| September 29, 2023

I think of it as the crypto indicator. While there are many ways to measure how overvalued or undervalued markets are, crypto seems to me to be the purist. Many measures of valuation use some sort of comparison between the interest rate on a highly liquid low-risk investment and the anticipated future earnings, dividends, or interest payments of other investments. Typically, we are making our comparisons to the three-month Treasury bill (T-bill).

When the T-bill pays very little, as it has for most of the time since the Great Recession, the prices for real estate, growth stocks, and other investments are justifiably expected to be higher. When the T-bill rate is high, as it is today, we should expect the prices of these investments to be lower than they are now. I shall skip the math since that is not necessary to my point here.

Crypto has no earnings and it pays no interest or dividends, either today or in the future. Zero, zip, nada. Theoretically, it has a value of less than zero, since virtual money has a lot of energy costs. Enthusiasts claim that the limited supply of tokens that blockchain ensures is where the value is. I have dealt with that argument in previous blogs and newsletters. Theoretically, the value of an investment with no assets, no income, and no earnings should collapse when there are many high-paying and low-risk alternatives.

What the crypto indicator seems to be telling me now is that there is still too much excess cash in the system. Therefore, even though I expect some serious volatility and an intermediate correction, pure enthusiasm and lots of cash are likely to delay the consequences of too-high prices until sometime next year. Astoundingly, crypto mania continues even though the world’s biggest crypto firm currently teeters on the brink of collapse. There will eventually be one collapse too many, even for speculators.

Life experience informs me that the type of investor who believes in crypto needs to be completely crushed before the excesses of market exuberance are washed out of the system. This is why I believe that the ten-year Treasury may hit 5% before we see a decline in rates. Jerome Powell recently confirmed the higher rates for longer narrative that I have been flogging all year. We are positioned accordingly.