By Tim Courtney, Chief Investment Officer
As of this writing, a cryptocurrency called Fartcoin sits at a $1.31 billion market cap, roughly quintupling since December.1 A banana duct taped to a wall sold in November at a Sotheby's auction for $6.24 million.2 In addition, at the end of 2024, Palantir—capitalizing on a wave of AI tech enthusiasm—traded at a price-to-sales ratio of more than 100 times.3
This is just a small sample of a kind of heedless fervor spilling into many corners of the market. Presumably, the people buying the “assets” listed above believe their prices will rise over time. Is that investing, is it gambling, or is there even a difference?
Here’s how we think about it. We divide assets into three broad categories based on what they do for their owners.
First, we have what we term “investment assets.” Investment assets generate cash flows for their owners. These can be earnings from stocks, interest from bonds, rent from real estate, royalties from oil/gas, harvest sales from timberland/farmland, etc. The expected return from investment assets depends on expected cash flows and their level of uncertainty.
The second category is “use assets.” These assets generate utility for their owners. For most people, the primary use asset is their home, but also included in this category are cars, furniture, clothing, and raw commodities such as copper, wheat, and oil. Their expected return is inflation less any depreciation.
Finally, we have “speculative assets.” These are all other assets that produce neither cash flows nor utility. Examples of this asset type are artwork, antiques, collectibles, jewelry, and currencies. Fartcoin, the banana art, and stocks that trade so far away from their cash flows are in essence speculative assets. While someone might buy assets like these just because they have an affinity for them (like artwork), there is no expected return for these assets. Buying these assets with a goal of selling them at a higher price later is speculating.
The number of people making speculative bets on assets like these and the amount of money at risk has increased greatly over the last several years. The huge amounts being directed towards speculation suggests that monetary (the Federal Reserve) and fiscal (government) policy are still loose—i.e., there is too much money and liquidity in the system. Stubborn inflation also suggests this is the case. While the Federal Reserve has been lowering rates recently, inflation and increased speculation mean rates may actually need to begin rising.
The fervor for speculative assets is growing. But this is something separate from what we would call investing. If you have any questions or thoughts on the rise in speculative investing, please reach out to your Exencial advisor and we will make time to talk.
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