One theme that keeps smacking me in the face again and again over the past few years is just how pervasive our current Everything Bubble is. It has worked its tentacles into almost every conventional asset class in the market today. They are all overvalued to some degree, with the worst offenders - the WeWorks, Ubers and Netflixs of the world - totally reliant upon a perpetual stream of fresh investment dollars from zero-interest rate crazed mouse-jockeys in order to continue operating.
So I was intrigued when I read an article on the popular financial commentary site Zero Hedge that introduced me to the concept of anti-bubble assets. According to this theory, every financial bubble throughout history has also produced an anti-bubble - a boring, cheap asset class that is neglected in the rush for everyone to be part of the historic investing "new paradigm".
I'll quote Kevin Duffy, co-founder of the Bearing Asset Management hedge fund and originator of the anti-bubble thesis:
"One of the things we know from past bubbles is that you often get anti-bubbles. This was clearly the case in the year 2000 when you had the new economy bubble on one side, and the old economy anti-bubble on the other side. When tech stocks peaked in March of 2000, a lot of the value stocks bottomed at the same time."
I can absolutely attest to the validity of this idea, because I experienced it firsthand. In late 1999/early 2000, I was fresh out of college and new to the financial industry. When I looked at the markets, it didn't make any sense to me that Webvan (a money-losing online grocery delivery service) was trading at a market cap of over $1 billion while the staid tobacco firm of Philip Morris was trading at a lowly P/E of 5 and a fat dividend yield of over 8%!
I drooled over the concept of purchasing Philip Morris for the juicy dividend yield, but alas, it was not to be. Being straight out of college, I did not have two dimes to rub together and nobody was going to loan money to a penniless 22-year old so he could speculate in the stock market. As you can probably guess, Philip Morris went on to make its shareholders as rich as Nazis while Webvan went bankrupt in 2001.
But this ordeal underscored to me just how hopelessly irrational markets can become in extreme bubble environments. And our current bubble is no exception.
Today's Everything Bubble makes the late 1990s dotcom bubble refugees look like chump change in comparison. Right now Tesla has an improbably large $151 billion market cap. Netflix sports an eye-watering total valuation of $188 billion. And Uber, even after being mercilessly punished by the stock market for being a piece of hot garbage, still retains an astounding $60 billion market cap. Webvan - the biggest failed IPO of the dotcom era - has nothing on our current crop of bubble darlings.
So now that we know where the bubble is, the real question is where is the anti-bubble? What asset class or classes will allow us to safely double or triple our money over the next 5 to 10 years?
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And while there can ultimately be no assurances about future investment returns (as the famous 1930s economist John Maynard Keynes once observed, the market can remain irrational longer than you can remain liquid), buying anti-bubble assets certainly stacks the proverbial deck in our favor.
According to Kevin Duffy, precious metals, short-selling stocks, retailers (Ed. note: in light of the Covid-19 pandemic, going long retailers seems like a busted thesis) and active investing are the mirror images of today's Everything Bubble. These are the asset classes/ideas that simply don't get the time of day from otherwise intelligent, rational investors.
Although I'm not going to take issue with Mr. Duffy's largely accurate assessment of our broken markets, I would like to extend the definition of anti-bubble assets slightly. I believe that in addition to gold and silver bullion, antiques, gemstones and fine art have also been wholesale abandoned in the rush to find the next Lyft, Beyond Meat or SpaceX.
Antiques, art and other hard assets are definitely perceived as boring has-beens at this point in the economic cycle. But I like boring. The perception that an asset is boring is what allows us to buy it for an obscenely low price. Boring is what produces outsized investment returns over the course of a decade or two.
And this leads us to my next point.
When bubbles burst, you want to be sure to have some money laying around to take advantage of the bargains that are sure to materialize. But I'm not convinced it is either feasible or wise to hold a 100% cash position. This is where having some antiques and hard assets in your portfolio can be invaluable.
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You see, antiques, gemstones and art, while not money, all share important similarities to money. Money must possess five attributes in order to function properly as a medium of exchange. It must be acceptable in transactions, durable, portable, scarce and easily divisible.
This list got me thinking about an article I wrote a few years ago titled The Five Aspects That Influence Art's Desirability. In that article I defined 5 attributes that antiques and fine art had to possess in order to be considered investment grade. Those characteristics are quality (of materials and construction), portability, durability, scarcity and stylistic zeitgeist (how closely a piece matches the style of its era).
As you can easily see, investment grade antiques share 3 out of 5 of the properties associated with money: durability, portability and scarcity. Right now nobody cares even a little bit about that fact, but the day is coming when they will. The Everything Bubble will burst one day. And when it does, bubble assets will plummet in value.
But people who have the foresight to invest in money-like, anti-bubble assets such as antiques, gemstones, fine art and bullion will do quite nicely. Conversely, people who don't buy today's boring assets will eventually wish they had.
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