Second-order market exuberance in the post-modern era...

I think we’re possibly in something much bigger than the 2000 dot com bubble...

This article was originally published on 12/17/2020 for my informal email list. I’m re-posting some of my earlier newsletters here as a gradual process to shift to Substack.

Tons of feedback for yesterday’s email with many of you asking me whether you should buy these electric vehicle companies’ stocks lol. I’m not qualified to do stock pitches (after all I was rejected by all of Princeton’s student finance clubs freshman year), and I hesitate to make predictions. What fascinates me more are the “meta-trends” of financial markets and this big, great bubble we’re in right now. Instead of stock recommendations, let me just give you my overarching view on the markets, mixed with some philosophy.

Second-order, not first-order impact

I think the markets will keep going up, but not because the stock market isn’t overpriced, but because nobody knows how we can exit this current party. The markets will keep going up not because the fundamentals have improved, but because even the brightest academics and policymakers continue to be incapable of answering how exactly we can get out of this current regime with extremely low interest rates and the Fed bailing everyone out. You can know something about where we’re headed based on the fact that nobody knows...

In an era where financial markets are disconnected from the Main Street economy, I don’t care about the first-degree analyses of the markets because they don’t indicate where we’re headed; I care about the second-degree impact of other people’s analysis on the markets.

Truths and fundamentals don’t matter as much anymore

We see the same dynamic in socio-political discourse in our “post-modern” society, where facts & truths themselves don’t matter as much as people’s perceptions of them.Voters today aren’t influenced by facts, but by narratives. Stock markets aren’t moved by business fundamentals, but by sentiments and “hope” (for vaccines, V-shaped recovery, the continuation of neoliberal order, or whatever you have in mind).

Few deviate from the central narrative

Investment banks are wrapping up their year with investors surveys. From what I’ve read and gathered, investors are trying to stay rational but have found many ways to justify the ongoing party. For instance, with American and European stock markets at record highs, investors do recognize that risk assets are overvalued and expensive.

But wait, not so quick, that doesn’t mean there’s a bubble! Most respondents in these surveys still believe that cyclical stocks (like airlines) are still “cheap” compared to mega-cap growth stocks. Most people are as bullish about the near-term forecasts of the S&P 500 as ever. 

Very few are deviating from the central narrative that vaccines will bring us out of this mess and things will be rosy in 6 months. Sure, with tons of caveats, but that’s the big picture that everyone agrees on.

I think we’re possibly in something much bigger than the 2000 dot com bubble. But you should feel comfortable because the party will last for a long while, and if you can get out before the bubble bursts, you’ll still make a fortune. When will it burst? Well definitely later than I give up on writing these emails so just stay tuned…