The markets are going the way I predicted. Bitcoin has been on a tear all this year. Gold is hitting new highs. Per this Zerohedge article, central banks are buying it with gusto as they realize that fiat currencies are losing favor.
Meanwhile, ordinary investors continue to pile into the overpriced stock market. I learned a couple of new acronyms yesterday. FOMO stands for fear of missing out. YOLO for you only live once. Large numbers of naïve people rushing into the market has long been a reliable sign of a market top. There is an anecdote about John D Rockefeller (as I recall) calling a market top when his shoeshine boy started to give him stock purchasing advice.
Per this ZH article, the volume of gold trading hands has been relatively low recently. Central banks have been net buyers, gold exchange traded funds (ETFs), representing retail traders, have been net sellers. Retail investment money has been flowing from gold into stocks.
Why that? It's a matter of momentum (MOMO). In an article I am still working on I explore the thesis that the government has an outsized influence on investment decisions. The government wants the public to feel rich, to be under the impression that the economy is doing well. A rising stock market creates that impression. The government - like all governments - wants its fiat currency – to look strong in comparison to alternatives such as gold.
The government, or its proxy the Federal Reserve, is allowed to trade in the markets. As would be true of any other player, when they buy in volume they create upward momentum, attracting other investors. When they sell, they create downward momentum.
The Federal Reserve lost $100 billion last year, a number that is projected to rise. They publicly attribute the loss to rising interest rates. I would not be surprised if part of the loss were attributable to market manipulation. Buying stocks when they are high and selling low, encouraging individual investors to buy. And short selling gold when it is low and covering when it is high, to hold the price down and make it appear unattractive.
A high percentage of investment today is handled through pools of money such as retirement funds, index funds, hedge funds and the like. Rather than do the hard work of figuring out which companies will prosper, the individual investor puts his trust in professionals.
Some of those professionals, such as Warren Buffet and James Simon, have done very well. Their success is reflected in the premium prices and/or management fees charged by Berkshire Hathaway, Renaissance Capital and the like. Most such funds have only average returns. Mathematically that must be the case since they control most of the market.
The upshot is that the individual investor is not personally investigating the projected future profitability of Google, Sara Lee, Home Depot, Walmart or whatever. They are betting on the average. The fund manager gets his cut in any case - a bit richer cut if he is lucky and things go up. My pithy conclusion is that the all-time highs we are seeing in the Dow and NASDAQ are not attributable to "smart money" but to average people who are putting their trust in agents of average intellect to choose stocks for them.
It is common people who don't want to leave their money in the bank or government bonds, where interest rates don't keep up with inflation. They have been selling the gold they hold in ETFs to buy stock funds. This year they are buying Bitcoin as well because of its price action: FOMO, YOLO, MOMO and such. Most don't understand Bitcoin, but they like the action.
Gold bugs like Peter Schiff predict a surge in gold when the Bitcoin buffs figure out that there is nothing there but ephemeral electronic bits in cyberspace. $69,000 for a bit of electronic fluff? Fuggetabouddit.
I think Schiff is half right. There will be a rush into gold, starting about now, as people realize that it has been undervalued and treading water for three years. There is also the lack of alternatives, as I recently pointed out here. My guess is that the rush will come with an exodus from common stocks, which are already substantially overpriced under all but the most optimistic scenarios for the world economy.
While Bitcoin is probably a bit ahead of itself, it has substantial advantages over gold. It crosses borders easily. It is (mostly) invisible. It cannot be physically stolen by thieves or exprоpriated by gоvernment. The supply is even more limited than that of gold - capped at 21 million Bitcoins. As Dr. Hay will tell you on this blog, it can all crash into a cocked hat if and when some genius with a quantum computer manages to crack its encryption. I read assiduously and have not seen much new speculation about this happening since it was first broached almost a decade ago. But it is a risk.
Why so melancholy? The rise of Bitcoin and gold signals the approach of hyperinflation, which in turn is likely to lead to the collapse of the American empire. The US government has used the $34 trillion of debt it has accumulated to buy peace. Placate us retired folks and buy our votes. Placate discontented minorities through generous welfare benefits. Placate the young with generous and often forgiven student loans.
Our government – governments all over the world – are at the end of their rope. They can't do that any more. They have no choice but to keep printing money, and the money has no choice but to lose value increasingly quickly via inflation. It has happened over and over throughout history. It invariably leads to some sort of a dark age.
And that's why I'm melancholy. I fight it through my memory exercises. This morning, though it took me twenty minutes, I reconstructed from memory the words to Bette Midler's song "The Rose". Another ten for "My Grandfather's Clock." In another session I ran as many church hymns as I could remember through my mind. Music has a soothing influence, even if it's only in your head. These are times that call for a strong analgesic.
That's the news from Lake WeBeGone, where the twelve-year-old Eddie is old enough to start to comprehend the world situation. The girls are happy just being girls. My resolution of the day is to take them shopping more often. Let them pick attractive clothes. Get them to pay attention to their looks. This unfair world places far more stock in a girl's appearance than it should. This is an arbitrage situation. Let's take advantage of the fact.
14-15 years ago, I bought Bette Midler's CD ``The Best Bette 2008'', and my favorite song was ``The Rose.''
I couldn't understand the lyrics, but it was a very good song. I have it ripped on my PC, so I'll listen to it again.
In the end, as John Maynard Keynes said, even though it's supply and demand, it's like a popularity contest.