By Jared Dillian


I’ve been either investing or writing about investing for 22 years, and I’ve seen a lot of weird stuff, but nothing as weird as Dogecoin, the lighthearted dog-themed cryptocurrency that was created as a joke. It’s now valued at more than $50 billion, exceeding Ford Motor Co. and many other companies with extensive histories. It’s not the first worthless financial instrument that I’ve seen soar to great heights—it happened to dot-com stocks at the start of my career—but the first one intentionally designed to be worthless. Elon Musk thinks this is funny. I don’t find the humor in it.

These are strange times. Stock market operators who have been around for a few cycles know the sentiment implications of something like Dogecoin: time to grab the canned goods and head for the bunker. As a professional investor, common sense dictates that you should be hedging or de-risking, but there seems to be no end to fiscal and monetary stimulus. As former Citigroup Inc. Chief Executive Officer Chuck Prince infamously said in 2007 right before the subprime mortgage bubble burst and caused a financial crisis, the music is still playing, so you have to keep dancing.

The comments from Prince are more profound than many people realize. Pretend it is 2007, and Prince has perfect foresight of what is going to happen to the housing market — it is going to crash and blow up the economy. Can he realistically stop Citigroup from the lucrative business of lending against residential real estate? Can he make that case to the bank’s board of directors when every competitor is making haystacks of cash in mortgages? Can he make that case to employees, whose compensation depends on the money raked in from mortgages? Even a bank CEO is powerless to stop a powerful trend in motion.

No one person has the ability to influence the market in a significant way. Prince couldn’t stop the housing bubble if he tried, just like former Federal Reserve Chairman Alan Greenspan’s “irrational exuberance” speech in December 1996 didn’t prevent equities from continuing to rally to new heights. The reason why is because of reflexivity, or the idea that sentiment feeds into price, which feeds into sentiment, which feeds back into price in a feedback loop. There’s an uptrend in asset prices, we’re powerless to stop it and it feels terrible because we know this has little to do with economic fundamentals.

The Fed has exabytes of data and hundreds of PhDs on staff, but it has zero ability to predict recessions. Institutional investors do a little better, but not much. After I escaped Lehman Brothers Holdings Inc. in 2008, I began consuming a lot of research. I read on one popular investment blog that the electronic measures of consumer price index — MIT’s Billion Prices Project and the Google Price Index — started to show deflation taking hold just hours after Lehman’s bankruptcy, which suggested that the financial crisis wasn’t priced in and was a complete surprise.

This has enormous implications for markets, in that we can’t predict outcomes; all we can do is evaluate the risk, reward and expected return. There were a handful of people who identified the presence of a mortgage bubble, but few had a big enough imagination to predict the consequences. It was worse than anyone expected, except for a handful of newsletter-writing permabears. The people who were most caught off-guard were the experts.

So where are our blind spots today? How could it all go wrong? When I look at Dogecoin, SPACs, Tesla Inc., GameStop Corp. and other signs of a bubble, the one thing that ties them all together is interest rates. If rates rise, these trades will implode as leverage is unwound throughout the system. One could make the argument that higher rates contributed to the bursting of the dot-com bubble. This time, rates probably wouldn’t have to go as high to cause damage. We got a small taste of that a few weeks ago when a spike in long-term bond yields caused a nasty bout of underperformance in the shares of technology companies.

Still, something seems off. Speculation is everywhere, and when that happens consequences usually follow. We don’t know if we’re going to have a garden-variety correction, like the hundreds throughout history, or if it marks the start of something more serious, like the handful of damaging bear markets we have experienced in the last 100 years. A lot of people made fun of Chuck Prince for his comments about having to keep dancing while the music is still playing, but it was unintentionally sagacious in a way that would make Yogi Berra proud. The music is playing, and you must keep dancing all while hoping that you are nimble enough to get out before it is too late.