Bubble Cities
Covid-19 has forced cities worldwide into national and municipal bubbles to protect their citizens from widespread infection and death. So it got me thinking, can we take this one step further and design underwater bubble cities where the virus couldn't catch us at all?! I'm not actually going to be talking about underwater bubble cities (because that's both stupid and insane) but today's edition is about bubbles and cities, so read on for the scoop.
Micro Bubbles
There's been a lot of fear about market bubbles lately. Google search terms like "market bubble" and "stock market crash" have risen dramatically since January. This isn't entirely surprising considering how well equity markets have performed during one of the worst public health crises in the modern era. Mark Twain's famous quote, "history doesn't repeat itself, but it often rhymes," is very applicable here. While certain asset classes are definitely overvalued in today's economy, I don't think these markets pose a broader systemic risk, like the dot-com bubble or credit crisis of 2018.One reason bubbles can be so deceptive is that there is often a grain of truth behind their narratives. The dot-com bubble, for example, correctly anticipated the impact of the internet. Many of the narratives linked to today's bubbles may also prove to be correct. The best investors are able to capture some upside but reduce the risk associated with bubbles by identifying the narrative yet investing in a more diversified way. I'll give you a few examples of my strategies for capturing upside and limiting my downside in highly speculative assets.
SPAC
IPO/SPAC markets are the hottest they've ever been in the last two decades. The concept of using a SPAC to take a company public has been around for a long time and have generally performed poorly in the long-run, so what's different this time? The answer is likely, not much, so I'm reluctant to have a portfolio heavy in SPACs. But one thing I mentioned in the January issue was the opportunity to buy SPACs before their merger announcement (usually $10) and selling it after the announcement. This strategy worked perfectly with the SPAC $CMLF I bought near its cash value at $10 in December and sold after the merger was announced around $20. In the long-run, I believe the total SPAC portfolio from 2020-2021 will underperform the indexes over the next decade, but that doesn't mean there aren't small pockets of opportunity.
NFTs
Non-fungible tokens or NFTs is another topic I covered last year about digital assets. The NFT space has since exploded mainly from the success of crypto art and NBA Top Shot, both scarce digital assets hosted on a blockchain. NBA Top Shot is a digital trading card marketplace. Instead of trading physical cards, users can buy, sell and trade video clips or ‘moments’ of players. According to Dallas Mavericks owner Mark Cuban, NFTs in general, of which Top Shot is the first and a leader, could turn into a top 3 revenue source for the NBA over the next 10 years. This is exactly the kind of exuberance you hear in a bubble; hot takes based on no evidence, extremely unlikely to come to fruition. I think all of my readers know I am bullish on digital assets, but I think Mark is getting ahead of himself. Recently, someone purchased a 13-second Zion Williamson highlight for $100k, and a LeBron James highlight for $250k! This smells like the beginning of an epic bubble so I have my popcorn ready. It reminds a bit of Crypto Kitties, which became very popular in 2017 with some collectibles fetching over $60k at the peak of the market. Today, the price of Kitties has diminished significantly. Similar to the previous example, I'm happy to profit in the short-run from this irrational exuberance. I bought an index of NFTs called the $Whale token in November 2020 at $4, now trading around $18. I think owning individual NFTs is a risky business, but I love the idea of investing in the narrative in a more diversified way. A 400% profit in 4 months isn't bad either.
Cities Rethink Their Value Proposition
The remote workforce is here, and it's permanent thanks to Covid-19. Now that you can work from anywhere, and the shackles are off, you can live and work wherever you want. Do you prioritize the weather, or maybe access to nature, or a long list of other criteria? The point is in a remote world, you have infinite optionality, which creates more onus on the government to sell you on coming and staying. For the first time ever, the government might actually treat people like customers and not citizens. Frankly, they won't have a choice if they want to attract talent and investment, the two things that promote innovation. We don't have to look far for an example of what treating prospective inhabitants like customers look like. Francis Suarez, the mayor of Miami, believes that recruiting the right people can change his city's future. Suarez has been so aggressive in his recruiting pursuits that "moving to Miami" is now a meme. So far, 17 high-profile financial and tech firms have already decided to call Miami home, including Spotify, Goldman Sachs, and Blackstone, bringing thousands of high-paying jobs to Miami. The takeaway for me is that Mayors should follow Suarez's lead and act more like college football recruiters. But being a salesman only gets you so far. The most attractive cities of the future will appeal to the bourgeoning remote workforce. This group has a different framework for rating liveability. First, there are the basic necessities like access to health care, transit, and safety. But the next hierarchy of needs is the big selling point; good internet, access to nature, start-up friendly, and most importantly remote work visas.
Until next time,
Justin