Cryptic Crypto Currencies and Stocks

You can’t see it or touch it but it’s there. It’s a digital currency, owned by a few and not controlled by any government or central bank. The best-known and largest crypto currency is Bitcoin. It was created in 2009 by a man named Satoshi Nakamoto. It originally had a value of around one tenth of a penny in late 2009. A Bitcoin user named Laszlo Hanyecz made headlines in early 2010 when he bought two pizzas for 10,000 Bitcoins. The transaction was valued at $25.00. Those Bitcoins would have a value of about $57,000,000 today.

Fast forward to 2017 and to Jamie Dimon’s (CEO of J.P. Morgan Chase) thoughts on Bitcoin from the chart and quotes below:

**Zerohedge Oct 13, 2017
*DIMON: PEOPLE WHO PURCHASE BITCOIN ARE STUPID
*DIMON: “WHO CARES ABOUT BITCOIN?”
*DIMON: I DON’T UNDERSTAND THE VALUE OF SOMETHING WITHOUT VALUE
*DIMON: I COULD CARE LESS ABOUT BITCOIN
*DIMON: BITCOIN IS `A GREAT PRODUCT’ IF YOU ARE A CRIMINAL’

So much for Bitcoin. It doubled in price since September when Dimon said it was a fraud. The last quote I saw it was being valued at around $5700.

As for stocks the most important indices continue to trade at record highs. The Dow is above 23,000 today. The SP500 P/E ratio is 25 today and 20 going forward. That’s historically very high by any measure.

Today is the 30th anniversary of the Great 1987 crash in stocks. The Dow Jones index declined by 508 points or 22% on that day. Last week marked the 10th anniversary of the 2007 peak in the Dow Jones before we entered the Great Recession from which we have yet to recover.

As we’ve stated many times in previous letters, the Central Banks’ coordinated zero interest rate policy combined with quantitative easing and complacency have allowed stocks to continue to drift higher with little regard for geopolitics (NKorea) and other macro events.

A fellow named Richard Thaler, who was awarded the Noble Prize in Economic Science last week, had some interesting comments during an interview with Bloomberg. He said ” humans are predictably irrational” and that “the stock market’s complacency in the face of North Korean nuclear threats and political uncertainty at home is disconcerting.” “We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping. I admit to not understanding it.”

Confusion and complacency reign while stocks go up and trading volumes decline at an alarming rate.

Good news on the intererest rate front! Rates are finally beginning to lift off from their extended historical lows as shown in the chart below.
Fed Funds — January 2007 to October 2017

Increasingly, market participants are pricing in the prospect of another rate hike at the December FOMC meeting, which fits with the prevailing projection among Federal Reserve members.

So stocks are at an all time high, interest rates are low but beginning to rise, trading volumes have collapsed and volatility has all but disappeared. That is a nasty confluence of data points that cannot continue. The Machines remain in control.

Beware of years that end in 7. They historically have been the start of something big!

J. Brock Hamilton October 19, 2017