When Covid-19 crippled the U.S. economy last spring, it elicited an overwhelming government response. Government leaders stated their intention to backfill any economic hole created by the pandemic. They have certainly done that, pouring money into the pockets of both individuals and corporations through stimulus checks, payroll protection grants, enhanced unemployment payments, and child credits. Hundreds of billions in support has also flowed to states, cities, colleges, and medical institutions. The total amount of government aid in the U.S. has been over $5 trillion dollars.
This money, combined with low interest rates, has led to an explosion in asset prices. Real estate has been hot in many regions, stock indices are reaching new highs, and crypto currencies have raced ahead of all other assets. The economic hole has been more than filled and the excess liquidity is flooding into nearly all assets. But the biggest recent gains are in crypto currencies. At least some of the money from stimulus checks, it seems, is finding its way into bitcoin, ethereum, dogecoin, or some of the other 7,500 digital tokens on the market.
The digital token (crypto) world is not something we have addressed in the past. It is an esoteric and lightly-regulated asset. John Oliver, host of “Last Week Tonight,” put it best when he said that cryptocurrency and blockchain are “everything you don’t understand about money, combined with everything you don’t understand about computers.” Today, blockchain technology is increasingly embedded in newfangled assets, and cryptocurrencies have swelled to a collective valuation of over $2 trillion. Inventors and promoters of cryptocurrencies and blockchain technology want to supplant the financial world as it exists today, the one where the Federal Government, banks, and intermediaries such as Visa, Mastercard, and Paypal are the ones who issue currency, offer credit, and record and verify all financial transactions.
The idea of an alternative financial system that is heavily encrypted, anonymous, yet totally verifiable (as to the proper allocation of every debit or credit from a transaction) has appeal to people on the left and right of the political spectrum. Such a system is a check on the power of government to control money supply, track transactions, and levy taxes. No wonder the first question on every individual tax form, right under one’s name and address, now says: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” Millions of Americans have made transactions in virtual currencies, but only a relative handful are responding with an honest answer to that question.
We are addressing the cryptocurrency craze now because it is the latest example of a speculative fever that has been sweeping the financial markets since last summer. A few months ago, all attention was on the meme stocks, such as Gamestop. As that fever subsided it was immediately replaced by dozens of cryptocurrencies that suddenly doubled or more in a matter of weeks. The biggest percentage gainer of all was something called Dogecoin, which was started as a joke back in 2013 by two computer software fellows who wanted to prove that foolish people would buy anything that purported to be a digital token. At the time there was a picture of a dog, a Shibu Inu breed, with a goofy look on its face that people found humorous and were exchanging with each other online. Dogecoin’s founders used that image as their mascot of sorts, hence the name Dogecoin. This digital “joke” coin sat for years at virtually no value, until the last few weeks when it shot to 45 cents per token, giving the 130 billion tokens a total value of $54 billion. This is truly speculation, and the greater fool theory in play at an extreme. It indicates how much money is floating around, and how impetuous people are willing to be in their speculation.
The sudden rise of cryptocurrencies, to a combined value of more than $2 trillion dollars, may in fact have dampened the rise in the stock market. Much of the wild speculation that used to occur in lower quality stocks near the end of bull markets has now moved over to the crypto markets, because the gains there can be lightning fast. The idea of investing in stocks, owning part of a company, and possibly benefitting from stock appreciation or dividends seems pedestrian compared to a double in a week (or a day) on a cryptocurrency. While the explosive public interest in cryptocurrencies may be a sign of a larger investment bubble about to pop, it could also mean that bubbles are occurring in different assets at different times, and are not intertwined with the broader investment universe.
Excess liquidity has led to a series of rolling bubbles in various financial assets. While it is important to proceed with caution in such a pumped-up environment, there are still many companies with share prices that remain tethered to business fundamentals. The overall stock market has performed well in recent months, as investors rotated from elevated tech stocks to a broader list that included banks, industrial, retail, and consumer products companies. Watching investment bubbles expand and then pop can be fascinating, but should not distract investors from establishing worthwhile, long-term positions in companies that may be attractively valued. We have been active in this regard, capturing some of the dramatic gains made last year and redeploying those funds to companies that may benefit from a full economic reopening.
The bond market has begun to shift more significantly in 2021. As investors anticipate continued government spending, increased deficits, and potentially higher inflation, they have sold their longer-dated bonds. Short-term yields are still anchored in place by the policy and language of the Federal Reserve, but yields rose on 10- and 30-year bonds in recent months. We have begun buying corporate bonds for the first time in nearly a year, and will continue to add to our bond holdings if rates climb higher still.