Monday, December 21, 2020

Bubble Bubble Toil And Trouble?

 Or maybe not.

So recently there has been a lot of buzz that we may be seeing a variety of speculative bubbles in the US and indeed world economy.  Many asset markets have risen in the last few months, with several of them either reaching new highs or getting close to doing so, with some of them rising very sharply quite recently, with all of this making many eyebrows rise to noticeable degrees and mumble about possible crashes, which could well happen in any of these markets. But probably not in all of them.

One is of course the US stock market, which has hit new record highs recently for most of its indices, with the Dow in particular making headlines when it passed 30,000, where it still is, if not at a record high level at this very moment.  It is ironic that President Trump spent so much time and effort focusing on the stock market, apparently engaging in stupid and ultimately deeply deadly policies regarding the pandemic out of a silly effort to affect favorably almost daily stock market movements.  People were not to be told how serious things were because, wow, the stock market might go down tomorrow and his reelection chances would be damaged!  Well, of course when how serious things were finally became clear in March, we did see a massive plunge of world stock markets, but a combination of Federal Reserve policy actions and a fiscal stimulus, along with the passing of the first wave of the pandemic, led the markets to recover quite rapidly from their horrific fall.  They generally continued to do not too badly even as we had another increase in the pandemic in the summer, which was probably just the spreading of the first wave into parts of the country that did not get it in March and April, especially parts where governors followed Trump in not enforcing masks and social distancing.

Of course it is probably the case that what has driven the most recent surge, including the passing of the 30,000 Dow barrier, has been driven by good news about vaccines becoming available, with this providing hope for a more solid recovery of the economy sometime next year.  However, much as Trump has whined that he deserves credit for all this (and he deserves some) and that if only those naughty companies had made their announcements two weeks earlier he would have gotten reelected, well, the real proof of the pudding is that stock market began moving up sharply in the immediate wake of the election with the word that Biden had won, before the announcement of the Pfizer vaccine, which led to Trump engaging in all sorts of tangled efforts to claim credit for that.

Well indeed the economy probably will improve more solidly eventually next year, and while price/earnings ratios are somewhat high, they are not in territory wildly out of line with what we have seen in more recent times, with in fact profits up substantially, a trend that predates Trump becoming president, although he certainly tried to implement policies to make them go higher.  In any case, while we may not see the stock market zooming all that much further in the near future, there is not an obvious reason to expect some sort of major crash ("corrections" can always happen), so, frankly, the stock market at least does not look wildly bubbly, despite having gotten to such high levels.

Gold has gotten some attention as it has flirted with old long time highs over $1900 per ounce.  It is just below those levels, and could yet go above them.  I have never felt able to explain gold prices very much, and we have seen bubbles in it in the past.  The funny thing is that much commentary on gold has been downplaying it as not performing all that spectacularly, given developments in other markets, including the stock market.  Of course supposedly gold goes up in times of uncertainty or fear of inflation.  And while there is still uncertainty, the appearance of vaccines seems to provide some optimism in general, and not too many are taking seriously a threat of reignited inflation.

Of course the other market that people are comparing gold to, with some claiming it is replacing gold, is cryptocurrencies, most especially bitcoin.  This has indeed surged dramatically recently and gone to more noticeably new highs, breaking through the old clearly bubbly high above $19,000 to surpass $23,000, with it still over $22,000 at the moment.  Other leading cryptos have also moved way up, including Ethereum and XRP, if not quite as dramatically as Big Player bitcoin (btc).

So these have been far more volatile in the past decade than stocks or gold or even oil for that matter, which has also moved up recently from about $40 per barrel to about $50 per barrel, not particularly bubbly.  And unlike any of those btc looks to be almost a pure bubble anyway, with no clear fundamental.  To the extent there is one it is use of btc by criminals to finance their activities covertly, which is certainly something real. But it is not at all clear that the demand for bitcoin for that has obviously expanded.  Ethereum and XRP both have clearly fundamental uses, the former allowing for contractual operations between firms even as that does not seem to have happened much yet, and the latter reportedly being used between commercial banks for settlements, although without its use expanding beyond that.

What seems to have driven this recent price surge in btc and other cryptos have been rumors and reports of central banks possibly establishing their own digital currencies, with other possible ones such as still-in-process Libra possibly appearing. These may or may not happen, but the funny thing is that if they do it seems to me that they would block any chance of bitcoin in particular becoming some sort of general international real currency, the "new gold" some claim it is. They would be the serious cryptocurrencies, not bitcoin, which would remain for use by criminals and the occasional coffee shop in this or that hipster haven.  I do not see these reports as providing some real foundation for a new higher fundamental for bitcoin.  But I do not know what is in the minds of the main traders in it who are reputedly in China and North Korea.

The final item that has been surging has been real estate in the US, which seems to have taken off quite dramatically in several parts of the nation since the pandemic struck.  What is odd about this is that in some major urban areas rents are down, reflecting many people fleeing to more rural or suburban areas to escape the pandemic.  But somehow prices in many areas are rising, with price/rent ratios thus rising.  Some of that may be due to record low mortgage interest rates, but these in turn are perhaps a bit mysterious as underlying interest rates have not moved all that much even as the Fed has maintained an expansionary policy, with certain monetary aggregated rising sharply.  

So, I guess a bottom line I see is that the most bubbly of assets look to be cryptocurrencies and real estate, with stocks and oil not especially so, and with gold perhaps in between those other two groups.  But, of course, who knows?  I may well prove to have all this quite completely wrong.

Barkley Rosser


Kaleberg said...

If you've been doing any investing in the last 30 years, you've probably noticed that just about EVERY investment class asset has gone up in price. The way it works is simple. Suppose an investor decides that some asset has gotten "overpriced", that is, they feel for whatever reason including boredom that it is time to sell it. So they sell it. Now they have money. What are they going to do with that money? If we had a more evenly distributed savings curve, they might spend it, perhaps on a new car, a house, an education, a trip or a Christmas blowout. Unfortunately, most wealth is owned by relatively few people, so odds are they already have money for cars, houses, education, travel or blowouts. The money they have invested is most likely wealth on top of what they need for a comfortable and then some life style.

What are their options? They can leave it in cash or put it in a bank for a negative return. Alternatively, they can buy some other asset with it. Since every sale is associated with a buy, prices should be stable, except for the fact that many assets provide a positive cash flow. Even a small positive cash flow means that there are more buys than sells, so prices will rise. When a cash flow stops, a particular asset may become less valuable, but while there are assets with zero cash flow, there are no assets with negative cash flow.

That means the prices of assets that rich people invest in will continue to rise. Sure, different kinds of assets will fall in and out of favor, so prices will rise at different rates, but overall, the stuff rich people buy to store value keep getting more and more expensive. The prices of some assets might drop for a few weeks or years, but they'll come roaring back, and they have nothing to do with any intrinsic "value" of the asset.

I've been investing since the 1970s, and I remember the crash of 1987 and the rapid recovery. Since then, I've made good money by assuming that investment asset prices will continue to rise with the rising inequality Americans choose starting in the Reagan years. It's a cynical investment strategy, but it has worked for most of my adult life. Interestingly, my father was a good investor, but he started under FDR and made money with falling inequality, but he had to pick stocks that would make money meeting the demands of a growing middle class. I've had it much easier.

P.S. Bitcoin has been around long enough to qualify as an investment grade asset, so I'd expect its price to rise unless some government or hackers can degrade the properties that make it a safe store of value, or our society switches the economy to meeting the needs of those who work for a living. Interestingly, the rise of bitcoin as an investment grade asset seems to have been triggered by the general recognition that blockchain technology is useless, save for implementing something like bitcoin. I'd almost believe that if someone found a real use for blockchains, bitcoins would be worthless.

Fred C. Dobbs said...

Totally different?

When money is running short, print your own

via @BostonGlobe - December 24

Last spring, shortly after it became clear that COVID-19 was more than just a little flu and that local shops would be down and out for more than just a little while, America got to wondering: How can we save small businesses?

Many commentators demanded quick federal relief. Some consumers went on gift card shopping sprees. And 2020 presidential candidate Andrew Yang tweeted a proposal combining the two — government-issued debit cards redeemable only at locally owned small businesses. ...

But a piece of his idea — a currency that could only be spent at local businesses — has been a fixture of life in Massachusetts’ southern Berkshires since 2006.

BerkShares, the region’s currency, are redeemable at over 400 Berkshires businesses — good for buying a pastry at the bakery or an hour of a lawyer’s time. Printed as real paper bills and adorned with hometown heroes like “The Souls of Black Folk” author W.E.B. DuBois, BerkShares can be purchased at three local banks. And for shoppers, those fancy notes are more than just a reminder to “buy local”; they’re also a way to get 5 percent off, because $95 gets you 100 BerkShares.

It wasn’t the first alternative currency in the world. It wasn’t even the first in the region. But BerkShares are arguably the most successful. In the currency’s 14 years of existence, the region has circulated $10 million worth of BerkShares, and the model has inspired other regions abroad.

Now, almost a year into America’s COVID downturn, and with roughly 800 small US businesses closing each day, politicians are trying to repair the damage. Massachusetts is investing in a “buy local”' advertising campaign. California is offering technical support to help small businesses adapt to e-commerce. But some municipal governments are looking to go further: promoting the use of a local currency by borrowing, spending, and accepting it themselves.

This could be a game changer for struggling regional economies nationwide; if municipalities were to spend money that could only circulate in their regions, they’d have a powerful tool for stimulating business, creating jobs, and generating tax revenue at the local level.

The idea of getting municipalities involved, which comes from the Schumacher Center for New Economics, the think tank behind BerkShares, is still in its infancy. But if it catches on — if it helps to thrust local currencies into the American mainstream — it could provide a potent new means for reviving Main Streets, whether they’re battered by a pandemic or by the relentless hammer of a globalized economy. ...