Is Bitcoin heading into a Classic Bubble?

The virtual current Bitcoin jumped $400 in one day and reached a new all-time high of $7,454.04 this past Friday. The cryptocurrency has soared a staggering 640% so far this year alone. It should be noted that bitcoin is mostly banned in countries like China. Any time an asset rises so much in a short period of time there is a fear of bubble among investors. Fears of collapse are especially high for investors in virtual currencies.

According to an article ublished last month by Andrew Williams at Schroders, bitcoin seems to be following the pattern of a classic asset bubble. From the article:

Take a look at the following chart, which plots its price movements over the last six years against the classic trajectory of any asset bubble.

It is a pretty good fit, with the journey over the last few months putting bitcoin above the ‘New Paradigm’ point of the ‘Blow-off’ phase.

 

Source: Thomson Reuters Datastream, 19 October 2017. Past performance is not a guide to future performance and may not be repeated.

To be clear, none of this is to attack bitcoin, the other cryptocurrencies or the extraordinary ‘distribution ledger technology’ that underpins them.

What we do find extremely concerning, however, here on The Value Perspective, is the behaviour of the wider market towards something whose intrinsic value cannot be assessed – for the simple reason it does not have any.

SourceIf bitcoin isn’t a bubble, it’s a spookily good impression, Schroders

Earlier:

UK Interest Rates From 1694 To 2014: Chart

The Bank of England raised the official interest rate from 0.25% to 0.50% for the first time in more than 10 years on November 2, 2017. Higher interest rates are a boon to savers but hit all types of borrowers especially mortgage borrowes whose loans are variable-type loans.

Until this recent hike, interest rates have been low for many years. In fact, the cost of money – the interest rate has not been this low for many centuries. The following chart shows the interest rate since the formation of the central bank all the way back in 1694:

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Source: History is a useful guide for investors – but which period are we in today?, Dominic Frisby, MoneyWeek

The chart below shows the interest rate since 1970:

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Source: UK interest rates rise for first time in 10 years, The BBC, Nov 2, 2017

WSJ Article: Individualistic Countries Have Higher Economic Growth

I came across an interesting  article in the journal this week by  James Mackintosh discussing Protestantism and Capitalism. The key argument in his piece is that the more individualistic a country is, the better it is for economic growth and innovation. For example, the US leads the world in iinovation especially in technology. No other place in the world can match Silicon Valley in terms of innovation and creativity. The US is also a more individualistic society than its peers in developed Europe. So in addition to eduction, infrastructure and other factors, individualism in Americans drive them to innovate and be successful.

Developed Europe on the other hand follow socialism and everything is done with the society in mind and not purely profits or creating billionaries. For the most, extremely individualistic behavior is frowned upon by the society as whole. This is in sharp contrast to the US where highly indidualistic individuals who become successful at least financially are glorified and almost worshipped by the society like gods or at the very least like some Hollywood celebrities. The flip side of a less individualism is that there is no Google in France, no Airbnb from Spain, a Uber from Germany or Amazon from Great Britain. In fact, hardly any company such as those mentioned above ever have been created in these countries.

From the article:

Five centuries ago this week, Martin Luther started the Protestant Reformation by hammering his 95 theses to a church door in Wittenberg, Germany.

His legacy raises questions that resonate for investors today: Can Communist China become a rich country? And does the political swing towards populism threaten economic growth?

Luther matters to investors not because of the religion he founded, but because of the cultural impact of challenging the Catholic Church’s grip on society. By ushering in what Edmund Phelps, the Nobel-winning director of Columbia University’s Center on Capitalism and Society, calls the “the age of the individual,” Luther laid the groundwork for capitalism.

 The question is whether capitalism needs individualism. Sociologist Max Weber popularized a supposed link between Protestantism and “the spirit of capitalism” at the start of the 20th century, noting that after the Reformation, Protestant countries in northern Europe grew richer than the continent’s Catholic south.

More detailed studies since have debunked Weber’s ideas, showing that it is education and openness to ideas that matter, not Protestantism itself. Hans-Joachim Voth, a professor at the University of Zurich, points to higher literacy levels in Protestant countries as recently as 1900, a hangover from when early Protestants, unlike early Catholics, read the Bible for themselves. These same countries remain among the world’s richest.

The full article is worth a read.

Source: What 500 Years of Protestantism Teaches Us About Capitalism’s Future, WSJ, Nov 2, 2017

Related: 

India’s Sensex Reaches Yet Another Record Again

Emerging markets are on fire this year. Many of these markets have soared much more than developed markets. Among the major emerging markets India is one of the top performers. The benchmark Sensex reached yet another record yesterday.

The Sensex has shot up by 26.5% so far this year. This is higher than the equity markets of Brazil, Russia and China. The Sensex closed at 33,685 on Friday with an intra-day high of 33,733. Global and domestic investors are puring into Indian stocks on hopes of further policy reforms and economic growth. Though there are many factors favorable to India, signs of irrational exuberance are starting to bubble up. For example, a few state-owned bank;s stocks boomed as much as 60% in one day when the state announced a capital infusion. When the country was recently ranked higher in a global ranking of ease of doing business investors cheered leading to yet another rise in equity markets. So from an investment perspective it wise to be a bit cautious at current levels.

The 10-year price return of Sensex is shown below:

 

The long-term price return of Sensex is shown below:

Source: Google Finance

The complete list of Indian equities trading on the US markets can be found here.

Also see: 

Interest Rate on Soverign Debt From 1150 AD to 2012: Chart

The following chart shows the yield on long-term soverign debt from 1150 AD to 2012. In the year 1440, Venice paid a high itnerest rate of 20%. Overall according to an article by Dominic Frisby at MoneyWeek money has not been this cheap for a very very long time when we consider the current interest rates.

Click to enlarge

 

Source: History is a useful guide for investors – but which period are we in today?, Dominic Frisby, MoneyWeek

 

An Update on US Personal Saving Rate

The US economy is a consumption-driven economy. Hence American consumers traditionally tend to spend than save. The personal saving rate grew after the global financial crisis of 2008-09 and reached a peak of 11% in Dec, 2012. But since then a growing economing and falling unemployemnt have led to a decrease in the saving rate again. According to a journal article today the persoanl saving rate has reached a 10-year low of 3.1% in September according to date by the St.Louis Federal Reserve.

The chart below shows the long-term US Personal Saving Rate:

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Source: St.Louis Fed

Wages for workers have remained mostly stagnant for many years now but consumer debt of all types have shot up as consumers take advantage of cheap credit available. Declining saving rate is a cause of worry for investors as consumers do not have a cushion to survive should the economy turn South again.