(Host) Naj Srinivas:
Hello and welcome to the Fisher Investments’ Market Insights Podcast, where we discuss our firm’s latest thinking on global capital markets and current events.
I’m Naj Srinivas, Senior Vice President of Corporate Communications here at the firm.
Today’s episode is a listener mailbag. We’ll be answering questions from you, our listeners. We had a lot of questions submitted to us recently and we want to make sure that we can do justice to as many as we possibly can today, so we split this Listener Mailbag session into two parts. Today, in Part 1, we’ll tackle Bitcoin and cryptocurrencies. And we’ll also dig into the inflation questions that seem to be on everyone’s minds these days.
Be on the lookout for Part 2 in a few weeks.
So let’s get started. To help guide us though some of these questions today, we sat down with Mike Hanson: Senior Vice President of Research, a member of our Investment Policy Committee and the host of the Well-Read Investor podcast here at the firm. On The Well-Read Investor podcast, he speaks with influential authors about how the ideas in their books can improve your investment decision-making. With that background, he’s the perfect person to help us break down these interesting, but complex topics.
So with that, let’s get to it.
Thanks and enjoy the episode!
Mike, thanks for being here today.
(Guest) Mike Hanson:
Naj, it's just always a pleasure and a happy Spring to you.
To you as well. So we have a lot of topics in our listener mailbag today, and I want to make sure we have time for all of them. So let's dive right in. Let's talk about Bitcoin and cryptocurrencies, generally. They've been in the news quite a bit. They seem to come and go almost as if a fad. I remember it was just 2016, 2017, where you couldn't look or open up a newspaper without hearing about Bitcoin. And we seem to have gone through a little spell of that again here recently. So what are your thoughts on Bitcoin and cryptocurrencies and have their place in an investor's portfolio—or their potential place in an investor's portfolio—changed since maybe a couple of years ago when we first talked about them?
Bitcoin is one of these topics that you could go a million different angles on what's going on with them. Is it for real? Will it last? Which ones will last? What's the technology behind it with the blockchain? And all the rest of it. But I think your question is a salient one, especially given that investor enthusiasm for these sorts of things is fairly high at the moment. And it's not something we've encountered over the course of the last really 10 years or more, really in some ways 20 years, to see optimism about new things and seeing a lot of money being put into them. And certainly to my mind, something of a speculative quality to all this.
And so I think the right way to think about this is if you're interested in Bitcoin, the question is why. And you said it well Naj, does it have a place in the long-term trajectory of the goals for your assets? The answer to that for the overwhelming number of people—in fact just about everyone—is going to be no.
But if you want to speculate, if you think there's something there and you think you know something that others don't about Bitcoin or have some angle on it. Of course people speculate, but I would just say kind of the following things about it in terms of being careful.
In terms of technology, first movers are often not that great a thing. In fact, a lot of first movers ended up being the losers in technology. They may pioneer something only to see another group come in and do it better, or have some innovation that really completes the idea and makes it go very widespread. This is very typical with technology. It happens with all sorts of things, including just things like LCD monitors. The advent of something significant happens, but it doesn't really make it to the public in a way that's usable and feasible for some decade or even more.
I don't know how big cryptocurrency is going to be. It seems real enough to me at this point with enough interest and enough backing behind it, that it's going to be around for a while, and that some people will in fact transact in Bitcoin. I don't find it to be a very good thing to do because it changes value five or ten percent a day. And if my absolute money changed that much in the course of a day, I really wouldn't buy anything with it because how do you buy a car with money that changes value ten percent at a time? It's a tough thing to do.
But I think there's a lot more to it than that people should consider. For example, very much under the radar over the last year is this notion that countries are coming up with their own digital currencies. And in fact, China has its own digital currency. And it's looking to do that in order to curtail other types of individual cryptocurrencies. It wants to own it itself. And I think that's a very important lesson because if there's one thing in my 20 years or so of doing this I've learned, is that when it comes to money, the government will not give up power—governments of the world that is, not just any specific one. Money is something that governments of the world have controlled by fiat for a very long time. I think that will continue. And when you get something like Bitcoin coming up, which is independent, crosses borders, you're very much bound when it gets large enough for governments to step in and do things with it or to put restrictions on. Now, I don't know what those will be or what the tone and tenor of there'll be or how it'll work out in the United States. But what I can tell you is eventually there will be rules and regulations. There will be the government stepping in and you need to be very eyes-open about that before you just go jumping into these things. Because like I say, maybe cryptocurrency is real, but it may or may not be Bitcoin. Bitcoin's a very peculiar thing with a lot of strange features to it. There might be a better way in the future.
And so speculation? Sure. If you've got some funds you want to speculate with, have some fun. A lot of people are trying to do that now, but remember when a lot of people are trying to do that and have speculative fun, that usually means more people lose than win over the long run.
So Mike, how do you think what’s currently happening with Bitcoin and some of these other new types of cryptocurrencies or financial instruments reflects broadly with what’s going on in stock markets today?
One of the things that's really jumped out to me over the course of the last month—and this is just a half-baked idea, but it's something I've thought of—is that we've said at Fisher Investments now for really more than a year—even we even quite a lot longer than that—that the characteristics of now have a lot to, more to do with late-cycle behavior than early-cycle behavior, especially with investor enthusiasm. It's like I said before, it's something that we haven't really seen even for 20 years and what you get in those periods are speculation on things. And so they tend to take a certain form or archetype.
And to me, what seems to be happening and maybe it'll turn out this way and maybe it won't ultimately, but speculation seems to be centered in what I would call tokenization of things. Bitcoin, in a manner of speaking as sort of a token. It's a currency. It's this thing that people trade. It doesn't really have that much behind it other than the system itself.
But take it even further. I mean, NFTs these non-fungible tokens that everyone's talking about, where you can buy a piece of digital art that you quote-unquote own, even though everyone can copy it and paste it or whatever it is on their phones. And, you know, it's an interesting idea. I'm not necessarily denigrating the idea. It's just that that's another form of tokenization. It's people putting money into something that doesn't really have a tangible asset behind it, per se, with property rights. And the property rights part is very important. I mean, to me, that's, that's very speculative.
But then even take something like SPACs—these special purpose vehicles where companies are kind of trying to get around IPO’ing, if you will, and going straight to these organizations that will let them get to the public markets by way of these investment funds. In a manner of speaking, investors are doing the same thing. It's…what they're saying is that I'm willing to buy this SPAC—this token, if you will—under the auspices that eventually there's going to be something great in it.
All those things to me, kind of speak to a kind of a tokenization of the world, a speculative function that there very well are some real trends there, but we're probably in a period that overshoots and sees a lot of people in a speculative exuberance end up losing more than they gain out of it.
I think a nice segue from cryptocurrencies is moving on to fiat currencies. And the topic de jour right now is inflation tied to all of the fiscal and monetary stimulus programs that are going on throughout the world to mute the impact of the institutional closures and COVID-19. So let's talk a little bit about inflation and how investors today should be thinking about inflation and whether they need to be worried about it or take action in their portfolios today as a result.
Yeah. Inflation is a tough topic. Always has been, because as money and capital markets develop, money just takes all these different forms. And money has evolved hugely in the last 20 years. I mean, we were just talking about Bitcoin, but things like what we call M4 [money supply], which has all the different types of money out there, you know, wholesale systems, money market funds. There's so many ways in which money changes hands in so many various formats that even keeping track of money per se. Especially on a global basis, you would think in this age of data would be an easy thing. It's actually harder than people think to really measure how much money is out there. Because it changes so quickly.
On top of that, inflation is a difficult for most because inflation is different for each individual. Yet the economist and the investor really thinks of inflation as one thing: It's the basket over overall, you know, goods and services that you can get. And yet for an individual, if you're someone who's retired, for example, you see inflation in things like healthcare and education and all sorts of things like that. Whereas someone younger may not feel those effects or may feel much different effects if the higher portion of their income is for food and whatnot.
So one of the first things to do with inflation is to try and take a more dispassionate view about it and just see what the overall baskets of goods and services are doing. Right now, we’re in this phase, especially over the course of the last six months or so where people have this notion that inflation is going to be very high or run higher than it has for you know, for many years. And I just don't think that's right. I think that inflation can pop up for a while, but it's very likely to return to about its trend over the course of the last decade or so, which is maybe a little under 2%. And I'm talking global here, not just the United States.
So what do you think is sparking all this inflation talk? It strikes me that inflation talk like this typically happens as you’re exiting big recessions or downturns in the economy, when monetary policy is pretty loose. We had big talk of inflation early on in 2009, 2010, 2011—coming out of the last bear market and recession. We seem to have that again. Is that just history repeating, or is there something unique about what we’re seeing today?
What has people concerned is that over the course of the last year, the stimulus payments, which have been big numbers without a doubt—trillions of dollars, not billions, not even hundreds of billions—have gone directly into the pockets of Americans and others in the world to be spent immediately. And if you're sort of an old-school monetarist, like I sometimes tend to be, you say to yourself, well increasing the money supply is going to get you to inflation because that's something that, for example, Milton Friedman believed. And while it doesn't work in all circumstances, it's pretty durable over time. And yet, so far we haven't seen that.
And so then the theory from there is all this money is about to be spent and it hasn't been spent yet because the economy has been closed. Except, you know, even that is just tenuous at best. The New York Fed just the other day, came out with an interesting study, and one of our very fine analysts, Luke Puetz, actually pointed this out to us the other day was that, in fact, their numbers indicate that stimulus payments haven't really gone to new expenditures, nor will they. What's happened is that Americans across the spectrum have been paying down debt.
And so if you think of the stimulus of the last year—those trillions of dollars—less like a stimulus, because I think that's the wrong word for it, and more like payments—transfer payments, if you will—that were there to stop the gap in a very bad economic time, which has kept a lot of people afloat and helped us in a lot of ways without a question of a doubt.
Think of it more like that than a stimulus. Because from here, there is no good reason to really believe that you're going to have above-trend money-supply growth on and on forever. There's just no indication of that really. That's not just true in the US, it's true elsewhere. And, what you need for real sustained inflation is not just a one-time event of new money because when you have new money in the system, you spend it once. And once it circulates its way all the way through the system, it more or less behaves like money usually does it. It has sort of a one-time effect, new money in the system. At least in my view. And so what you need for big inflation is sustained money-supply growth. And that's the part I think we're, we're not going to get very well.
So I'm just a believer that inflation is not going to be as high as, as others think. I do think the velocity of money will come up a bit. This is a very important feature that economists think about all the time with inflation, which means it's not just about the money supply growth. It's how often the money changes hands. And that's been exceedingly low over the course of the last year. And I do think that will come up and that will also contribute to some pressure and inflation, but net-net, what we have is an economy where money is not really circulating that much. It'll start to a bit, and we've had a lot of money creation, but it's been used to pay down debt for the most part, especially in this country. And that beyond that, we don't have a huge amount of money supply creation coming behind that.
And so, it all contributes to a very strange-looking world this year, a year in which a lot of things look as if they're going to be overheating, the numbers are going to look very large, especially in a positive sense for GDP and other types of metrics. But that market's price way into the future, much beyond six months or a year. And what I think a lot of the markets are already starting to wake up to is that yes, we're going to have a recovery. It should be a pretty strong one in fact, but look for more moderate inflation and growth in the period beyond that.
There's that old saying that history doesn't always repeat, but it rhymes. And a lot of the stories of inflation today, remind me of in the early bull market of 2009, 2010, 2011, tied to the quantitative easing efforts that were going on with central banks. People were talking about inflation starting to pick up and run rampant—again, tied to the supply of money, quote-unquote, going up—but we actually never saw inflation pick up materially. And in fact, inflation has been persistently low for quite some time now.
To what do you attribute that to? The fact that we just haven't seen inflation pick up materially. And is that a normal thing to go a period, as long as we have here without inflation rising materially?
In the very long view of, of inflation in history, inflation is pretty low. It's not that it's not very high. It's lower today than it has been long-term historically. But what I think colors a lot of investors views—especially if you're someone who's got a lot of experience work for a long time may even be retired—is that you experienced the 1970s. Which was the time of the so-called stagflation, which was low growth, high inflation. And any new money-supply growth at that time just stoked inflation like a fire. And so that's the experience of many. And then you get, as you get into the early [Nineteen] eighties, you have people like Paul Volcker, of course, chairman Volcker of the Fed—who recently passed—who fought that with high interest rates and, and all of that. And it caused a recession.
And that's the experience of many who have seen that over the years, but that period itself was more like an anomaly than a typical reality of markets. In fact in the last 40 years, inflation has trended downwards even with money-supply growth. Money-supply growth, especially in the last 10 years, hasn't been particularly meaningful. And you said it very well: quantitative easing, which was billed as a top-line thing to be stimulative in fact, was meant to ultimately meant to build rebuild banking balance sheets. That's where all that money went: as excess reserves on the Fed's balance sheet. So it never made it into the system.
Now we do have some real money supply. I mean, I don't mean to characterize that differently. These stimulus payments went directly into the pockets of Americans and in the same feature in many other countries. That's real new money and it, and it that's, that's a real thing. It's just a matter of whether or not it's sustainable. And as I was saying earlier, and as you said, history rhymes, but never exactly repeats.
I cannot help—and that this is an imperfect analogy, but I think it's an okay one. I cannot help but remember, four years ago, just four years ago, when you had a new president—very controversial president—named president Trump. He comes in with an entirely Republican Congress and says, “Look, I'm going to do stimulus in the form of tax cuts as my big signature first big win.”
He goes and does that. What did the market react to? Well, the market said, well, here we are, we're off to the races. You're going to have small-cap value stocks outperform. You're going to have higher inflation. Here we go. And in fact, markets reacted that way for about three to six months, and then the effect dissipated. Why? Because these things aren't nearly as big—as impactful—as kind of the media wants to build them. It doesn't mean they're not important. It's just that you gotta think globally. These are huge, huge economies we're talking about.
And so we take it to today. We have a new president—a little bit more demure in personality perhaps than, than president Trump in President Biden. But it's a similar situation. He has Congress entirely on his side. Very narrowly, just barely, but he does. He wants to get a first big win. He gets his stimulus bill. Instead of tax cuts this time, now it's more spending, but it's all under the auspice of being stimulative.
What do we have? Investors saying, small-cap value going to outperform. Now we're going to get higher-run inflation. There are differences to today, of course, but I'm just struck by that analogy. And it's quite interesting because now here we are in April and over the course of the last couple of weeks interest rates in fact have started to come back down a bit and things have started to moderate and growth stocks have started to retake some leadership. And that's a really important feature for us that, that do money management because many investors today believe that—and this is of a piece of inflation—but where long-term interest rates go also tell you a lot about where some types of stocks perform. That when interest rates are going up and the economy is doing better, you tend to have value stocks outperform or what you might call cyclically oriented stocks. That certainly has happened over the course of the last about six months or so. But when you have interest rates that are low and a yield-curve spread that's low, it tends to favor growth stocks—stocks that are non-cyclical that have a much longer growth trajectory and a higher growth trajectory than just cyclicality.
And so this debate rages on, and while I don't think you pin anything to just one metric like interest rates, I think it's very telling—tied to all these analogies we're making—that we've had this big frenzy about inflation, higher growth, small-cap value, cyclicals. And yet already, we're starting to see a tide turn at least a little bit as it has been the last couple of weeks. And we'll see what happens from here.
A big thanks to my friend Mike Hanson for sharing his insights with us on these listener questions about cryptocurrencies, Bitcoin and inflation. Be sure to check out his podcast, The Well-Read Investor, wherever you get your podcasts.
In Part 2 of our Listener Mailbag episode, we’ll look at questions around global trade and examine how it’s connected with important cybersecurity issues. We’ll also answer questions about the potential stock market impact from proposed US infrastructure plans and from China’s ongoing economic recovery. Plus, as an added bonus, Mike will have some new book recommendations, and I, of course, always look forward to Mike’s book recommendations. He’s always got some good topics and some good books in mind to read.
If you want to learn more about the topics we discussed today, you can visit the Market Insights podcast page. You’ll find a link to the page in our episode description. On our website, you’ll also find more info about The Well-Read Investor podcast.
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We’ll talk to you again in a couple weeks with Part 2 of our listener mailbag episode.
Until then, I’m Naj Srinivas. Stay safe and be well. Thanks for tuning in!
Investing in securities involves the risk of loss. Past performance is no guarantee of future returns. The content of this podcast represents the opinions and viewpoints of Fisher Investments, and should not be regarded as personal investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Copyright Fisher Investments, 2021.