PANDEMIC SERIES, THIRD ESSAY (Bitcoin and Stocks, Ports in a storm or storms in a port?)

 

PANDEMIC SERIES, THIRD ESSAY

(Bitcoin and stocks, ports in a storm or storms in a port?)

We face a national overload of major socio-economic, medical and political issues.  Yet despite such a negative environment, and as counter-intuitive as it seems, Bitcoin and stock market prices are flirting with and occasionally surging to record highs-- indicators of a healthy economy with strong growth prospects. Are they for real? Here is my “take” on whether these high price levels are sustainable.

First, Bitcoin: Storms in a port. Other than someone being willing to accept them in payment for purchases (as a “medium of exchange”), I believe Bitcoin have less inherent value than tulips in Holland. Moreover, the U.S. Government does not offer “backing” to Bitcoin, whereas it does “back” the American dollar* underlying our stock markets. Nonetheless, believers in cybercurrency will argue that the incredible run-up in prices of Bitcoin proves their inherent “value”.  (Non-believers allege “money laundering” is what makes Bitcoin attractive.) If the music ever stops on the Bitcoin merry-go-round, and even just one major player decides not to accept Bitcoin in payment, look out below!

Second, stocks: Ports in a storm. In the near-term, stock prices appear to be sustainable, in large part because investors have few attractive liquid alternatives to stocks while interest rates remain near historic low levels. Also, the Federal Reserve has committed to supporting economic growth and making ample credit available to fuel a recovery without increasing interest rates significantly. Further, unlike Bitcoin, stocks have “backing”, directly through the real, intellectual and human assets of the global business community and indirectly through the Federal Government’s commitment to stabilize the purchasing power of the dollar.

In the longer-term (24 – 36 months out), as the global economy recovers from the gut-wrenching experience of COVID-19 and new realities shake themselves out, interest rates will start drifting upward.  Keep in mind, to the extent they have favored stocks over other investments, low interest rates have been like helium, lifting stock prices skyward.  It seems logical, therefore, that when the economic recovery takes hold interest rates will rise and suck some of that helium out of stock prices--maybe slowly, maybe quickly, depending on the strength and speed of the recovery. For these reasons, I like stocks in the near-term but see a downside on a longer-term basis when rates rise.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

*U.S. Government “backing” of the dollar essentially means the government declares the dollar is worth a dollar—if you could bring a dollar bill into the U.S. Treasury, for example, and request a dollar’s worth of value, you would be given coins totaling one dollar or a Treasury check for one dollar, which you could cash in at a bank for coins or a paper dollar bill. So that’s not much help in explaining what is meant by the Government’s “backing” of the dollar. The real answer flows from the Government’s commitment to preserving the relative stability of the purchasing power of the dollar (a stable currency)  by preventing strong inflation, which erodes the purchasing power of the dollar in both domestic and international trade. The Federal Reserve System is a powerful partner of the Federal Government in their joint commitment to preserving the purchasing power of the dollar. In contrast, no one guarantees the purchasing power stability of the Bitcoin—not the Fed, not the Federal Government, no one.