As the crypto markets began to reverse Thursday's gains at about 10 am New York time Friday morning, I wanted to amplify the point I made in my RM column yesterday. I have been trained to value companies for the past 30 years, which is, in effect, how one values stocks. Companies have cash flows and earnings and growth rates in those two metrics, and thus can be valued using the basic principles of discounting. Cryptos cannot.
So, as I said yesterday, that is a VALUATION judgment, not a VALUE judgment. Believe me, you will not find a commentator as horrified as I am about the debasement of the world's fiat currencies by the drunken-soldier-like spending of the world's feckless central bankers - I'm looking at you, Jerome - than I am. It is madness, sheer madness. But currencies do have some valuation methodology based on national income accounting - taxes, spending, etc. It doesn't mean we should throw up our hands and give up. Certain central banks, the People's Bank of China, for instance, are actually still practicing responsible money supply management practices, and not flooding the world with depreciating currency.
Cryptos have no such no inputs. Only in the case of Bitcoin, but not Dogecoin, a limited supply. So demand will drive the price, but there is never any return on such a purchase other than capital gains. That might be true of Tesla (TSLA) , but it is NOT true of the S&P 500. Yet, according to multpl.com, the S&P 500's current dividend yield of 1.36% is the lowest in 20 years and approaching its dot-com bubble nadir. This chart is horrifying to me.
It is no coincidence that the correlation of crypto to the S&P 500 has been rising. As real returns are ignored in search of capital gains, stocks, even after a blistering run since the March 2020 lows, just aren't "hot" enough for some speculative investors. Hence, we go to crypto.
Morningstar has data dating back to 2013 for the correlation of the price of Bitcoin to the price of the S&P 500. For the years 2013-2019, that figure was near zero, and usually slightly negative. For all of 2020 it was POSITIVE 0.22. According to skew.com. owned by Coinbase (COIN) , the 12-month average correlation between the prices of the S&P 500 and Bitcoin was 0.41 as of March 2021. Do you see the pattern here? As I have said before in my RM column, stocks are crypto, man.
I have seen this movie before, at least the ending of it. I was on Wall Street, actually based in London's financial center, The City, when the dot-com bubble blew up in 2000-2001. Investors took their collective eyes off real returns in the search for capital gains, and got burned, to the tune of a 70% decline in the Nasdaq. Fast forward 20 years and the market's eyes have been averted from real returns yet again.
When I first started on Wall Street in equity research at Lehman Brothers in 1992, a wise old-head told me "this time is different" and they are the four most expensive words on Wall Street. I had the good sense to leave Lehman many years before it blew up. But those words stick with me to this day. Do not forget them.