I know I drone on about currencies all the time. I just can’t help it. Stock prices are measured in this unstable unit, the value of which is based on faith. It’s just that a lot of investors focus on (say) stock prices, P/E ratios, EV/EBITDA figures, PEG ratios etc. without any reference to the measuring stick against which the stock is measured. It has puzzled me how the market can value companies like Peleton, or $GSX, or Casper Sleep, or $NIO, or $WKHS so richly when the almost certainly can never generate income sufficient to cover their cost of capital (which, in any case, is as low as it is ever going to be, at least under an economy which is in any sense vaguely normal). The answer is that money is flowing into these stocks in volume, and it’s being created by commercial banks in response to signals from the central banks. Yes, I know, I know. This has been said over and over again, and yet there have been no consequences.
Well, it seems that I’m not the only one who thinks that something is rotten in the state of western economies. None other than Kenneth Rogoff has said, in Project Syndicate that the wheels are close to falling off the bus, that the tottering current account deficit of the USA will not grow indefinitely before toppling. He also points out that when this happens, the consequences will be very serious for all of us.
Mohamed el-Erian has been warning for some while that we are in bubble territory. Really, most of his tweets are on the same theme, but this is a typical one:
From the @FT.— Mohamed A. El-Erian (@elerianm) November 13, 2020
Remember, these are #markets that, supported by favorable technicals and liquidity-anchored conditioning, have just wanted to go up.
The supporting narratives have been made to fit the price action rather than the other way around.
#investing #investors #stocks pic.twitter.com/EKE1laliMX
This of course raises the question of what is a suitable yardstick? Gold is the traditional one, as the supply schedule is fairly stable, although the demand schedule, like that for any other unproductive asset is not. A basket of consumer items is the traditional way to measure inflation, but assets have a very different demand curve to these. To an extend the flows may be based simply on fashion. The trend towards passive investing has certainly tended to favour liquid securities such as large cap stocks and government bonds. The demographic profile has too. Baby boomers have a lot of assets, and they are reluctant to sell them while they are getting a low income from them. Especially when most western governments tend to tax capital much more lightly than income, supposedly to encourage investment. It is a mere coincidence and a convenience that the finance sector benefits a great deal from such an asymmetrical tax treatment.
Another, recent, unit of account is bitcoin. This, by design, has a totally inelastic supply curve, which therefore makes its price a perfect function of demand. Certainly, many investors do not trust governments to keep a lid on the supply of money as much as they trust computer code written by a totally anonymous hacker to constrain the total number of bitcoins in existence capped. It must be depressing for Rishi Sunak and Andrew Bailey to think that they are trusted less than someone with a made up name (Satoshi Nakamoto) who may well be dead, or at least on his own island in the Caribbean drinking himself to death.
I read somewhere that 80% of people who had ever acquired bitcoins were showing a profit now. Maybe this is worrying.
From a technical point of view, I’m not a buyer of bitcoin. It’s like saying that bitcoin is digital gold. Yes, but digital gold, like a digital recording of a song, can be perfectly copied, over and over again. The thousands of alt-coins mean that the supply of cryptocurrencies in aggregate is unlimited. Of course the hodlers say that
BTC IS THE TRUE PATH TO NIRVANA! BTC HAS BEEN THE CHOICE OF EDUCATED AND IGNORANT ALIKE FOR CENTURIES! BTC WILL NOT CORRUPT YOUR PRECIOUS BODILY FLUIDS!! BTC IS THE STANDARD CRYPTOCURRENCY! BTC MAKES THE SUN SHINE AND THE BIRDS SING AND THE GRASS GREEN!!