Stocks were mixed yesterday as good economic news was overshadowed by the ongoing steady rise in long-term bond yields. As I have noted many times, 2021 is going to be a year where the tailwinds of rising earnings confront the headwinds of increasing interest rates.
Yesterday, on the surface, was a stalemate with the Dow up and the NASDAQ down. But higher rates will lead to P/E compression. Without getting into the weeds too far, that hurts high P/E stocks more than low P/E stocks.
None of this stopped speculative fever. This morning it was announced that SpaceX, Elon Musk’s space venture, has raised another $850 million, raising its market cap to $74 billion. To be sure, SpaceX is a real company generating revenues through rockets sold to NASA and others to launch satellites. Ultimately, it will hopefully become a vehicle to transport humans through space. But a market cap of $74 billion is larger than the market caps of PNC Financial or FedEx#. Since SpaceX is still private, we don’t see financials, but it doesn’t make money and I have no idea when it will. At best, I can call that valuation aggressive.
The lead story in today’s Wall Street Journal highlights the fact that Bitcoin sold for over $50,000 yesterday for the first time. In Q4, it is estimated that about 150,000 new coins were mined and close to 360,000 were purchased (net). You don’t have to be a rocket scientist to know that means higher prices. More buyers than sellers. Around the edges, there is a slow movement toward acceptance. Bank of New York Mellon, Mastercard, and PayPal# all say that they will integrate Bitcoin into their networks. Tesla said they will allow its use to purchase a car. But will they really? Is Tesla going to price its cars in Bitcoin or dollars? If the latter, then what Tesla (and others) mean is that they will take your Bitcoin at an agreed upon exchange rate. Am I being technical? I am. But I remember when the dollar was very weak and stores like Barney’s in New York said they would accept payment in euros. This was a marketing message not something that Barney’s expected would get wide usage. If I walk into Macys today with a wad of euros, I doubt I will get very far.
At least for now, Tesla doesn’t expect many buyers to show up at a store with a thumb drive that includes one’s Bitcoin key. No one is ready to walk into a Wawa and buy a hoagie with Bitcoin. But the fact that these financial intermediaries are dipping their toes in the water suggests they are taking Bitcoin more seriously than they were a year or more ago. That certainly plays into the bull’s case.
There will be a maximum of 21 million Bitcoins created. Ever. At least those are the rules of the road today. Based on the total already mined (over 19 million) that market value of Bitcoin in circulation is close to $1 trillion. Some Bitcoin enthusiasts suggest before long a Bitcoin might be worth $1 million. That would approximately equal the entire GDP of the United States and two-thirds of the market cap of the S&P 500, but without any cash flow or dividends. Hey, in this crazy world, I suppose anything is possible. If Bitcoin is a store value, like gold, then why is Bitcoin soaring and gold not moving? If Bitcoin is another currency, why is nothing priced in Bitcoins? All other currencies are regulated by central banks in some fashion. Is Bitcoin a statement that central banks have lost control of money? That sounds a bit extreme, at least for now.
Bitcoin may have its place in the world someday. But for now, it is a tradable commodity. It is taxed that way. Gains and losses on Bitcoin transactions are subject to the same rules as the sale of other financial assets. You pay long-or short-term capital gains upon sale. For now, one should look at Bitcoin as a tradable commodity, like gold, oil, soybeans or lumber. If you haven’t looked, many of the other commodities have been soaring in price as well. They have moved because real demand is rising faster than real supply. I am not sure whether I call Bitcoin demand real in the same context, but the imbalance of demand over supply clearly explains the rise in price.
Meanwhile, our economy continues to gain momentum. For now, Covid-19 appears to be on a downcycle, at least in the U.S. I am not an epidemiologist and can’t tell you whether seven or more new mutations will lead to another surge. But if I assume our world will become more open in the months ahead, that the benefits of the last stimulus package just started to flow through the economy in January, and that the Fed will keep pouring $5+ billion into markets every day, it is clear economic momentum is accelerating. If an additional stimulus bill approaching anywhere near $1.9 trillion will pass in March, that will only serve to be an additional accelerant. With money supply growing at a 20%+ rate, and with savings still in double-digit territory, powerful demand is being created. Whether that demand will be powerful enough to lift inflation to levels beyond Fed targets remains open to speculation. The rise in rates to date still leaves them below the rate of inflation. Bonds still can’t compete for money. The rush of businesses to borrow and take advantage of these low rates, even by businesses with less than investment-grade credit, tells you borrowed money is “free”. But until real rates turn positive (i.e., there is a cost to money after deducting inflation), demand will exceed supply and rates will stay low enough that the rallies in other asset classes from stocks to Bitcoin can continue. Eventually, as stimulus wanes and real rates turn positive, the playbook will change. But not now.
Today, Ed Sheeran is 30. Paris Hilton is 40. Michael Jordan turns 58.
James M. Meyer, CFA 610-260-2220