Malt Liquidity 36
Relative value is denominated by a functional liver
Deep Fucking Relative Value
A fundamental principle of any Buffett-and-Graham-ite is that “the dollar matters”. Every thicket of valuation, business strategy, and investment strategy is built off of optimizing “the value of the dollar”.
But what happens when the dollar doesn’t matter?
Financial journalists on average tend to exemplify “those who can’t do, teach” regarding speculation: their job is to report and not speculate like, say, a trader or a blogger (after all, credibility is dependent on accuracy of takes and interpretations - there is still skin in the game). A common pontification in the financial journalism space is whether “value investing is dead”, when the question really should be “what is value denominated in when cash is worthless?”
Take the absolutely ridiculous scenario of the Bank of Japan turning into a meme stock:
The surge in the shares, or subscription certificates as the BOJ refers to them, has baffled market participants. While the BOJ is unusual in being a listed central bank, the stock pays a tiny dividend and holds no voting rights. In fact, the central bank doesn’t even hold shareholders’ meetings. The stock traded at an all-time low just in January.
From what I understand, owning shares in BoJ is a slightly less pointless Green Bay Packers shareholder certificate.
Even though it is referred to as "common stock" in corporate offering documents, a share of Packers stock does not share the same rights traditionally associated with common or preferred stock. It does not include an equity interest, does not pay dividends, cannot be traded, and has no protection under securities law. It also confers no season-ticket purchasing privileges. Shareholders receive nothing more than voting rights, an invitation to the corporation's annual meeting, and an opportunity to purchase exclusive shareholder-only merchandise.[4]
Shares cannot be resold, except back to the team for a fraction of the original price. While new shares can be given as gifts, transfers are technically allowed only between immediate family members once ownership has been established
Why is this notable? Well, Japan is notorious for having decades-long ZIRP policy. And while the articles lately talk about the “success” of the policy, I tend to feel this is a mirage. An oft repeated axiom of mine is “subsidized artificially low cost of capital causes serious risk transferral externalities”, and it wholly encompasses the weirdness of something working just fine theoretically as long as people believe in it. If people start bidding up stocks for no reason in a country where the stagnant currency has been culturally reinforced for decades, there is a worrying shift away from the formerly ironclad mentality that “cash value matters”.
Human beings are beings of pattern, however. Post-hoc rationalization appears in every facet of normal cognitive wiring because humans are generally terrible at dealing with meaninglessness in any other way. In other words, the value in things does not disappear, but rather the denomination of it might shift.
Currency obviously is not meaningless. It pays for your taxes, your bills, and any other cool stuff you might want. However, if you already have everything you want, to an extent, what’s the value of holding cash? Certainly, you can invest it to make more - when the value of the cash is immaterial, volatility risk becomes asymmetric (aka getting blown out just means you have to stop playing), hence why everything is speculated on from crypto to Pokemon cards to shoes. But what do you measure the return in? If you don’t particularly care about the cash value (bear with me here), denominating your return as a % of cash really doesn’t make much sense. It’s a high score in a video game rather than an asset materially impacting your life.
Take the NFT, for example. Comparing buying an NFT to owning a baseball card isn’t exactly correct - the scarcity of the baseball card, no matter how meaningless you find it, is an actual property of the underlying itself, while an NFT provides no scarcity regarding the underlying itself; it’s synthetic. Owning an NFT really means nothing in and of itself - after all, blank pngs devoid of pixels and lots of pixels are going for multiple ETH (ignoring the fact that there’s probably a lot of disguised flow from a known/owned cold wallet to give the image of volume - see TopShots). But if we’re denominating the value in the cash value of ETH, I think we’re missing the point.
This ties into a core criticism of crypto, where people smugly say “well what do you cash your crypto gains in other than currency?”, but here’s the counterpoint: what if we consider “meaningless transactions” as realizing crypto gains in a relative value sense denominated in clout? I am reminded of the phenomenon on the early days of the app store of “I Am Rich”, a predecessor to the meaningless NFT in that there was no value other than showing you could set money on fire through having the app. Likewise, trading ETH for NFTs of blank pixels or whatever could really just be a way of showing to people that you have a lot of ETH to spare.
But - technically speaking - your transaction remains anonymous until you “realize” it by showing off that you’re the purchaser. Thus when the artist tweets about you and it gains impressions, this is in essence realizing your ETH gains in terms of temporary clout - and when you reveal yourself as the purchaser, you complete the redemption.
Those tweets probably had a hundred K or so impressions and probably sparked plenty of discussion - I know I discussed the “relative value” concept of NFT transaction for a few hours after seeing those tweets. Isn’t this essentially a direct transaction from ETH to CLOUT rather than paying USD for “promoting” a tweet? And who actually looks at promoted tweets anyway?
The idea of realizing gains in clout scales relatively well too - while investment banks only care about cash,
U.S.-listed special-purpose acquisition companies, or SPACs, raised $82 billion in 2020, a more-than-sixfold increase from the year before and a figure greater than all of the money previously raised, according to Dealogic. They even attracted a star-studded group of backers, ranging from basketball legend Shaquille O’Neal to former House of Representatives Speaker Paul Ryan.
Banks find buyers for a company’s shares and backstop the stock price. In return, they typically get a fee of 2% of the money raised in the initial listing, then another 3.5% when the company completes its deal with the target.
the SPAC itself is the promoter cashing in on their clout to gain implicit stakes in the companies they reverse merge with. And obviously I have written about the Elon “north star” effect, which turned TSLA into a tradable Patreon subscription.
On a totally unrelated note, here’s an NFT for an image of the edit copy of this post. I swear, people in the crypto space primarily value things relatively, not in dollar amounts.
On that note…