The Hunger For More
Disclaimer: All of this is speculation. Please do your own due diligence.
Let’s set the tone right. Here are some relevant quotes:
Where Things Stand
2023 was nothing short of a whirlwind. To briefly recap: inflation was persistently high but began to decline, geopolitical tensions continued to rise and spread, financial markets and monetary policy became increasingly restrictive, regional banks collapsed and were backstopped thereafter, and capital markets somewhat stabilized and performed well as inflation began to abate. A lot happened in what could be deemed as the “long-short” year - pun intended, of course!
We are experiencing an incredibly unique composition of economies globally. In a few countries, economies have stabilized while many larger and dominant countries still face various challenges. Some of the major challenges being: immigration policies that continue to outpace the declining labor market demand, housing market with severe supply constraints, higher borrowing costs that impact how builders plan and build communities, and restrictive monetary policy that suffers from the ever-increasing liberal fiscal policies; all the while, inflation targets keep on slipping away from the 2% target. I still maintain that the Fed will have to increase the long term inflation targets to 3% over time. The reason being that we now live in an economy where we have started adapting to higher prices, wages and rates, which divert from the historical trends we became accustomed to over the past decades. Gone are the days where we can consistently achieve a 2% inflation target given the rates will stay higher.
Even with that backdrop, we have what appears to be a strong and resilient labor market although with the expected decline in demand. Meanwhile, the housing market has achieved an interesting equilibrium by way of rate increases that have stopped. However, with interest rates likely staying higher for longer, upcoming financing and mortgage renewals for both commercial and residential markets will unwind over-levered contracts over the next couple of years. It is no coincidence that the Fed is in no rush to run-off commercial mortgages from their balance sheet. For instance, imagine a commercial office property valued at $500m in 2019 being reappraised today at $250m. That is quite a haircut and harsh reality that awaits the sector broadly. So why cause severe distress if you don’t need to?
Fool’s Gold
Scarcity and consumer psychology around status symbols are the foundational pillars that support discretionary or luxury products and their price. Cryptocurrency understands its audience well and tends to capitalize on those pillars. Before we dive deeper, it’s important to note that I used the word price and not value. There is a stark difference between the two. To drive the point home, let’s dive into something easily relatable like luxury brands. Luxury brands in general tend to mass-produce their products and charge a premium while their marketing sells the illusion of scarcity, desirability, and status. For instance, let's take Rolex as a luxury brand, which many have heard of and seen.
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As a horology enthusiast myself, is a Rolex really worth its price tag? Well, they make good watches, but they are far from impressive to some. There are other watch brands that many pay more for. But why? One could argue that Rolex has great heritage and historical contributions to the horology community, but little value in terms of innovation of movement in their watches, and the overall quality you receive for the price. As a result, Rolex has to maintain the status of their brand by way of scarcity, as there are other brands that offer better quality products for the same price or less. There once used to be a wait list that became too large to keep, and now the unspoken rule is to purchase their entry-level products before you are offered the sought after models. And this is for a company that allegedly produces over 1m watches each year, whereas other luxury watch brands on average probably produce less than 100k watches per year. Let that sink in.
That GMT/Daytona/Submariner that you were told are rare to come by are not as difficult to acquire as the boutique near you suggests. Additionally, if you went to a Rolex boutique prior to 2020, you may have walked in and out with one of those watches at or below MSRP. It’s quite impressive how Rolex has mastered marketing since. It has been the marketing and artificial supply constraints at the Rolex boutiques that has helped create a secondary market where the price remains higher than MSRP. And so far, they clearly know how to target their audience successfully. That precisely is the nuance between price and value, and in many regards, it is similar to cryptocurrency and the marketing that surrounds it.
Now how does all of this relate to cryptocurrency? With Bitcoin’s global exposure, I will only touch on that one cryptocurrency. In its nascent stages, what Bitcoin represented is quite different to what today’s narrative has become. The selling points or rather its value used to be anonymity, blockchain (a fancy word for an immutable public ledger on a shared database), scarcity, transactional speed, and a decentralized “currency” (uninsured) that would be difficult to manipulate. Those who understand Bitcoin already know where I’m headed and have likely chuckled by now. Fast forward to today, I have a few questions I will leave for you to ask yourself and come to your own conclusion:
These are just some of the many questions I have regarding Bitcoin and cryptocurrency at large. You can infer a lot from those questions or better yet statements in some regards. However, it is entirely possible that I don’t comprehend the realm of cryptocurrency at all and I am wrong. After all, I’m just an observer that finds the offering and the changing narratives amusing. Ultimately, can you justify the price you are willing to pay and reason about its intrinsic value today? As Buffett aptly put it, “price is what you pay, and value is what you get.” Own at your own risk and play responsibly, folks!
The Hunger For More
Large and dominant economies by design are dynamic yet stable, self-correcting, and utilize human ingenuity to continuously progress. And every now and then we encounter periods of stagnation or excessive growth that warrant special intervention before stabilizing. We encountered such a period over the past few years that resulted from the rampant quantitative easing and resulted in persistent and high inflation. While money is not as cheap as it used to be, it has become less restrictive over the past few months, such that this change has been noticeable enough all the way in Hanoi. In speaking with a few local business executives in different industries (Wine/Spirits, Banking, Telco), they expressed that although access to foreign capital is not at the same level as it used to be, it has become slightly easier to access/raise capital to invest domestically over the past couple of months. And that is likely a function of the stability within the Canadian/US capital markets given the pause in rate hikes. Although this likely applies only to the larger conglomerates for the time being, startups still need to be increasingly prudent.
As the saying goes: “change is the only constant in life.” We now live in times where economies will have higher interest rates for longer than many expected globally. Sure, we will likely get a rate cut in 2024 and beyond, but the interest rates for the most part will remain higher for longer than conventional wisdom suggests. If I had to speculate, interest rates in North America will stabilize around 3% over time instead of the 2% target. Incidentally, Japan just ended their 17-year monetary policy stance of quantitative easing and negative interest rates with a hike. Now take a moment to grasp the change in narrative such actions bring about for a major economy like Japan, its businesses/investments and partners globally, and the pain that is inevitable for those surviving on cheap liquidity. Implications of such changes are far-reaching, but require time to trickle through.?
We live in extraordinary times that unfortunately demand painful policy changes to stabilize economies globally. We can only hope that such changes are implemented in a timely manner and with equanimity. The appetite for risk appears to be back and there is hunger for more. It will be a delicate balance.
Seems like the risk-taking spirit is making a comeback! Finding that balance between seizing opportunities and managing risks is indeed crucial. It's all about treading carefully while staying open to new possibilities. Here's to navigating this delicate dance with confidence and savvy!