Central Bank Madness — Potential Investments Outlook

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover the senses slowly, and one by one.

Charles Mackay, Extraordinary Popular
Delusions and the Madness of Crowds

A few months back, a family member asked about Dogecoin.

If you’re not familiar with it already (it’s been all over the news lately), Dogecoin came about in 2013 as a joke.

At the time when my relative asked about it, the coin was trading at 6 cents. I asked him what he liked about it and his answer was that there were lots of celebrities tweeting about it.

To be honest, I hadn’t really looked into it. So I did.

I’m no crypto expert but I really couldn’t see what all the fuss was about.

It’s not like bitcoin, for example. What’s attractive about bitcoin to me is that it has a supply limit, while with Dogecoin, every minute 10,000 coins are added into the network.

So, I didn’t think about it anymore…until a few days ago when I watched it soar to 44 cents…

As it turns out, Dogecoin fans were trying to get the crypto up on 20 April using hashtags like #Doge420 on social media sites.

At the time I write this it’s back down to around 21 cents.

In investing, there are fundamentals, but there’s also the crowds. After all, the market is influenced by the collective decisions of many.

Dogecoin, GameStop…it’s all a side effect of all the liquidity around.

In my mind, there’s no question we are in a massive bubble…one much bigger than in 2008.

Dogecoin, GameStop, NFTs…they are the ones getting all the bad rap, but the bubble is everywhere you look.

In stocks, in property, you name it.

Central banks have been pumping money into the system for years now. It’s pushed stock prices and property up. It’s flowing into riskier assets.

And prices are so distorted that it’s hard to know what anything is worth.

The thing is, what do you do? Do you stay on the sidelines in cash? Or risk it in a bubble?

Of course, you can make money in a bubble if you time it right. Dogecoin is living proof of that.

But there’s plenty of risk, and all this is all well and good until things change. And things always change. What’s popular today may not be so tomorrow.

You may never recoup your money if the asset collapses and it never gets back to the price you paid for.

Which was something that happened in Spain during the property bubble in 2008. It left many families with mortgage debt higher than what their home was worth. Money always tends to disappear in a crisis.

So far, it looks like we’re in the ‘euphoria’ phase.

From the Financial Times:

For equity markets, the parallels between current conditions and those of 1999 are striking and worrisome.

The investor mood in markets has been in ebullient territory since last November, when high-efficacy vaccine news lifted spirits as a budding light at the end of the tragic pandemic tunnel.

That is the signal from Citigroup’s gauge of investor sentiment — the Panic/Euphoria Model — which takes into account factors including the amount of investor positions anticipating a fall in stocks, the level of funds borrowed to purchase securities and commodity price futures.

The last time we saw such an upbeat zeitgeist that did not coincide with an immediate equity market correction was in 1999 when the dotcom bubble was in full bloom.

Typically in the past, when our gauge is at such high levels, it would indicate a 100 per cent probability of lower share prices over the next 12 months. This is despite the current powerful US economic growth expectations buoyed by fiscal stimulus and business reopening.

Low rates for long, high debt and negative real interest rates won’t last forever.

But that doesn’t mean you shouldn’t invest.

What has the potential to retain value in the future? What has a major underlying trend with the potential to disrupt? And what’s the right price to pay for it?

There’s no easy answer.

In my mind, there are a few opportunities out there. One is the clean energy transition. The other is cryptos and the technology behind it.

Stay tuned for more…


Selva Freigedo Signature

Selva Freigedo,
For The Rum Rebellion

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Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

The Rum Rebellion