Pop: Bubbles Are Bursting Everywhere

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The bubbles in risky assets, including bitcoin and many other speculative bullshit, are finally bursting, showing why intrinsic value matters—and the laws of economics, though recently suspended, have not been repealed.

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After a long time where a price strategy looked like a tortoiseshell (losing ground to broad markets, tech stocks and every other rabbit-like momentum strategy), things seem to be changing. Quick.

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Last year, price fell, behind broad market indices and international stocks (the biggest store of undiscovered value) performed poorly. But the sea has changed since December. Only time will tell if this is a permanent turning point, but the historical context will say yes.

The alleged catalyst for change is the Fed raising rates, the effect of which is to undervalue speculative stocks with absurdly high prices in the context of rising cost of capital. Fed Minutes Released on Wednesday Brought this point home. But the reality is that when a bubble bursts, there are reasons behind it. They burst because physics and economics could no longer support evaluation. No other reason is necessary.

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Some of the bubbles that burst are as follows:

cryptoCrypto assets are crashing, which would be considered cataclysmic in the general markets. Bitcoin is down almost 40% from its highs; Ethereum is down 34%. More colorful (yet less commanding) names like Polkadot are down 50%. Crypto has seen crashes like this before and can rise well from the ashes in a nanosecond. But as I wrote recently, you cannot value crypto so there is no logical basis for owning it. This is a classic speculative gambling. And such things usually end badly.

Momentum Growth Stocks with Negative Return on Capital: Perhaps the biggest craze of the past few years has been the buying of stocks that have captured the imagination of the public during the pandemic. Overall these companies have a negative return on capital (earnings/shareholders’ equity), a sure sign that they are wasting shareholder money. These stocks are exemplified by ETFs such as Ark Innovations (ARKK).
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Joe Teladoc. owns everything from
TDOC
As for Roku, both of which are down more than 40% over the past year. Buying a basket of such businesses is the culmination of speculation.

meme stocksYet more absurd are meme stocks, trash companies that shot to the moon on the back of a tweet. The leader of this madness, AMC, is down 39% over the past three months. Above $80 billion in market capitalization has been wiped out high since. The meme stock called the “greater fool theory” is the ultimate exercise in the belief that you should buy the stock because it’s going on praying that a bigger fool than you will eventually get it out of your hands for the same reason. Many of these shares will go to zero.

Just as there were hundreds of dotcoms for every Amazon in 2002 (like Pets.com), so too will there be mass murder in the vast array of speculative garbage that currently tarnishes many portfolios. It is hardly beneficial to be like a tortoise when the hare is all running. But the decency of the rabbit eventually takes its toll. That time could be now. Slow and steady can win the race again, as it often does.

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