Fear and Loathing In 2020

This morning I was thinking: what would Hunter S. Thompson have to say today? Here’s what I imagined…

We made it. The year is over. It has become more than cliché to say that 2020 has been a crappy year. So much so that I get nauseous every time I hear some utterance to that effect. If 2020 has been anything, and it’s been a lot of things, it has been the year of herd mentality. We may not have reached herd immunity, but we sure reached herd behavior. Originality, with fewer and fewer friends, took the last train out of town this year, leaving us surrounded by invading hordes of zombies of banality. Rather than devouring our flesh these zombies drive us insane with inane cliches like “Now, more than ever” and “We’re in this together”.

So, today I take my stand. I’m on a crusade to push back the tide of the obvious, the inane and the boring. Today I pronounce that being early is not the same thing as being wrong. That it is not a Sisyphean existence to push back against the prevailing tide, but rather we may find that some glory resides outside of the pack mentality. This fight is hard. This fight is dire. The original coastal elite, Alexander Hamilton, may have uttered the words, “The masses are asses,” but he may not have realized that within each of us resides the “mass” or the “ass” whichever you prefer. We are pack animals and thus enjoy conformity, so this fight is not just external but internal as well.

But external forces are powerful, and their power is growing. My access to information in this world is getting narrower and narrower, as just a handful of tech companies now control nearly all the information I consume. My fight will not be easy. Tech companies have one god and that is the god of optimization. Optimization may seem like a harmless form of worship, but carried to its extreme—and optimization, by nature, always gets carried to an extreme—is fascism. So, take head, this fight is of immediate consequence. Optimization in the age of information means “they” feed me what I want to hear. If I am bombarded with information to which I’m already prone to agree then how can I ever believe in anything else. Fascism, in our modern world, will not come in a form in which we expect it--just like terrorist will never hijack a plane with box cutters again because we know the outcome—rather it will come cloaked in the guise of assistance and will carry a name like Alexa.

So, today as Netflix guides us in our entertainment choices, as Amazon kindly helps us make consumer choices, as Facebook optimizes our friendship choices, as Google helps us source our information, and as Apple lords over all our other life choices we should no longer wonder how all wealth aggregates at a narrower extreme. Maybe Hamilton was right—I am what I sit on.

I’ve digressed long enough, and alas, this is a financial/market related letter so I must now shift to what one has to do with the other. What was my point after all? Oh yes, thought conformity and the impact on financial markets…

It struck me the other day that the demand curve for financial assets is the inverse of the demand curve for goods and services. If you remember back to your high school economics class, we were taught that as the price of a good or service rises the demand for said good or service declines. However, with financial assets that does not seem to be the case. Perhaps this is somehow embedded with the reality that an asset only has value if it has the perceived ability to appreciate. Thus, the more it rises the more enhanced its perception to appreciate becomes, creating a feedback loop which spurs more and more demand. Traditional goods or services exist in the world of utility. A bicycle is only useful as a means to get somewhere. It competes with other forms of transportation. As the price of one rises the lower price option becomes more demanded. Financial assets, and stocks in particular, don’t seem to live in this world. They live in bizarro world where the demand for a stock rises as its price relative to its peers rises.

Which brings me back to my original digression. Our modern information hose, like the demand feedback loop for stocks, is currently optimized to feed us what we want to read/hear/believe. We are bombarded with positive reinforcements about buying stocks. They become more and more attractive the higher they go because they are giving us what we want, or the reward feedback. Just like we are more apt to follow the lead of the next item on queue with Netflix, Amazon, Google, Facebook, or Apple because they are giving us what we want. Each one taking us down a dystopian path. For the markets, as valuations climb, as rock-bottom interest rates push us all into riskier and riskier asset choices, the market creeps closer and closer to an inflection point.

Final Note

As a final aside, David and I would both like to thank you for your support and patronage over the past year. It is always a pleasure serving and working with you and look forward to a more open environment in 2021. Happy New Year! 

Thanks for reading,

Zach and Dave  

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