Market Reality
We live in interesting times. Historic bubbles seemed to be regional. The Dutch Tulip Bubble1 (1630’s), South Sea Bubble1 (1720). With globalization bubbles now tend to engulf the planet. The 1929 crash, and more recently the 2000 Dot Com Bubble1 and the 2008 U.S. Housing bubble1 to name a few. By nearly any metric, the stock markets highs of 2021 are unparalleled2. How is this possible? The pandemic caused companies to shut down, closing stores and offices, or running way below capacity due to an inability to bring in workers and customers staying home.
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Bond prices were in the stratosphere. Since when do negative interest rates make any sense4? This is the epitome of a bubble. Negative interest rates are only possible when investors overpay so much for a bond, that they are guaranteed to lose money. Interest rates around the world were either near, at, or below zero. Thus, loans are super cheap as interest rates are the lowest in human history (because bonds are the highest priced in history).
To complete the “everything” bubble, we must include real estate. Real estate prices are a factor of the affordability of the monthly payment. Real estate became so extremely high, that even record low interest rates strained affordability11. If rates were “normal”, housing prices would have to be much lower.
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There were other signs of a bubble. Intangible Non-Fungible Tokens5 (NFT- digital record of ownership), empty canvasses6, non-existent music7 and most recently a woman’s intangible “love” 8 have been priced in the many thousands or even hundreds of thousands of dollars! Really?
Wondering what an NFT is? In order to really understand an NFT on an intangible asset, I will equate it to a tangible asset like a house. With an NFT you own a document that says you own the “house”. But anyone else can own the house as well (digital copy is identical to the original) and the masses can and have downloaded your house exactly as you did. The only difference is you paid a fortune for the ownership document. See the following example.
A digital artist named Mike Winkelmann sold his NFT (of the below image10) for US $69 million5. What did the buyer get? Anyone can still view “Beeple’s” original10 and even make exact copies of it at no cost. $69 million just does not buy what it used to. In my mind the buyer bought nothing.
Extreme low interest rates caused the now well-known everything bubble. We know logic would have us buy low and sell high. When we buy high, we reduce our potential for upside and increase our downside exposure (increase risk). The masses buy high and sell low despite this logic. Success secret: do the opposite.
Regardless of the evidence that stocks, bonds, and real estate are in a bubble, there are still great opportunities for your life savings. Being aware of the dangers allows you to protect yourself and even profit from the opportunities they provide.
If you have any questions, or just want to learn more, please feel free to contact us.
1 https://www.investopedia.com/articles/personal-finance/062315/five-largest-asset-bubbles-history.asp
2 https://currentmarketvaluation.com/models/buffett-indicator.php
4 https://www.investopedia.com/articles/investing/070915/how-negative-interest-rates-work.asp
5 https://onlineonly.christies.com/s/beeple-first-5000-days/beeple-b-1981-1/112924
5 and 6 https://www.theglobeandmail.com/opinion/article-nothing-has-never-been-more-valuable-than-it-is-now/
Earlier this month, the Italian artist Salvatore Garau sold Nothing for a mere €15,000
($22,000) – making him an underachiever extraordinaire at a time when Nothing
is sacred, and people are clamouring to pay millions for it.
“You do not see it but it exists; it is made of air and spirit,” Mr. Garau said of his
“immaterial sculpture,” titled Io Sono. “It is a work that asks you to
activate the power of imagination.” And yet, if he had been financially savvy,
he would have issued an NFT, a non-fungible token, for the work. Back in March,
a digital artist named Mike Winkelmann, better known as Beeple, sold a
digital collage as an NFT – not some physical artifact, but just a
spritz of bits attesting to a kind of ownership-adjacent non-ownership. Anyone
can still view Beeple’s original and can make exact copies at no cost. The
buyer spent US$69-million.
5 https://www.makeuseof.com/what-do-you-actually-own-if-you-buy-an-nft/
7 https://www.theguardian.com/music/shortcuts/2013/jan/28/church-sold-out-cd-silence
7 https://en.wikipedia.org/wiki/List_of_silent_musical_compositions
8 https://nypost.com/2021/07/29/polish-influencer-just-sold-her-love-as-an-nft-for-250k/
9 http://www.olivertalamayan.com/success-secret-do-the-opposite-of-what-everyone-is-doing/
10 https://edition.cnn.com/style/article/beeple-first-nft-artwork-at-auction-sale-result/index.html
11 https://wowa.ca/calculators/affordability
According to BMO, home buyers must have a minimum 5% down
payment for homes worth less than $500K. For homes between $500K and $1M,
home buyers must have at least 5% for the first $500K and 10% for the
remaining amount. For homes worth more than $1M, home buyers must
have a minimum 20% down payment.
12 Ninepoint
presentation July 21, 2021 slides 10 and 11.
13 https://www.youtube.com/watch?v=_qfgTf09f5I&t=1825s
well done research that details how the world used gold/silver for most
of history. The reserve currency misinformation chart that is used wide spread.
Less to do with reserve currency and more to do with fiat.
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