This radio commercial from Progressive is ridiculous, but this line stuck with me:

“These days nothing is normal and everything is weird.” – Progressive Insurance

Age, and experience, play a role in this feeling, but things really ARE weird right now. Let’s look at three big reasons why and what to do about it.

Reason #1: The Internet

When the Internet, i.e. ARPANET, started in the 1970s, you could map it on a single piece of paper. Needless to say you can’t do that anymore. A map of the Internet today is just a map of the world.

You used to be able to think about the Internet as an analog of the real world. You go to sites. You get mail. Not anymore. The Internet has a structure and logic all it’s own and increasingly no longer maps to the real world. And when an online ethos invades the physical world, things get weird.

Ben Thompson at Stratechery notes that this reversal of causation online->real world is one we all have to start making. Thompson notes that the GameStop saga is best understood as a meme. He writes:

This is why, in the end, the best way to describe what happened to Gamestop is that it was a meme: its meaning was anything, and everything, evolving like oral traditions of old, but doing so at the speed of light. The real world impact, though, was very real, at least for those that made and/or lost money on Wall Street. That’s the thing with memes: on their own they are fleeting; like a virus, they primarily have an impact if they infiltrate and take over infrastructure that already exists.

An additional challenge is the feedback loop between the physical and online worlds is neither one-way or static. The barrier between the two is now fluid. Benedict Evans writing about the new world of retail notes:

What will happen as the generations that grew up with ecommerce no longer see it as new and exciting but instead internalise it, and take ownership? Retail is pop culture, and that’s live streaming but it’s also the shop that only you know about. Maybe the internet is due for a wave of things that don’t scale at all.

This is why a TikTok influencer can cause a product to disappear from the shelves overnight. This is why sneakers today are as much a tradable good versus something you wear on your feet. In short, weird.

Reason #2: Zero Interest Rates

A certain generation of investors have not known anything other than essentially a zero interest rate policy on the part of the Federal Reserve and other major central banks. Absent a head fake in 2018-19, you have earned a negative real return on cash, broadly defined, for the better part a decade and a half.

Source: FRED

To anyone who started investing in 2010, the odd thing would be a positive return on cash. The idea that the Fed Funds rate was ever in double digits seems absurd. The longer this has gone on, the more investors have become conditioned to it. It’s just human nature. We respond, and adapt, to the world around us. Josh Brown at The Reformed Broker talks about what this has caused:

So now you have trillions of dollars, owed with almost no interest, all chasing investments with the potential for massive capital appreciation – the cost of this money being so low as to render the need for current cash flows completely irrelevant to the global players of this game: Sovereign wealth funds, hedge funds, asset managers, index ETFs, mutual and closed-end funds, retirement savers, family offices, day traders, corporate treasuries and teenagers on TikTok.

Lessons once learned, especially early on in one’s career, stick with you. Which is why many professional investors over the age of 60 today see signs of rampant, runaway inflation at the drop of a hat. It’s conditioning.

Interest rates do have real world effects. Longer term interest rates have already begun ticking higher. Home mortgage rates are already on the way up. The bigger question is when (and how) will rising rates affect a stock market, and a class of investors, who have never had first-hand experience with them?

Reason #3: Pandemic

There will be plenty written about how the pandemic has affected society. For our (narrow) purposes, let’s just focus on one aspect. People are bored. They are looking for something to do. Tiger King only takes you so far.

Sports betting is seemingly everywhere and growing. Individual investors are trading options and penny stocks like they are going out of style. In the course of a year, went from having too few IPOs to more SPACs than you can count. People are buying digital sports cards like crazy. The hottest art market is now one for digital works.

It’s hard to keep up, especially in the collectibles space. I have been keeping an eye on the space, but I am still shocked at how interest in, and capital flowing into, the space has grown. There is now an IRA provider that will help you fill your account with all manner of alternative investments including art, farmland, etc.

There are some signs of froth, for sure, but that doesn’t mean all of this will go away once we get to the other side of the pandemic and interest rates move off the zero floor. Some of this will stick around for the long run, sports betting for one. It’s human nature. Ben Carlson at A Wealth of Common Sense writes:

I get the knee-jerk reaction to roll your eyes and talk about how ridiculous this kind of thing is. Why pay so much for a rectangular-shaped piece of cardboard with a picture on it?

But it doesn’t make sense to completely dismiss this stuff for the simple fact that it continues to occur. And it’s going to continue occurring because we’re humans and humans can be ridiculous.

We’re emotional. We lead with our feelings. We’re superstitious. Nostalgia might as well be its own investment factor at this point.

Too much capital and too many entrepreneurs have zeroed into the alternatives/collectibles space for it to simply go away post-pandemic. There will be companies and formats that don’t make it. They will in retrospect look ridiculous. However some trends will persist and will, in retrospect, look inevitable. That is how business, culture and our brains work.

What To Do

No one can tell you what the future will bring. Will Bitcoin be ‘digital gold’ a decade from now, or will something else have supplanted it? Nobody really knows because it depends on the collective decision making of billions of people.* Anyone who tells you they know it likely selling you something.

You need a plan. A plan that fits your own personal needs and preferences. That plan may be to completely ignore everything going on stick to a simple mix of traditional asset classes. Your plan may include having a ‘fun money’ account that allows you to participate in some of these assets without blowing up your main account. Heck, it might even include going all-in on new investment themes. But it needs to be your plan, because nobody cares about your money than you do.

In the moment, it can seem like the end of the world if you miss out on the next Gamestop, Bitcoin, or NBA Top Shot card. The beauty is there will always be another one coming down the road. You can jump or not. Ultimately it’s your decision and hopefully it’s one you can live with. Let’s let Josh Brown at The Reformed Broker sum it all up.

You can let a trade go by. You might regret it, you might not. Let another one go by right afterward. You can say no to a deal. You can turn down a meeting. You can retreat. There’s plenty of room in the middle of the parade. Let someone else be the majorette. Parades end. All of them.

Things are weird right now and often don’t make sense. No matter what, give yourself a break. You are human and have emotions like fear, greed and envy. As JC Parets at All Star Charts notes “Pay attention and you’ll start to notice.”

*Gold has survived for millennia as a store of value because that is what people chose to believe. You don’t see a big market today for frankincense and myrrh.

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