Why everything keeps going up
Almost all asset prices are rising relative to cash. I say almost everything because there are still some dog investments out there which nobody wants to touch. Most reasonable assets are rising. Rare assets and those with a sense of certainty are booming in value.
So why is everything moving when we’re supposed to be in an economic depression? Because governments are flooding the economic system with cash.
You see, if we had this COVID pandemic and governments around the world did nothing — we’d be in a depression. Not recession, depression. Most people focused on the problems and let me say, these issues cannot be overstated. COVID is having a shocking impact on the economy.
But, governments are offsetting this by an unprecedented amount of money printing and stimulus.
Money supply is going through the roof
Here’s the amount of new money being created in the US going back 10 years. This doesn’t include the rest of the developed world. The amount of new US dollar money supply is going through the roof.
Now some argue that this is needed. I agree. They’ll say that what matters isn’t just the supply of new money, but the velocity or how the money works its way through the economy. I disagree.
When you create money out of thin air, there will be consequences. Eventually the economy will come back — I don’t know when, but it will be back. When that happens, there will be so much money flying around that the price of everything will start rising.
The world’s largest economy - America - is in a tricky situation. They’re the biggest, but also the most vulnerable. They already have more than US$20tn in government debt and Biden wants to spend another US$2tn in a new round of stimulus. They need it to prop things up.
But this all comes at a cost. Eventually rates will start to rise because there will be a huge amount of money in the system. We’re already seeing the early signs of this with US 10 year bond yields (the cost of US government debt) start to notch higher. This happens when the market expects inflation, or prices to rise. Its a small rise from March lows and still much lower than rates two years ago, but we’re starting to move higher.
Interest rates may have bottomed
Here’s the tricky part. The economy is still sick and governments cannot afford rates to rise. But if they continue printing more money, investors will eventually look elsewhere. It’s a vicious cycle and one which I don’t want to be tied to.
News of a new COVID strain in the US will probably see more easing, money printing, stimulus and all that sort of stuff. At some point, investors holding US government debt will continue selling. Rates will rates, the problem will get worse.
Focus on the opportunities
That’s the bad news. The good news is, most rare assets will rise. Some even in a parabolic fashion like we have seen with Bitcoin and Ether — two of the most popular cryptocurrencies in the market.
Bitcoin is rising because investors want to exit the US dollar. Bitcoin has a fixed supply of 21 million coins. So as the US Government continues to print more money for stimulus, the number of US dollars relative to Bitcoin will rise. That’s why Bitcoin is rising in US dollar terms.
We’ve also seen a rise in other currencies relative to the US dollar. Gold and base metal prices have also increased. So too has real estate, in fact the most expensive real estate in tight pockets with limited supply is rising quicker than average.
In strong markets like Australia, where the pandemic has been contained and strong government action has limited the downward spiral, house prices have bottomed and continue to recover since mid-2020.
Premium markets like Sydney have in fact posted consecutive gains. The flood of money from low rates and government stimulus is pushing investors into what they trust.
The stock market tells us a similar story
Investors are also moving massively into stocks, but again, not all stocks. The best performing companies over the past six months have been technology stocks and blue chip companies with earnings certainty.
That’s the key word — certainty.
Anything with earnings certainty or fixed supply (real estate, Bitcoin) has been flying. In an uncertain world, tech companies have sound favour with investors because of the certainty the bring about their competitive advantages. Tesla, Amazon, Apple, Facebook, Microsoft have been flying.
Bottom line: Things are bad, good options are becoming great
There are huge problems in the economy, we know that. I’m not focused on the problems, I’m focused on the opportunities that will benefit from the stimulus, money printing and huge government efforts to save the world from a depresssion.
The best assets are the rare — residential real estate near strong infrastructure, finite supply assets like art, cryptocurrencies like Bitcoin, leading technology stocks like Tesla.
The biggest loser is cash. Not only is supply increasing dramatically, but the return is at 0% and even if rates go up in the short term, gains will be very limited.
Focus on rare assets which have a sense of certainty. On that, here is the latest podcast:
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