An Obvious but Easy-to-Miss Danger Sign in the Markets

By Herb Greenberg

Friday, January 14, 2022

Editor's note: The Empire Financial Research offices are closed on Monday in observance of Martin Luther King Jr. Day. Look for the next Empire Financial Daily in your inbox on Tuesday, January 18, after the Weekend Edition.

When it comes to this market, everybody wants to know... which inning are we in?

Many folks think they know – nobody really does for sure – but there is one danger sign that crops up at market tops that is so obvious it's easy to miss...

I hadn't thought much about it and certainly hadn't put two and two together until I saw an article in the Financial Times earlier this week by my longtime friend, Peter Atwater. Peter is an adjunct professor at William & Mary, author of Moods and Markets: A New Way to Invest in Good Times and in Bad, a contrarian's contrarian, and an expert in confidence-driven decision making.

Peter calls this phenomenon "extreme abstraction." Or as he put it in his opinion piece...

The rocket ship emojis and popular trends that included trading in non-fungible tokens of cartoon bored apes were manifestations of a deep-running trend towards extreme abstraction. From SPACs, to cryptocurrencies, to NFTs, to Web3 and the metaverse, what investors wanted most were things that, well, were difficult to explain.

Think about it... if you have a Twitter feed with an investment bend, these new acronyms or investment concepts started springing up out of nowhere until they became ubiquitous... seemingly getting mainstreamed overnight in the financial press.

Yet, even today, how many average people really know that 'SPAC' stands for 'special purpose acquisition company'?

How many of these folks know what cryptocurrencies really are... or how "NFTs" – non-fungible tokens – really work?

And don't even ask them to define what the metaverse is...

While we all knew the market was nuts, Peter's concept of the extreme abstraction of it wasn't apparent while it was happening – not even to him. And he didn't realize it until a few months ago, while he was working on a new book on confidence-driven decision-making. Or as he told me...

I had this "Duh!" moment that, of course, it was all about whether things were concrete or abstract. And then when I looked at what investors buy at different points in confidence, it all fit together.

Which gets us to where we are now. As Peter wrote in the Financial Times...

At lows in confidence, investors crave certainty. They buy shares in the safest companies, those with tangible assets, "real" earnings and cash flow, if they buy equities at all. On the other hand, at peaks in confidence, investors have an insatiable demand for possibility. They buy dreams at the highest price...

The net result of the high confidence is startling: investors are now committing the most money to the most abstract opportunities in history while paying the least amount of attention.

Blind investing is one thing, but the extreme approach by investors cautions that we may have reached sentiment peak for the record books over the past year.

Already hidden behind the move higher in the broader major stock indices, we have seen a steady retreat from extreme abstraction.

Look no further than Google Trends, which tracks Google searches...

In the chart below, you can see the low search interest for "SPACs"...

Search interest for "NFT" is starting to lose a bit of steam...

Ditto for searches for "metaverse"...

Even search interest for "bitcoin" has kind of bitten the dust in broad appeal...

Of course, my last Google Trends search on bitcoin a year or two ago – which showed it had fallen out of favor – was just before one of its big bounces... when it was trading at much lower levels. It trades for more than $40,000 today.

That's why even Peter is realistic in his assessment of what happens next...

As he explained in his always entertaining Financial Insyghts newsletter...

Investors' retreat from abstraction and into things increasingly more real has hit a crossroads. The question now is whether what we've seen so far this week is a bear-market bounce or a beginning, with new record highs to come.

Given the wild behavior we saw at the starting point of the trend reversal, you have to ask yourself could things get even wilder than that? Could we see a GameStop 2.0 that is a true showstopper? That is what it will take if we are going to see new highs.

Having been surprised repeatedly by investors' willingness to consider extreme abstraction anew over the past several years, I have to admit that I am open to the idea. The current ashes are ripe for a resurrection of folks like Cathie Wood. This could be her July 2019 Elon Musk moment.

If that is the case, what is ahead will resemble the Roaring 20s on crack cocaine – even the excesses will have excesses.

If that happens, which Peter goes on to caution is unlikely, you can only image how extremely abstract things will get. At least this time (hopefully), we'll know it when we see it.

As always, feel free to reach out via e-mail by clicking here. And if you're on Twitter, feel free to follow me there at @herbgreenberg. My DMs are open. I look forward to hearing from you.


Herb Greenberg
January 14, 2022

Whitney Tilson

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About Berna

Berna Barshay is editor of Empire Financial Daily and a contributing editor to the Empire Stock Investor and Empire Investment Report newsletters.

She graduated cum laude from Princeton University and earned her MBA from Harvard Business School in 1997.

Following her graduation, Barshay spent 20 years on Wall Street. She began her career in equity derivatives at Goldman Sachs and later worked as a buy-side equity analyst at Sanford Bernstein, where she covered global consumer cyclicals and conglomerates.

Later, Barshay spent five years working as a portfolio manager of the Ingleside Select Fund, a long/short fund with a focus on value and event-driven stocks. She later was a portfolio manager at Swiss Re, where she managed the Consumer long/short book on the equity proprietary trading desk.

She has additional experience as a buy-side analyst at several long/short hedge funds – including Sky Zone Capital, Metropolitan Capital, Buckingham Capital, and LaGrange Capital – where she primarily covered consumer and technology, media, and Internet stocks in the U.S. and Europe, with some additional work in financials and energy.

Barshay is a fashion enthusiast, a pop culture addict, obsessive indoor cycler, and prolific social media user. She currently lives in New York with her husband, daughter, and three dogs.