Everything is a Valuation

+ my thoughts on hyperinflation

A valuation is an assessment of worth. It is the conscious or subconscious relationship between subject and object. Different subjects can value the same object in wildly different ways, such as the way you value a piece of artwork, or the way the market values your home. There does not always have to be a monetary component, for value does not have to be measuring in dollars. In relationships for example, one person can measure value in quality time, and another in physical affection. These things can not be translated into currency, but rather are their own currency unique to the subject’s perception. I don’t want to get too esoteric on the philosophy of valuations, I am merely trying to show that there are several different variables at play in the valuation equation: subject, object, unit of measurement, and perceived value. You can measure your love with $ETH, and your portfolio with affection, but let’s not get too wild or sociopathic. Let’s just consider a simple concept: everything is a valuation.

Markets are an aggregation of valuations, and as investors, it is our job to allocate resources based on our own perception in relation to the market’s. If I think the $SPY is directionally moving up long term, and it’s down 5% today, I’m going to buy the dip because the arbitrage between my valuation and the market’s is potentially a net win. This is the fundamental basics of economics down to the barter system.

Currently, almost all markets are screaming at all-time highs. The S&P, the Dow, Nasdaq, the Coin Market Cap of the entire Crypto universe. Everything is pumping like crazy and the perception is that there are going to be more and more people coming into this market as buyers, and thus the market will keep going up and up. But a valuation can only increase so long as there is someone there to pay more for it (or value it more) than you did. That goes for any type of asset.

The headlines right now are starting to talk about inflation. 6.x percent increase vs the normal 1.x yadda yadda. The criteria in which they are measuring is based off the Consumer Price Index which measures the value of a dollar vs a basket of goods in the economy. Food, gas, etc. This is how typical inflation is measured, but this is not your typical type of inflation. The money that has been printed and dispersed has not made it into the market in the typical consumable goods. People are not consuming more. They are saving, and they are investing in assets. More and more millennials are getting involved in not only traditional assets such as homes (which they can finally afford in their 30s), but they are also seeing how they have missed out on prior market booms and want to take some non-traditional routes to investing to avoid the busts that have become all too frequent in the traditional spaces. This is happening through the democratization, tokenization, and fractionalization of assets. Artwork, historically an asset reserved for the highest of income, has become an attainable asset through Masterworks.io. Fractional share of real estate can be purchased on spaces like Pacaso, Million Acres, Fundrise, and more. Robinhood has 23 million users able to buy fractional shares of stocks, commission free. This democratization is giving more people access to more assets than ever before, at an historic high-water mark of available cash and low interest rate. Almost a quarter of the total $USD in existence was printed within the past year or so.

Now let’s throw cryptocurrency into the mix. Why would someone who has experienced multiple stock market crashes in their short lifetime invest their new minted disposable income into something that may appreciate 10% a year if they are lucky. And for their reward of multiple years of 10% gains, eventually doubling their investment, they are hit with a debilitating correction due to some bureaucratic corruption or market manipulation beyond their control. These new investors want assets that are uncorrelated to this market they are losing trust in. Things that can appreciate 20% a year being stashed in someone’s vault like a Basquiat seem much safer. And if they want to gamble (which they most assuredly do) they aren’t going to place it in some stock on the hope they can double their money over 5 years, they are going to try to get in early on a coin that can go 10,000x. Who wouldn’t want to do that? The game theory here is going to be strong in the coming years.

To sum up the entire crypto market sentiment in a phrase: I ain’t here for a 2x..

So, about these all-time highs in the equity markets. Where is the money coming from? And what happens when people stop buying in? And where are we going to see the effects of all this inflation? Let me unpack these things one by one.

Where is the money coming from? Like I said earlier, everything is a valuation, and ATHs mean that markets are valuing the same things in a new way. Take for example Rivian, the EV company that just IPO’d and has a valuation of $110B when they are essentially still in the pre-revenue phase. How is this possible? Because the market is pricing in all the future (very high) expectations of returns, right now. That means that any further price movement is going to be dependent on something in the news that makes the outlook 20 years from now more appealing. That is a hard way to navigate the market. It is hard enough to predict what the next quarters earnings are going to be, but because investors have so much cash right now, and interest rates are zero, they need places to stash it, so they are betting on what they think the market is going to think about what this quarter’s earnings means about the 20 year outlook. Very meta, and exhausting.

 (quick aside – I hate that Facebook stole the word meta from us. We need a new word to describe the phenomenon of self-referentialism without having to clarify this has NOTHING to do with Mark Zuckerberg)

Moving on, the two richest men in the world, Elon Musk and Jeff Bezos, have just become sellers in this market. Each of them has sold off considerable parts of their portfolio in the past few months. Does this mean they are not bullish on their own company’s performance in the future? Almost assuredly not, but what it does mean is that they are bearish on how the market may perceive of their company’s value in the future. If Tesla is currently valued like it is making 100m cars per year, and they are only making 1m cars, what happens to the stock when it finally gets to 100m? There is no future when they can 100x that again and make 1b cars per year, so reality has to set in at some point on the horizon. The price settles, and growth slows. Likewise with Amazon, at some point the company will take over so many different facets of the economy that it will have to be broken up (AWS spinoff being the first domino to fall). To be clear, I do think Tesla should be valued much more than just an EV stock, it is an entire energy company, but the concept remains the same. The two richest men in the world also happen to be two of the smartest men in the world, and where are they putting their time and effort? Space. The place where the payoff is not a 100x in 20 years, but perhaps a 1000x in 50 years. We could of course invest alongside them with Blue Origin and SpaceX if it were not for the fact that they are both privately held companies. They are saving all these Xs for themselves.

(quick aside on private company valuations vs IPO and public markets – Over the past few years or so the valuations of private companies have also skyrocketed. A “unicorn” was a term coined to describe a private company with a valuation of over $1B, because it was so rare. Now there are about 800 unicorns in the world which gives you an idea how much money is pumping through the VC/PE markets. At each investment stage of a private company, from seed to Series A, B, C, etc. the valuation can go thousand of x before ever going public. This means two important things. One is that venture capitalists can get in at the seed round and sell their shares in the Series C and make hundreds of x return and millions of dollars off a company that likely has not turned a profit yet. Secondly, all this valuation pumping is staying in the private market, which is available to accredited investors only, and when (or if) the IPO comes, the public market gets to participate in a measly 10% bump on IPO day and track the blasé slow growth over decades. Same concept as a cryptocurrency, the potential returns are highest the closer to inception you get in.)

So, what happens when people stop buying in to the stock markets? And where does the inflation show its face? Well, the answer to the first question should be obvious. Growth stocks that the market deems overvalued are going to go down. And so, where does inflation show up? In all the other assets that have been invested in during the pandemic that I mentioned earlier. Art, real estate, but the big one is crypto tokens. The total crypto market cap in USD is now over $2 trillion dollars, or roughly 10% of the annual US GDP. In a place where 1000x is all too common, people are placing $1k bets and coming out millionaires, and they aren’t putting this money back into stocks. This money is still too concentrated to influence the consumer price index (one person would have to buy a whole lot of milk and gas all over the country to raise those prices). This money is being pulled out strategically to buy things like houses, pay for kid’s colleges, maybe buy a Lambo or two. The traditional things that inflate when the wealth is concentrated in the hands of the few. We have already seen housing, healthcare, and education costs rise exponentially over the past few years, especially when compared against stagnant wages, and these recent changes will likely continue at a higher pace. What we get now is something we will all likely refer to as hyperinflation. It is the unlocking of a new tranche or class in the economy which is even more unattainable. Right now we have pretty big differences between the 99% and the 1%, and recently more people are starting to notice the (just as big) differences between the 1% and the 0.1%. I am not talking about that. I am talking about the (even bigger) differences between the 0.1% and the 0.01%. Because while all of us millennials are getting our feet wet investing and making some nice money on exponential returns on crypto, people who are already wealthy are realizing the same returns. If Joe Schmo can turn his $1k into $1M, then Joe Millionaire can turn his $1M into $1B.

How does this really affect people? To start, probably not much. We all will still have the money to survive normally on our own, but this upper echelon just becomes even more out of reach. Were you on the cusp of moving into the 1%? Sorry, that’s middle class now. Do you think that $4k for a Louis Vuitton bag is expensive? Well, there are people making $50k a year in Los Angeles who still think it is normal to try and floss like that. Now that bag is going to be $40k, because that 10x difference is not going to be noticeable to those who can afford it. In places where you were “sort of” priced out of the market but could still overextend yourself and participate, you will now be “definitely” priced out of the market. I don’t care how superficial you are. If you are making $50k a year you are not spending $40k on a bag (although I am sure Los Angeles will prove me wrong). Slowly things of status will have to raise their prices to remain things of status. Gucci/Louis/Prada follow the same pricing parity as the gas stations that are across the street from each other. When one goes up, the others must follow. Even between industries we will see this trend. Steak and lobster, the ultimate status symbols when dining out may go up 4-5x for the same cut. Premium (but not luxury) items like Jordans might see a 2x going from $200 to $400, just to retain some of that status level. Slowly but surely any item that relies on its brand name for perceived value above its competition in the market it going to have to revalue themselves and increase prices. And what does that mean for the average consumer? Well, Kraft mac and cheese is going to be even more priced apart from the generic brand, and what’s more is that the generic brand will no longer have an incentive to deliver the same quality product that it was trying to compete with. It can then devalue itself (keeping is price relatively unchanged) by thinning out the pricier ingredients, which usually means some sort of chemical or preservative or generally artificial and not healthy flair to it. After all, there is still going to be a very large population of people that are going to need food, shelter, and education. And in the name of margin retention that means reaching an economy of scale with a cheaper cost of goods.

Everything is a valuation. How we value our time, our clothes, the way we are perceived, the cars we drive, the home we live in, our hygiene, our shoes, our work ethic, and talent. And it is up to us to decide how we allocate our capital. Do we choose to keep having the same perception of luxury goods? Of a “branded” college degree? Do doctors continue to choose profits of private practice over “do no harm”? Or do we change our collective perception and start to value things differently. Different schools can be developed at lower costs to teach the skills needed to compete for a job in the market. Underground brands of clothes that are locally sourced and handmade can supplant mass production of fast fashion and designer trends. Maybe someone could do something about healthcare..

Hyperinflation is almost a foregone conclusion. Whether it happens in 5 years or 15 years, it will come, maybe not in the way I have outlined here, but in some form or fashion and sector, it will come. And while this sounds preachy or canned, it will always be up to us to decide how we value things, and how we allocate our capital.