The chorus of individuals who are in a state of speculative induced euphoria is growing louder. It is a chorus as loud as any I have witnessed, including the late 90s dot com bubble.
In those days, I had friends and relatives calling me to discuss stocks like QCOM and JDSU. I knew of a prominent physician who started trading index futures, putting a significant percentage of his net worth (he would later lose his home) into a trading strategy that was based solely on the markets continuing to go up. I would go to parties and the sole topic of discussion would be the amount of money individuals were making in the technology boom.
2017 has been much the same, except that we are now dealing with an unregulated, non-traditional asset class, in cryptocurrencies, that has attracted close to a half trillion in investor assets over the past 12 months. An investment that is a prominent illustration of complete disregard for any of the key tenets of investment, whether value, liquidity or viability. Investors are unknowingly playing musical chairs, while comforting themselves with axioms like, "it's the future."
It doesn't stop at cyptos, however. The speculative based mania has started to devour the minds of investors to the point that they believe volatility is a relic of the past, creating a surge in assets based around profiting off of the absence of volatility.
And then there is, of course, the popularity of the FANG names. If you weren't invested in FANG names in 2017, or perhaps some of the satellite names in close orbit to FANG, you had tickets to the underperformance theater, where crickets are your stars of the night and moldy cheese is the entree du jour.
The theme for 2017 in the markets wasn't anything but get to stampeding with the herd or get to having your head stomped into a curb. If you refused the beck and call of the voracious crowds then you very simply sucked. If you had any sense of contrarianism built into your strategy, you missed. It was a trend followers market in the truest sense of the word, eliminating any and everything else from contention for performance.
Markets inherently prey on consensus. They have for literally thousands of years. Human nature doesn't allow for the dynamic to change because psychology cannot converge along the same lines without destabilizing the asset base. While investors are celebrating their victories and bragging to friends, the foundation of the investment is literally crumbling beneath them.
We are now deep into the crumbling stage. Consensus thinking will be punished, as always. The only question from here is how swiftly the punishment will be delivered and how severe it will be when it arrives.
In the meantime, mean reversion strategies, including value, have been discounted to the point of absurdity. The viability of such strategies questioned with a conviction not seen since Warren Buffet was widely considered an idiot in the late 90s.
Question everything you see in the markets presently because a vast majority of it will turn out to be a consensus delivered illusion until the point a recalibration and rebalancing of investor psychology takes place that allows for the next phase forward.
