Who Will Survive When the Next Bubble Bursts?
We are living through challenging, difficult, stressful and uncertain times, and the cheapest money in economic history is coming to an end. Let’s take a deeper dive into what that means for the ‘next bubble’ to burst.
History tends to repeat itself as the old saying goes. Yes, we are in the midst of the middle of 2022 which looks much different than 1933, 1973, 1999, 2008 or 2020 looked. But at the end of the day, the principles remain the same. When the first Covid-19 lockdowns started in March 2020, the stock market and crypto markets declined very rapidly.
No one knew how dangerous or harmless the pandemic would turn out to be and what the implications of shutting down a 21st century globalized economy would entail. What followed in the course of the next 2 years was unprecedented on many levels. Governments and central banks jumped in, fresh money became accessible to anyone who could breathe or sign a document, and what we got was the cheapest funding environment that the world has ever seen.
Trillions of dollars were literally ‘printed’ out of fresh air and added to a computer database by the Federal Reserve in the form of stimulus checks, PPP loans, government funding, debt, etc. But you cannot simply print trillions of dollars out of thin air without consequences.
This resulted in the ‘next bubble’ where anything from meme stocks, the global stock market, real estate, index funds, Bitcoin, Ethereum, NFTS, and thousands of other cryptocurrencies blew through their all-time highs (ATH) and put people in a crazed state. It didn’t matter what you invested in during 2020, just buying something and waiting for the ‘number to go up’ was all that mattered. Price, valuation, metrics, and data sometimes went out the window! Everyone was flying high at the time. However, those happy times can only persist for so long in these industries.
Cheap money is more likely than not coming to an end. What happens when endless cheap money stops circulating into the economy and interest rates and inflation both go up? Risky assets start to bleed people deep and for a long period of time. Coinbase just announced that it’s laying off 18% of its workforce. Tesla announced the same for up to 10% of its staff. Countless other companies unfortunately have been announcing the same hiring freezes and layoffs for their corporate staff. But that tends to be the case whenever technology and especially growth stocks are going down this year.
The similarity now is comparable to when the dotcom bubble started to pop in the late 90’s and early 2000’s. The Fed started to tighten monetary policy in May 1999 and the bubble peaked in March 2000 before imploding. What’s happening now? The Fed has begun to raise interest rates, most recently 75 basis points (or 0.75%) as inflation is skyrocketing out-of-control. And these levels of rates being raised are not going to stop anytime soon this year or next.
This has been the Fed’s largest rate hike in two decades since 1994 and the ECB is raising interest rates as well for the first time in 11 years. Of course, we still have a lot of uncertainties. Super loose monetary policy is definitely a factor (don’t forget that inflation was at 7.9% in the US before the war in Ukraine started), but there are still supply chain and war-related issues at play between Russia and Ukraine.
Sanctions against Russia are crippling their economy; Russia weaponizing its energy sector; the possibility of the war escalating; China’s crazy Zero-Coivd strategy (that could also be economic warfare to cripple supply chains globally, idk)… the list goes on and on as there is A LOT of uncertainty in the air we breathe right now.
The Federal Reserve and the ECB are stuck between a rock and a hard place right now: do they keep interest rates low, and inflation will run even hotter. Stagflation with high-interest rates and a shrinking economy is what follows similar to the 1970’s. This means the prices of goods and services will continue to rise while you have a lot of unemployed people or folks with BAs, MAs, and MBAs looking for work in their respective fields. This doesn’t even factor in the minimum wage rate and entry level work for individuals looking to get back into the labor force or establish themselves after being ripped apart in the job space these past two years. No one wants that suffering, worry, stress, and anxiety like we had at the beginning of 2020 when the global lockdowns happened.
So what is the alternative? The Fed continues to raise interest rates and risks tipping the economy into a recession, which is also painful but probably needs to happen in order to not fully blow up the global financial system. The problem is that in a recession (or even a depression) you’ll also have a lot of unemployed people, struggling businesses, and a shrinking economy. The solution is usually to lower interest rates and follow good old Keynes’ fiscal and monetary counter-cyclical policies, AKA spend more government money when the economy is poor and less when the economy is good. But you see, the government doesn’t have a spending problem already. They have an income problem which happens when you have too many lawyers in power writing political laws into effect and not enough businessmen and women running the government.
It’s clearly more complicated than that and no one really knows, even the politicians and economists and businesses telling you so.
This time it’s different…okay but not really
This brings us back to our original points. The economic wipeouts in the stock markets and crypto markets could actually be good, similar to how the dotcom burst wasn’t the end of internet companies and let me tell you why. To be quite frank: I am very skeptical about nearly all the crypto assets out there (except for Bitcoin, Ethereum, Blockchain technology and the handful of things with an actual use-case and providing value to the world). 95%, or more, of the crypto market is probably worthless to be honest with you. We just saw Terra Luna collapse. What’s next? Largely the product of ridiculously cheap funding driven by excessively loose central bank policy, no regulation, and people putting their life savings into Dogecoin, alt-coins, meme-coins, and other ‘assets’ with barely any intrinsic, fundamental or economic value to the world.
The crypto markets and industry surviving depends on whether it will be able to solve real-world problems. Yes we are seeing de-globalization, the rise of DeFi and countries plus governments heading in a more authoritarian direction, with a bloody war still raging in Europe between Ukraine, Russia and the rest of the world powers.
A New Monetary Order is in Play
The big picture is what excites me the most. We are entering a new monetary order, there is no debating that. The seizing of Russia’s foreign exchange reserves and the collapse of their ruble marked a turning point in geopolitics. It showed everyone: Your dollars are only worth something as long as the G7 (and especially the United States) say so. China, India, Europe, and others took notice. We are in the middle of Bretton Woods III — a new world (monetary) order centered around commodity-based currencies in the East that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West. Sounds like something we are currently experiencing here in the states, isn’t it?
After this war is over, if it ever ends, ‘money’ will never be the same again. It (the USD) was never the same after it was taken off of the gold standard. The two become separate forms of currency. Those who owned gold, the commodity. Those who owned and believed in paper, backed by the Federal Reserve and US government who have the power at any time as we have seen to print more of it out of thin air and with the push of a button. Bitcoin, if it still exists in the future, which it will because of the 21-million coin limit, will probably benefit the most from all of this.
I don’t mean for any of this to sound negative, it is merely the truth and facts of the matter. I have no clue what’s going to happen next, no one knows. If you listen to folks pitching and selling which stock to buy next or who’ll win the election, or the crypto race and who the next Tesla, Amazon or Google will be, you are crazy. There are tens of thousands of stocks and cryptocurrencies out there, and countless NFT projects (shoot me now). Pick some, and maybe you’ll be lucky. Dollar cost average (DCA) into the blue-chip stocks, time tested companies, and BTC and you will be golden. Just know that 95%-99% of them will eventually go to zero, maybe more as we’ve seen.
Apple, Tesla, Facebook, Google, Nvidia, Moderna, Pfizer, BTC, ETH are all risky. Of course it’s investing which is inherently subject to risk and past performance does not guarantee future results or profits. But do you want to know what is also risky? Not investing. Not being on top of, researching, doing your due diligence or listening to podcasts or getting involved in any of these billion dollar companies also is something you could potentially miss out on. There is a chance these companies and new ones will come out as the winners in the midst of all this uncertainty. Only time will tell.
Don’t be the person on the sidelines or the one ending up holding the bag when it’s all said and done. Study the markets, study history, have disposable cash on hand, keep investing in yourself, find a group of like-minded individuals in a community that is serving others and is authentic and trustworthy. Maybe our rock JPEGs and NFTs will moon again by 2023. Either way I hope you enjoyed this longer form blog. Stay tuned for more and strap in your seatbelt because we’re in for a bumpy ride!
My Very Best,