The circumstances seen in today’s market will be looked back on with awe. From a purely historical sense, being able to watch what’s happening on a day to day basis is amazing because it is a case study in how markets can go awry. Investing is much more difficult because the bubble sucks you in, no matter how hard you try to avoid it. One example of how bubbles suck everyone in was the housing bubble of the early 2000s. I know a person who bought a house responsibly, putting 20% down and buying one he could afford. His house fell 40% in value. He still lives in the house, but it must’ve hurt to know he could’ve bought it much cheaper a few years later. The problem was he needed a house to live in to start a family. He couldn’t wait for the bubble to pop, especially since he didn’t know when it would pop; the housing market could’ve risen for another 10 years. Bubbles don’t exclusively hurt people taking high risks.
Snap is an example of a bubble stock as it is trading at about 74 times 2016 revenues. Facebook trades at 14 times revenues. If 100% of Snap’s revenues dropped to the bottom line, the stock would still be expensive. Anyone who is buying Snap stock recognizes they are speculating and can lose 44% of their money as quickly as they made it today (if they bought at the IPO price). My point is that Snap isn’t the only bubble stock in the market. The entire thing is a bubble. Pension funds who have been forced into the market because bond yields are low are going to get hurt. Everyday investors who are getting less than 1% interest on their savings account will be hurt if they plow money into an index fund hoping to get a decent return.
As I mentioned the current market is getting absurd. One example of this is the VIX which continues to track the market even though it’s supposed to be the inverse of the stock market. It decoupled on Wednesday’s rally, but recoupled on Thursday. The S&P 500 was down 0.59% and the VIX was down 5.02% to an 11 handle. The other big change today was the odds for a rate hike in March. The odds increased from 66.4% to 77.5%. The chart below shows how quickly the odds changed. The chart uses Bloomberg’s WIRP function which overvalues the odds. I showed the chart to visually explain how fast the move has been. With the rally in equities, Fed officials have free reign to raise rates. It appears that’s what they’ll do on March 15th.
The future question investors will have in the next few quarters is when rate hikes will start to slow the economy down. The age-old question of when the Fed will take away the punch bowl will be asked again. However, for now, investors are euphoric about the fact that the economy will have strong growth in the first place. To use the Goldilocks analogy, the porridge is at the perfect temperature. The two things which could change this are Trump’s fiscal policies not providing the expected growth and the Fed raising rates too quickly. Both of those potential landmines will not come in the next 6 months as the fiscal policies will take time to develop and the Fed will, at most, raise rates 50 basis points in that period. The only way the Fed will raise rates quickly is if Trump nominates a hawk as Fed chair in early 2018. As you can see, the landmines for stocks start to appear later this year and early next year, meaning stocks can party on for now.
One example of the euphoria which is in the stock market can be seen in the chart below. The chart highlights when the S&P 500’s 4-month return is greater than 10% and consumer confidence is at a multiyear high. The indicator has been signaled in the current market. This is the 7th time it has been signaled since 1960. The indicator is getting noticed because it flagged the 1987 crash before it happened. It also flagged the tech bubble, but it was a couple years too early. The signal in 2010 was a false positive. My response to this chart is it confirms my opinion that the market is overextended, yet shows that the market can still rally a few more months unabated.
Another example of an asset at bubble levels is bitcoin. I’m a big believer in the long-term potential of bitcoin because government’s have not protected the value of their currencies. By taking out debts they can’t pay back, they inherently devalue their currencies. It’s much safer to use bitcoin as a currency because it doesn’t have the risk of being devalued to pay for past debts. I don’t think trading bitcoin makes sense. Because I’m assuming you get paid in dollars, you are inherently timing the market when you purchase the currency with the dollars you get paid in. To avoid price risk, I think it makes sense to buy it in increments every month. I’ve been recommending halting your purchases given the massive run-up we’ve seen. Because bitcoin made a new all-time high, I expect the momentum to continue, but soon afterwards a crash like what was seen in 2014 is possible. Bitcoin recently surpassed the price of gold for the first time ever.
The chart below shows the search history of the term “bitcoin price.” It seems to peak near price peaks. It last peaked on January 5th which was the day after the crash caused by Chinese government intervention. Just like how the stock market is now ignoring the Fed which used to be a source of volatility, bitcoin is starting to ignore Chinese government intervention. The run bitcoin is on is unsustainable. It’s up 31% year to date. The market cap is $20.57 billion. It will need to get into the $100s of billions to start to compete with the dollar, but that is years away from happening.
Conclusion
With a market cap near $28 billion, Snap, a company which doesn’t have any profits, is worth more than the bitcoin currency. While both have had rapid rises over the past few years, there is no question bitcoin is a better buy. Bitcoin was the greatest mathematical breakthrough in a generation, while Snap has created the ability to swap faces with your friends and take pictures. Math doesn’t lose popularity the way social media firms do. While I wouldn’t buy bitcoin at today’s prices, I think it’s a great store a of value over the long-term.
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