To The Moon

The first quarter was a troubled one. The positive start was mostly a reaction to the extreme negativism in December month. Sometimes things in the stock market are simple. When everyone is negative, the stock market can only go one way and that is up. That was the case at the end of December. As many as 85 percent of economists were counting on a recession, and the sentiment indicators swung to the extreme negative. Even if fundamentally things are not going well, that makes it a good time to get in. During the quarter, it appeared that the economy was doing so well that the recession scenario had to be moved to 2024 or even beyond. The flip side of that is that the inflation numbers did look stronger than had been anticipated. Now there are the necessary one-time effects and adjustments running in between, but a stronger economy also allows inflation to stay high for a bit longer. In any case, it did provide pricing out rate cuts and some more rate hikes. Those interest rate hikes were enough to cause a banking crisis and it seems to be behind us now, but because the cause (higher interest rates and an inverse curve) has not been addressed, the problem could flare up at any time. In such an environment with fears of recession, rising inflation, more interest rate hikes, with a banking crisis, it seems natural for investors to look for safe havens, not to mention all the war news and other geopolitical developments.

Looking back at the performance over the past quarter will conclude that the safe havens are large tech stocks, gold, and Bitcoin. The large tech stocks can still be understood. The percentage in the value index of these stocks at the end of last year has never been higher. Moreover, it is precisely these companies that cut staff sharply, have no debt, have relatively few staff related to revenue anyway, and where the subscription model often ensures that raising prices is no problem at all. Moreover, tech companies' share prices fell sharply last year. That the more traditional tech companies (Microsoft, Apple, Amazon, and Google) were up about 20 percent is already extraordinary, but the real value appeared to be in Nvidia, Tesla, Facebook, and Salesforce. The traditional safe havens such as defensive companies showed just the opposite, falling in price. This is unlikely to continue for the rest of the year. The moment the Fed pauses, the cards will be reshuffled.

Another notable winner is gold. Let me start by saying that I am by no means a gold adept. I did try to make an investment case for gold in the 1990s, but I was advised against it by colleagues. It would not be good for my career. A gold mine was a hole in the ground with a liar next to it, etc. In the decade that followed, the price of gold increased tenfold, and a psychological problem then is that gold looks ridiculously expensive from my perspective. Furthermore, there is a peculiar kind of idiots swirling around gold this century telling us that the world is going to end (financially). Then I prefer the rational views of Warren Buffett who also does not understand why people go to so much trouble to get gold out of the ground only to store it again with just as much trouble in a vault deep underground.

After the Great Financial Crisis, people who made a case for gold were lumped in with people who believed in conspiracy theories, not a healthy environment either. This was evident when I wrote some 10 years ago that commodities were not a structural asset class and that it was time to exit at the end of the commodity super-cycle, which began with China joining the World Trade Organization in 2001. Initially, the gold price also sank, but in the summer of 2016 there was a recovery and I was tempted to say that gold could go to the $500 mark, which, by the way, was eagerly picked up by the gold-adepts. We did not see that $500 again, but there was a condition to that $500 and that was the end of conventional central bank policy. That end did not come, instead, a major part of the monetary madness was yet to come. In addition to the monetary madness, the U.S. banking crisis (a consequence of the monetary madness) and the use of the dollar as a weapon against the Russians caused a recovery in the price of gold. Russians, as well as Arabs and Chinese, value gold more than large parts of the rest of the world. By implicitly linking the renminbi to the gold price, the Chinese also want to boost confidence in their currency. What really matters to investors is whether gold is a better investment than stocks. It hasn't been since the summer of 2016, but it has been for the past five quarters. This seems to indicate that we are in a different regime, say one in which the dollar may weaken even further.

Now gold to me is the same as bitcoin, probably gold even has to lose out to bitcoin in terms of transportation. I do see the potential for digital currencies, they could eventually cause a real revolution with Web 3.0, but as with gold, I don't see that much intrinsic value. But bitcoin also had a good first quarter. Now bitcoin is not a true safe haven at this time, but more of an alternative to the Nasdaq (high correlation and even much higher beta), and thanks to big-tech stocks, the Nasdaq also performed fine in the first quarter. I don't see the fundamental value of bitcoin, nor, for that matter, gold. Nevertheless, I do believe bitcoin will eventually end up at an all-time high. It appears that much of it has now lost its codes. If this continues, bitcoins will become extremely scarce yet again.