18 Mar 2021 NFTs, SPACs, WSB, and the Problem of Boredom
There’s a lot going on in the world of finance right now: Non-fungible tokens (NFTs) are dominating the conversation in the most nonsensical way, Bitcoin is ravenous, SPACs are cashing the blank checks that investors have handed them, awful stocks have seen huge volume and price increases because of chatroom junkies, real estate markets are moonshotting, and even silver went on a wild ride. It’s enough to make you question the value of a plain old stocks-and-bonds portfolio.
Cullen Roche wrote something earlier this week on just that question, which I won’t bother trying to improve on:
I’ve written a good deal about how all of asset allocation is a “temporal conundrum”. In other words, we all have specific time horizons on certain liabilities – your rent, your mortgage, your credit card bill, etc. And the key to good financial planning is matching those liabilities with certain assets that are very likely to provide liquidity for those future expected expenses. Your biggest asset is your labor and the predictable income stream that it generates for you over time. But you also need a portfolio of other assets that are likely to provide you with supplemental cash flow streams over time. Especially if you ever want to retire.
This is why stocks and bonds play such an important role in your portfolio. Most of us won’t generate predictable cash flows from owning our house, cars, art, Bitcoin and other non-cash flow generating assets. So stocks and bonds play a crucial role in asset allocation specifically because they provide those predictable cash flow streams. While markets may not be perfectly efficient it’s actually quite rational that these two markets make up the vast majority of the global financial markets – investors like to own them because they generate somewhat predictable expected returns over specific time horizons.
The shorter version of Cullen’s analysis is basically this: Your future will have required cash outflows, and you have to make decisions with assets today that will line up future cash inflows to those outflows reasonably well. That’s the problem of asset allocation in a nutshell. And none of the things I listed above—NFTs, Bitcoin, SPACs, penny stocks of failing companies, your house, silver and gold—none of those things have dependable cash flows. They mostly don’t have any cash flows (except the ones flowing out)! So that’s why we use high-quality bonds and a widely-diversified stock portfolio.
But what I really want to get at today is not simply why we hold stocks and bonds and why we don’t recommend so-called “alternative investments.” Instead, I want to address the elephant in the room: This is all. So. Absurd.
I don’t mean this in a “Get off my lawn!!” sort of way, like I feel threatened by all of these insane acronyms and terms (just look at it: Non-Fungible Token—by the time you get to the end you might as well be at the bottom of a Lewis Carroll novel). No, I mean that so much about this time is objectively, certifiably, absurd. If Carroll trafficked in the genre of literary nonsense, then we have a whole slew of folks trafficking in the genre of financial nonsense.
And you know what, I am completely in agreement with Matt Levine’s basic intuition on all of this when he coined his “boredom markets hypothesis” early in the pandemic. At the root of much of this absurdity is simply boredom. People with time and without much responsibility have been stuck at home for over a year, they may have even gotten some extra cash from the various rounds of stimulus, and they’ve turned to absurd things like Non-Fungible Tokens because they are in some strange sense of the word, “fun.” The idea of throwing money into a proverbial toilet of absurd financial markets does not sound very fun to me, but then again, I am not bored.
The problem I suspect for most of you reading is not boredom either, but rather seeing the nonstop attention being paid to these boredom-induced absurdities and wondering what in the world it all means for regular people trying to make good financial decisions. Trying to set aside assets today to fund future cash flows. And to you, I say, now more than ever, if you need permission to turn off the firehose of financial news, I am granting it. I am always happy to grant this permission because I’ve yet to see the CNBCs of the world do much besides cover the lowest common denominator of fear. But especially now, please feel free to turn it off. There are real things that need your time and attention, where you can actually affect change and do something meaningful, both in your finances and in the broader world in general. Worrying about these fads is not one of them.