I have been trying to get my head around how some assets are priced, a topic that at times torments me. I understand fundamental analysis well, and how – for example – the expected future cash flows of a company are used to value the company’s shares and its bonds. I also understand rudimentary technical analysis although I don’t use this as a driver of “buy-no buy” decisions except in unusual circumstances. However, if you set aside all this mumbo-jumbo for a sec, the reality is simple – as asset is more or less worth what the last person paid for it.
While prices can and do occasionally delink from intrinsic value in traditional asset markets like stocks and bonds (remember meme stocks?), the disconnect seems to occur more often in private markets, where savvy investors can gain an edge through intellect and analysis. Perhaps the disconnect is most true with so-called “passion assets”, which generate no cash flows to underpin their value. For example, a beautiful painting or sculpture from a world-renowned artist, a classic automobile, a case of first-growth Bordeaux, a Daytona Rolex watch, or a rare coin generate no cash flows. For these illiquid assets, valuation is simply what the last person paid, or perhaps more appropriately, what the next person is willing to pay. This diatribe brings me to the big news of the week – the approval by the SEC of spot Bitcoin ETFs.
I have owned cryptocurrencies in the past, but I exited this emerging asset class in 2017 for one reason – I got frightened. In retrospect, I left a lot of money on the table by cutting and running. Try as I may, I simply could not understand the drivers of the day-to-day price movements, even if I believed in “the cause” of crypto’s (i.e., decentralised finance). Fair enough, but I suppose the reality is that – for better or worse – I began to question their valuations, lost as to how cryptocurrencies should be worth anything at all. Advocates can present a case that cryptos are a store of value, or that they can be used as a medium of exchange, especially for cross-border transactions. I am afraid I don’t buy either, at least not yet. In fact, the dark side of me thinks that the price of Bitcoin has surged since early 2023 because it is being used as one of several avenues to effectively circumvent Western sanctions on “bad actors” like Russia and Iran as the US tightens the screws. Is this stupid? Probably, but as I said, it’s my dark side.
You might or might not agree with me, but whatever you believe, the introduction of spot Bitcoin ETFs from well-recognised brokerage and asset management firms last week without doubt brought another level of credibility to cryptos. If you subscribe to #Bloomberg and want to learn more about investing in spot Bitcoin ETFs, this article is worth a quick read: “Here’s How to Invest in Bitcoin ETFs”. Ah…back to memes, a perfect example of publicly traded stocks surging and losing complete touch with their intrinsic value. Meme stocks eventually fell to Earth, and when they fell, they fell hard. Could this happen to Bitcoin and its brethren sooner or later? Time will tell.
The rest of the week was driven by:
US inflation data, which was mixed. On Thursday, December CPI (BLS release here) came in slightly hot for headline but in line for core; there was little market reaction. However, when PPI was released on Friday (BLSrelease here), it showed that December (MoM) headline PPI actually declined, with YoY headline coming in at 1.0% and YoY core PPI coming in at 2.5%, lower than expectations. Yields at the short end of the curve plummeted as investors got back on board “the Fed is going to ease soon” train.
Further escalation of the conflict in the Middle East, with the US and UK bombing Houthi positions in Yemen in retaliation for Houthi’s ongoing attacks on vessels in the Red Sea. Oil was grinding higher much of the week, but actually ended up slightly lower. Once again, geopolitical risk doesn’t seem to matter much in the oil – or more broadly – risk markets altogether.
Fourth quarter earnings for S&P 500 companies kicked off on Friday, with four of the top six US banks (Citi, JPM, Bank of America and Wells Fargo) reporting earnings. I didn’t look at these closely, but understand that JPM was fairly positive on its management call regarding the outlook, and Citibank announced it would be sacking 20,000 employees. Three of the bank stocks declined, with Citi bucking the trend. (Increasingly, the key to a stock pop is layoffs, which seem to be broadening across several sectors.)
Mixed economic data in the Eurozone and UK, and it feels increasingly like an ongoing cycle of “one step forward, one step back”. Equity and bond markets in Europe were sideways to slightly down. Both the Eurozone and UK are teetering on recession but seem to bumping along with nil growth for now.
Global equity markets were mixed this week. The big winner was the Nikkei 225, which rocketed ahead more than 6% on the week as enthusiasm builds due to a combination of an ongoing accommodative Bank of Japan (it can’t last forever, or can it?), strong Japanese corporate earnings and reasonable valuations, certainly vis-à-vis US equity markets. US equities were also solid, but Chinese (and emerging markets) equities floundered, starting the year the same way they ended 2023. US Treasury bonds were better bid following mixed CPI and PPI data, with the action mostly taking place at the short, more policy driven, end of the curve. The 2y-10y yield curve narrowed a further 17bps, to negative 18bps, as its inversion continues to flatten. The US Dollar was stable vis-à-vis the DX-Y index, and the Yen was slightly weaker. Bitcoin sagged on Friday into the close, I suspect because the mid-week approval by the SEC of spot Bitcoin ETFs was already largely priced into markets.
Monday is a federal holiday in the States with both stock and bond markets closed.
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.
Corporate bonds (credit)
Safe haven and other assets