Since the 2008 financial crisis, countries around the world have been pursuing a very accommodative monetary policy to put their economies back on track, which has led to unprecedented increases in asset prices.
Property prices rose well above what would be affordable for most middle-class people in developed countries, and equities surged over the 13-year period, prompting investors to buy. A new asset class called cryptocurrencies has started to take a large share of investment assets. This may have been due to the fear that governments without control may print fiat money that has no backing.
With the onset of the COVID19 pandemic last year, the situation has become much more dangerous, not only because of loose monetary policy, but also a fiscal policy of printing trillions of money to help their hit economies. This policy has caused the value of fiat currencies to decline further, as can be seen in their declining purchasing power, where it now costs more to buy almost everything than before. As a result, the prices of investment assets rose sharply. However, is the increase in asset prices justified? For comparison, let's look at how much more money governments have printed so that we can estimate how much the value of the fiat currency has fallen.
In general, as a loose definition, a central bank's balance sheet can be used as an estimate of the amount of currency printed. Looking at the chart below, which only applies to the US, the US Fed's balance sheet has risen vertically since the COVID19 pandemic, doubling over the past year by an amount that has accumulated over 15 years. The same situation is happening worldwide in every country because the COVID pandemic is a global event.
What's better? Risk or Investment?
If history matters as always, asset prices may soon inadvertently spike to enormous volumes because of the sheer amount of money governments have created. In the United States alone, the same amount was printed last year as in the last 15 years. Therefore, using the percentage increase in asset prices over the past 15 years can be a good measure of what kind of price increase we can expect.
According to statistics, the median of US house prices has increased about 2 times in the last 15 years, while overall stock prices have tripled. Cryptocurrencies, a new asset class that emerged from the 2008 crisis, have grown thousands of times over. This spike in prices has brought enormous gains to those who have invested in them, and the gigantic gains are unlikely to turn into losses, even with the market retreating for many who started investing early. This has put people who do not invest at a significant disadvantage, not only because they are not getting the profits that their investing colleagues have made over the years, but also because of inflation, which wastes a small percentage of their wealth each year.
As vaccination programs are spreading around the world, hopes are high that the pandemic can be contained by the end of this year, and with that, economies are reopening, fearing governments might cut back on their support. However, the events of this month have definitely dampened these fears, allowing for the continuation of increases in risky assets, with the result that those who do not invest are likely to lose again in the next 2 years.
The United States and Europe, the two regions with the most developed capital markets, reiterated their position on keeping interest rates at historically low levels as well as continuing fiscal and monetary support to their economies for fear that too early cuts could affect their economies. economy later. This lowers the risk of assets that will inevitably count another rise, with exchanges and the cryptocurrency market as the main beneficiaries. Personally, I favor cryptocurrencies because of the difficulty of valuing these assets as the valuation of stocks has gotten a bit too high.
During the ECB meeting in early March, the head of the ECB, Christine Lagarde announced a faster printout of money in the form of accelerated asset purchases to strengthen markets and lower interest rates on loans.
The US government issued a third stimulus package in the year, this time printing $ 1.9 trillion to finance it. Last week, the Fed also quelled concerns about the rising bond market, further assuring that there would be no interest rate hike until at least 2023 and that the Fed would allow inflation to exceed its level by then.
Markets rebounded after the Fed said the Dow Jones Industrial Average surpassed another ATH to over 33,000 and Bitcoin, a new asset for just 10 years, was at close to $ 60,000.
With the amount of possible losses, as well as the inflation that will rage in the near future, the person who does not invest is already losing compared to someone who invests even passively by only buying assets and holding them. All this increase in price is actually a symptom of a decline in the value of fiat money, not an actual increase in the value of assets. Hence, such a phenomenon does not necessarily have to be an asset bubble, because it is money that has depreciated and differs from historically where money has retained somewhat of the same value but asset prices have risen. Back then, things were different than now, when central bankers went crazy just throwing money in and out of the market all the time. As the saying goes, never fight the Fed, because central bankers print money to buy assets, the one who doesn't buy will be left behind.
An uninvested person can do well if they get on board as soon as possible, especially for cryptocurrencies, which are a direct invention to mitigate the effects of a global weakening in fiat currency. The longer you wait, the greater the risk that our fortune will run out when fiat money loses its value.
About Kim Chua, PrimeXBT Market Analyst:
Kim Chua is an Institutional Trading Specialist who has been successful at leading banks including Deutsche Bank, China Merchants Bank and more. Chua later launched a hedge fund that has consistently made three-digit returns for seven years. Chua is also a profound educator who has developed his own trading curriculum to pass his knowledge on to a new generation of analysts. Kim Chua actively tracks both traditional and cryptocurrency markets and is eager to find future investment and trading opportunities as two very different asset classes begin to converge.