolish ways because of the endowment effect of wanting to preseve those assets, sometimes at the expense of feeding the new or remaining business (raising external capital can limit the NOL recovery and so management may force the company to internally finance growth).

Anyway, this is a larger topic for another day, but it is a counter-example, I think, to the Klarman view that there are no bad assets, just bad prices. I get his point - free options are just that.  But the endowment effects on the free option holder; the desire to make something of that option, can warp the perception of how to grow the greatest aggregate value.

In any case, everywhere I look, I see high prices and low returns.  I suppose there is a real possibility that we will see huge inflation and that operations of firms will be able to grow to justify today's valuations, but today's valuations won't have moved much and the purchasing power of those assets will be greatly diminished, so the "richness" will be nominal only.  More likely, we will get a period of pricing weakness, though not so long as we are in "lockdown"; imprisoned but working upper middle class types are experiencing incredible savings rates that are fueling this market surge.  The end of lockdown might actually see a decline in transfers into brokerage accounts, so ironically, economic growth might actually hurt equity prices.

It's a very tough time for someone to have a consistent strategy, in part because the strategies that have worked pretty consistently since the 1940s, are not set up for what we are about to experience.  The "normative" experience of US equity markets might be much more of an outlier than we think.  Japan, mid-century Germany, revolutionary Russia, revolutionary China; all of these places have experienced really catastrophic results where buying the dip didn't put you on a glide path.

But in a speculative mania, where money and profits seem pretty effortless (and I will admit that nearly all of my investments have been working but I have been raising cash) it is very hard to take money off the table.  Also, if we truly do get inflation, short duration assets will struggle; especially if we have policymakers engaging in financial repression on yields of short term instruments, as seems likely.

On Coinbase and Bitcoin 60,000

 Below is a letter I wrote to some investor friends.  The backstory is that I attended an annual meeting of FRMO Corp in 2016 or so, where Murray Stahl, the CEO, advised everyone to invest in Bitcoin.  Actually, since there is a transcript of the meeting available here you can look up his story, yourself, the example is on page six.  Murray has returned to the subject at length in later meetings.  2017, 2018, and 2019.  2020 has yet to be published.  I attended those to.  In spite of this, I never actually purchased bitcoin, though I could have taken his "vacation" example just to see.  Instead, I told myself, FRMO can make the investments for me, and I will instead invest in FRMO.  Not as much upside, perhaps, but less downside.  Also, that FRMO could make investments in the space that simply would not be available to retail investors.

Hindsight is 20/20 and of course, I would have made alot of money had I listened to him.  But I don't know if I could stay with it, because a) this whole market feels like a mania - driven by a cult of performative "newness" that is deeply Millennial and therefore encourages action over reflection(1), and b) I still don't really know how to think about it, and therefore I don't by any of the valuation methods.  This includes the PQ = MV argument that Murray makes.  The circulation of gold doesn't have to equal the circulation of dollars (or of all currencies), any more than the number of Swiss francs does.  I get the idea, but it seems to me that if it has utility in this way, it is as a reserve unit, not as a currency, really. 

Even so, I question whether something that is so inherently reliant on large systems - the need for electricity and internet connectivity to function - can really serve as a base unit.  We financialized and digitized money because of the impracticality of lugging around physical money.  Bank of America spends something on the scale of $1bn a year to move coin and cash around.

But the normal pattern of abstraction and financialization is to start with an asset that exists in the real world, but which, for various reasons; weight and cost, risk of theft, or lack of divisibility (e.g. a business operation) lead to a development of a convention, a contractual relationship around that thing which makes transacting with it much easier and more practical (and expands the range of potential investors).  In this case, it feels that what is happening is the opposite - that someone has constructed a completely synthetic digital construct and is now trying to make the real world reflect the digital one.  It has a man-bites-dog sort of quality (and mystery) that make it perfect catnip for financial journalism.

It seems to me that "new ways to trade" have alot to do with this more than the asset classes themselves.  Tulipmania, after all, was really about the intersection of three things: first, some new techniques developed by florists for grafting bulbs of different colored tulips to create new color patterns, second - and far more important - financialization of the bulbs by the creation of a futures market for the bulbs (that had to stay in the ground over winter), bored florists waiting for spring and finally, the pressures of a war. In 1637 the Thirty Years War was entering its final and most brutal decade, dramatically shortening duration preferences among pretty much everyone.  So, some new technology, coupled with new trading platforms (Amazon-like Robinhood stock recommendations? or new "disintermediated" trading platforms, boredom and lockdown - the mania was most intense during winter - and the pressures of an existential threat heightened willingness to take risk for short term gains.

Bitcoin and crypto have remained surprisingly resilient even as the narrative has changed (quick quiz - what was the Byzantine General's Problem?), in some cases many times.  That might mean that there really is something there; major investors are getting on board, after rejecting the early justifications for its utility.  So I am totally open to the fact that it is I who am missing the thread here.  If any reader wants to help me understand it; I am particularly interested in the economics of mining and how it can be that the most efficient miner doesn't manage to beat everyone else to the solutions to the validation problems.  I understand why it is necessary to keep as many nodes operating as possible, but not how this is addressed; unless, Harrison Bergeron, there is a Handicapper General?

Anyway, here is my note. The Luddite's voice rings strongly:

So, sometimes I feel like an idiot not listening to Murray when he said: buy bitcoin.  Being a skeptical type, had I done so, I no doubt would have exited my position by about $20k certainly by $25.  If I say that figure in retrospect, then in the moment, I would likely have been exiting above $10k and certainly above $15k, with at most only a small position retained, and I would have been sure that 20 to 25k was all that was realistically possible at least at the present time.

I just don't see what these coins really offer.  So much of what they are selling is the opportunity to speculate.  At least in the 1990s the use cases were understandable if implausible.  Viewed the other way, it seemed clear that they couldn't work.  (It cannot be that $1 of fiber optic cable laid by anyone anywhere was worth $7 and allowed the company laying said cable to borrow $2.  I mean, on some level, perhaps, but honestly not possible at scale.  There was real value there tho.  In that case, it was a case of finance people overplaying the capitalization of new income streams to book profits and benefits up front - "revenues" followed the capital investments, rather than the other way around.  But with crypto? I just can't see it.  Maybe I am too old or too dumb.  I observe that the use cases and the narrative have changed multiple times and yet none of the cases have proven out.

It was going to be a bank-less payments system.  Or a store of value (digital gold) or a supercomputer, or access to a currency trading platform or or or.  A bit like the 90s, when everyhting was goign to be digitized.  Eventually that happened, tho it was the people who were legacy firms in those industries that found it easiest to transition the customer experience to digital, since there were still offline processes that had to function and be managed and such.  Grafting the new tech onto the legacy firm turned out to be easier than taking the tech and building a de novo competitor in an industry.  I feel the same here.  The capital assumptions - that all of these firms can be asset light digital properties once they adopt this tech, doesn't seem sensible either.  In a sense, I think the goal is to build new social networks, but honestly, how many of those can society possibly need?  The ones we have seem to be making us miserable.  I get that if you could create a Mutual of Facebook, with the users owning the platform, that might be very valuable, except that the value will of necessity be very widely distributed.  Is Facebook's trillion dollar valuation all that valuable if roughtly evenly distributed among hte 2bn users it claims?  I guess if the most active users get a disproportionate amount of the profits, it's worth more to them, but then you also have to be constantly trying to use facebook; the usage becomes an end in itself instead of as a tool.  That strikes me as literally the proof that Seth Klarman's dictum: that there are no bad assets only bad prices, is false - an asset that requires you to spend all your time investing activity on it to make it work, seems to be a truly bad asset, even though it's paying you.  Its basically a job (as many "assets" are).

Or perhaps its specific activities that matter - like validation / mining.  There, tho, the business seems to be that he who supplies the computing power to run the network gets the money.  At some point, mining will likely stop, right?  I mean with Bitcoin that will happen - then how do you get people to supply power to the network?  Do they just get the assets transferred to themselves.  Essentially demanding Satoshis as fees, right?  Eventually these large pools of digital assets might loan them to people, or they might serve as a reserve currency backstopping some other payments system.  Ok.  but then the big aggregators simply become a form of reserve banks.  How is that so different from what we have today?  It's sort of anti-statist (assuming that the government or the FRB don't offer computing power to the network at rates that enable them to make this money.

Dunno.  Maybe I am just making no sense.  But I can't see what problem these things solve better than the system we already have.

To me, we live in an era that is again obsessed with "new era" thinking - this is applying to all sorts of things beyond the financial markets.  We are questioning liberalism, the nation state, representative government, rule of law (favoring instead attainder by twitter mob) and the dignity of the individual, let alone things like economics.  Alot of firms seem to be surfing the "new era" thinking; that like celebrity, famous for being famous, new era firms are investable for their newness.  Of course, that can be a way to get very very rich.  But - and this is where I see a real problem with the decentralized approach - commerce is generally best managed when it is headed by an individual of exceptional energy and talent.  Crowdsourcing business decisions is not a winning strategy so far as I know.  But maybe there are a few good examples?  Economies, yes.  Institutions, no, because the larger the institution gets, the more crowdsourcing is a vote for incumbency and to protect insiders, which is why external competition is so crucial to disciplining them.

Again, maybe I am just missing it.  I really would like someone to explain to me what "digital trust", or whatever the latest use case is, is, so I can understand what this is really all about.

(1) this is more broadly an attitude about the culture generally and about upper middle class Millennials in particular.  There is a very strong attitude of Jacobin "Year Zero" thinking in which the expectation is that we can simply dump overboard everything that came before them, including the culture itself.  You can hear it in the way their shortcut for "ancient history" is to refer to something old-fashioned as being "circa [insert year between 1965 and 1980 or so].  This is unwise and arrogant.