Call me old fashioned

Happy Friday!

A few weeks ago, it seemed as if tech was falling apart. I wrote a note defending the sector and why I was sticking with it. I don’t want to say that it was the right call just yet, because I’ve learned that successful investors must live in a constant state of paranoia, but tech hit an all-time high yesterday. This makes me happy, and I’m reminded of one of the best quotes I’ve ever read about stock prices by Jim Grant (he publishes the very popular Grant’s Interest Rate Observer):

“To suppose that the value of a common stock is determined purely by a corporation’s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Welles when he told them over the radio that the Martians had landed.”

The notion that the tech sector’s future cash flows being discounted due to a higher 10-year yield seemed nonsensical to me at the time, and it still does today. But like I said, I am nowhere close to taking a victory lap just yet. I’m merely stating that I think tech’s future is going to do just fine for a little while longer.

Speaking of past writings, last week I wrote about why a home is not an investment. I forgot to share this link, which is from a blog I read occasionally. The author shreds the idea of a house as an investment, and I can’t find a single error in his analysis.

Let’s shift gears… I cannot in good conscience cheer on these NFT buyers any longer. If you agree, then you’ll love this chart below. NBA’s Top Shot “market cap” has been cut in half in just a few weeks (more stats on Top Shot and the source for this chart is here):

I know nothing about Top Shot, but that hockey stick that began in mid-February probably incentivized content creators to flood the market with supply to meet this demand.

This is reason #826 why it’s risky to buy any “asset” than can be created this quickly and easily. Scarcity is less valuable if the supply of scarce items isn’t all that scarce. Furthermore, when the price of something is purely based on the supply available (which is exploding) and the demand to own it (which is constrained to only those who understand this NFT stuff and see the value), you get a market that is flimsy at best. 

Think about it this way. Supply can be created with a few clicks of a mouse. There are no raw materials per se, and processing power can tokenize video clips pretty quick. So, the barriers to new supply are relatively low.

New demand is only created by convincing non-NFTers that NFTs are cool and have value. That’s an education process and a difficult one. Who wants to be lectured by some Millennial about why LeBron dunks that can be viewed for free on YouTube are worth a lot if you carry the one and only certificate of authenticity that sits on a blockchain in a smart contract and can only be purchased using crypto after linking a digital wallet to an NFT marketplace?

Call me old fashioned, but I’m sticking with equities because the economy is en fuego. The jobs report for March was a staggering 916,000 net new jobs. Consensus expected 675,000. March also brought the best manufacturing report in 37 years AND the best services report EVER.

I believe that numbers like these will only fuel stronger demand for equities, and since it’s not as easy to mint new stocks as it clearly is for NFTs (unless you are Elon Musk issuing new shares of Tesla), I like the supply/demand dynamics of stocks way more than cryptokitties and $69 million screensavers.

Lastly, while this is by no means the strangest thing to happen inside a 7-Eleven, it’s still worth watching:

Enjoy the weekend…