The guest commentary below was written by written by Michael O'Rourke on 2/2/21. This piece does not necessarily reflect the opinions of Hedgeye.
“How people value assets is changing in a low interest rate environment and we are looking at stocks because we’ve seen what’s happening GameStop, and we have that second by second pricing.
But look what has happened in other alternative assets. Trading cards or digital trading cards, or artwork, and we celebrate when somebody presumed smart comes in and pays some incredulous amount for a piece of art.
We celebrate when that Michael Jordan rookie card has gone up 700% in a year or less. And we don’t presume the people who are buying trading cards are just dumb investors who don’t know what they’re doing. In a zero interest rate environment where (there’s) access to buying assets, trades are going to happen.” - Mark Cuban, February 2, 2021
Mark Cuban did an “Ask Me Anything” on Reddit today. It was then reported that Cuban recommended the purchase of GameStop shares. The billionaire then went on CNBC to clarify that he did not recommend a purchase, but instead explained how he would respond to today’s trading if it was a stock he liked.
Cuban’s half hour appearance on CNBC today was interesting to say the least.
The quote above was one of several interesting comments Cuban made today. He describes a new investing paradigm among Gen Z and younger millennials as having developed different approaches for “how they look at stores of value and how they look at how assets are priced.”
He also noted that traditional valuation metrics may not work in the digital environment.
The interesting part is that the above quote (describing the environment) sounds very much like the description of asset bubbles and potential echo bubbles.
His comments sounded like a rationalization for the current speculative environment.
Cuban is no stranger to the markets and has been trading for decades. In the financial markets, Cuban is famous for not believing the hype during the internet bubble as he sold Broadcast.com to Yahoo! for top dollar turning himself into a billionaire.
In 2005, he explained the Yahoo hedge, “I sold the minute I was eligible to sell. At first, I bought puts on every index that I could find that included Yahoo!, as a hedge. I pretty much took every penny that I had to protect that position. It carried me over to when I could actually sell outright. I lost most of the money used in the hedge, but I was willing to lose all that money to protect myself until I was able to sell.”
Cuban is the man who knew better than anyone that the 1999-2000 environment was unsustainable and walked away with $1.5 Billion to show for it. Thus, hearing his rationalization about asset prices today is surprising.
Cuban has had a long held unique perspective on the stock market, referring to it as “basically a ponzi scheme,” driven by supply and demand.
Thus, the low interest rate environment is fueling the demand for assets. We would add that the Fed’s perpetual printing is creating an enormous supply of money chasing those assets (charts below).
The market's pricing mechanism is broken, and it is extending beyond stocks.
We believe investing is about positioning for the future environment, hopefully, the next environment one will encounter. After nearly a decade of Fed printing and zero or near zero interest rate policy, one can argue the environment may not change.
Regardless, paying “incredulous” prices for stores of value is likely a dangerous approach.
Recall that the store of value that is the S&P 500 was 40% lower 11 months ago. The environment, the behavior and the speculation are all consistent with a bubble. If you need one more anecdotal bubble sign, today Jeff Bezos relinquished the CEO role at Amazon. It was on January 13, 2000 that Bill Gates relinquished the CEO role at Microsoft, just prior to the March 2000 peak of the 1999-2000 bubble.
This is a Hedgeye Guest Contributor note by Michael O’Rourke. O'Rourke authors "The Closing Print", a close of day in-depth analysis of market activity which provides quality intelligence that "tees-Up" the next day’s trading. Mr. O’Rourke was a Portfolio Manager and U.S. Strategist at Marshall Wace Asset Management and served as Chief Market Strategist at BTIG. He began his career at the Spear, Leeds & Kellogg division of Goldman Sachs. He regularly contributes to media including: Barron’s; The Wall Street Journal; Business Week; Bloomberg Television and Radio; Fox Business Network; and CNBC. To receive The Closing Print, contact Mr. O’Rourke at firstname.lastname@example.org. This piece does not necessarily reflect the opinions of Hedgeye.