Bubbles, Crashes & Fiscal Dominance - Should You Be Worried?
To investors, Sam Callahan worked with Lyn Alden to publish a piece yesterday titled Full Steam Ahead: All Aboard Fiscal Dominance. They dug into the data to show a number of future scenarios for the United States economy. I recommend reading the full report, but here are the main takeaways:
One of the conclusions from Sam’s analysis is “in this environment, holding hard, scarce assets such as real estate, equities, gold, and bitcoin offers a pragmatic way to preserve purchasing power and navigate the pressures of fiscal dominance.” This aligns with my thought that citizens, regardless of their investment experience, are being pushed away from dollars and into investable assets. You can overlay the rise in investment exposure with the explosion of risk-taking opportunities, including crypto altcoins, sports gambling, and much more. As more capital enters the market, many asset prices will be driven higher. As prices go higher, people begin to get wealthier. As they get wealthier, this new capital is convinced they are smart, rather than at the right place in the right time. You can see where this is going — capital appreciation begets more capital entering the market. People begin to chase returns. The “get rich quick” mindset is undefeated throughout history. And at some point investors start to allocate capital to financial assets indiscriminately. This is when the market becomes susceptible for bubbles and the ensuing asset price crashes. Almost as if it was planned, famed investor Howard Marks published a memo earlier this week titled On Bubble Watch. Marks lays out an interesting argument for what constitutes a bubble:
This is a fascinating way to think about bubbles and it coincides with what I have experienced in the various euphoric manias I have lived through already. Think back to 2021. It felt like every person with a brokerage account was getting rich. Asset prices would grow to the sky. And you would be excommunicated from the investment world if you spoke of risk, bubbles, or crashes. That should have been our sign that things were too good to be true. I don’t think we are at the same level of euphoria today, but it is definitely something to continue to watch as we enter 2025. There is a potential path forward that takes us right back to the excitement and chaos of that market over the coming months. Howard Marks is clear in his memo that he is not an equity investor. However, he takes the time to outline his current view of the market, including the potential risks.
I am not here to predict a market crash. I actually believe we are headed in the opposite direction. The fiscal dominance that Sam Callahan wrote about, combined with the need for more risk-taking by citizens, will likely drive us higher across numerous asset prices. But at some point there will have to be a correction. Will stocks crash like they did during COVID? I don’t know. Will bitcoin crash 80% again to repeat the 4-year cycle? I don’t know. There will be a separation between long-term investors and short-term speculators though. The difference lies in whether you can hold through a market correction or you are forced to panic sell as prices are crashing. The former will outperform the latter almost every day. So the story for the next two decades really boils down to one thing challenge in my mind — can you find resilient assets that will persist through the increasing volatility we are headed towards? If you can do that, your portfolio will do quite well. If you jump from fad-to-fad, I am worried that financial ruin awaits you. Keep your head on a swivel out there. The world is accelerating and uncertainty is our date to the dance. Hope you all have a great day. I’ll talk to everyone tomorrow. - Anthony Pompliano Founder & CEO, Professional Capital Management 🚨 READER NOTE: I am hosting Bitcoin Investor Week in NYC from February 24-28th. This will be the largest finance conference of the year focused on bitcoin. Speakers include Mike Novogratz, Cathie Wood, Jan van Eck, Anthony Scaramucci, Jack Mallers, and many others. You can purchase tickets here: Get ticket for Bitcoin Investor Week Coinbase’s Chief Legal Officer Explains How Regulators Have Been Abrasive to Bitcoin & Crypto IndustryPaul Grewal is an American attorney working as Chief Legal Officer at Coinbase. In this conversation we talk about it all, why regulations have been so abrasive toward the crypto industry, what is going on with de-banking, Operation Chokepoint 2.0, what happened with Tornado Cash, why Trump administration is so bullish for crypto regulation, and what milestones Paul looks forward to in 2025. Enjoy! Podcast Sponsors
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