The spread between treasuries and both investment grade and junk bonds has thinned. Investors are hungry for yield and they are bidding up prices for higher yielding issues, closing the spreads. Distressed and private debt has become a lucrative market, as evident by Oaktree’s (OAK) excellent year. It is worth noting there are some exceptions, such as the selloff in Puerto Rico’s general obligation 2035 bonds. These are selling roughly between 35–39 cents on the dollar following comments from Trump. But in a few months, I would not be surprised to see investors bid those prices up as well in the hunt for yield. Shorting treasuries (TLT) is a popular trade, but it has been a dangerous gambit in this interest rate environment. As with equities, loose monetary policy has led to odd market conditions and a bubbly bond market. You’ll note that this is a common thread across all asset classes.

Real Estate

Source: Zillow

According to Zillow, the median home value is up to $201,900 in the US. We are back to where we were before 2008 in nominal terms across most geographic regions. However, the increase in home values isn’t exclusive to the United States as can be seen below:

Source: Bank for International Settlements (bis.org)

Developed nations are seeing houses appreciate in real terms steadily over the past five years. This report goes to Q1’17 and real home values were only 2% below what they were prior to the crisis. Given the continued housing strength, real home values are now close to what they were prior to the housing bubble. In some countries, we are seeing explosive growth in property values:

Source: bis.org

Ignore poor old Brazil there, which was plagued with high inflation in the past few years, resulting in negative real growth. Housing is booming in Canada and is seeing strong growth in Australia and China as well. I can tell you from anecdotal experience that when real estate prices keep going up, it is one of the first asset classes that unsophisticated investors are drawn to. Those stock things are for wealthy people. But real estate? I know a friend who has a friend who flips houses for a living. My sister’s husband owns a house that he rents out and he also makes money from the increase in the home value! How tough can it be? It’s like the gateway drug for investing, which is ironic given that the lower liquidity and challenges associated with managing property make it one of the least friendly asset classes to invest in directly!

Oh and, in case you missed it, mortgages are becoming easier to secure again. Creditors are starting to play with the terms to make it easier for home buyers again. It’s all about attracting new borrowers. Yet again, loose monetary policies affect another asset class as low interest rates encourage consumers to purchase their houses now while rates are still low.

Alternative Investments

Alternative investments are booming as well (I view alternative investments as outside the financial world). The floor prices of liquid domain names (e.g: google.com is a domain name) have steadily increased in the past year. The total liquid domain estimated market cap has increased from roughly $7.8 billion in Q3’16 to $8.135b in Q2’17, or roughly a 4.3% increase (didn’t do year over year because reports only began in Q3’16). Note this doesn’t include sales of non-liquid domain names (e.g: Freedom.com sold this year for $2 million and wouldn’t be considered a liquid domain), which are also doing well year-to-date.

If you’ve read or watched the news lately, you’ve likely heard about the last Da Vinci held in private hands going to auction at Christie’s for at least $100 million. Notably, fine art is one of the few investments where prices are slowing down across most subcategories:

Source: Artprice’s H1’17 report. Graph is their proprietary index with base level 100 in 1998.

Perhaps we should all be investing in art! If only I understood it. Even with art, we’re seeing an increase in transaction volumes which suggests more players are entering the market. If we dig even further into niche alternative investments, such as collectibles and trading cards, we’ve seen a spike in interest there as well in the last few years. I don’t have any fancy charts to show you, so take what I have to say with a grain of salt (you should be anyway). I have a friend who owns an antiques store who claims he is seeing higher turnover and more “investing” types lately than traditional hobbyists. I suspect we will see a trend toward nontraditional asset classes moving forward as well given the expected returns in traditional asset classes. Guess which one Bitcoin belongs to?

Bitcoin & Cryptocurrencies

In the end, no one can say for certain whether or not Bitcoin is a bubble. We can infer that loose monetary policy has led to rich asset valuations across all classes (refer to my Howard Marks quote at the top of this article). We also know investors have been hungrier for higher returns and yields, pushing more capital into tech companies and riskier bonds despite the fact that confidence in the markets is relatively low. It’s like we’re in a bull market because Mr. Market is being held at gunpoint by central bankers (comic strip idea). The gun is monetary policy, in case that wasn’t abundantly clear yet.

Bitcoin is an asset that has not only offered returns, but is also the first “killer app” of a brand new, powerful technology known as the public blockchain. We are only beginning to explore the implications of this technology, but we know that Bitcoin’s sheer size makes it very difficult for any other cryptocurrency to displace it in its niche case of peer-to-peer transactions.

Due to its decentralized nature, Bitcoin has begun to act as a “safe haven” asset for countries whose currencies face hyperinflation such as Venezuela. We’ve seen it move in the same direction as gold during the last two North Korean threats, although these were short-lived movements for gold.

Even disregarding its hedges against geopolitical instability, Bitcoin has a notably low correlation against other asset classes. Several studies (Chris Burniske’s book “Cryptoassets” also shows similar results) have shown Bitcoin’s correlations with the stock market, bonds, and commodities such as gold to be close to 0. The primary reason is its volatility, which in turn is the result of its pitiful size in comparison to the other asset classes we are comparing it to. Financial advisors are beginning to look at the place of cryptocurrencies such as Bitcoin in a modern portfolio as low correlations are beneficial for risk reduction.

The largest catalyst on the horizon is the approval of a Bitcoin ETF (COIN), which will allow traditional investors to enter the market more easily. Note that the only traditional vehicle right now, GBTC, trades at a sizable premium because of investor demand:

Some of this demand comes from the fact that it is the only vehicle by which traditional investors can have Bitcoin exposure in an IRA. However, there are other options such as the company literally called Bitcoin IRA. The premium behind GBTC can only be explained as the byproduct of traditional investors who honestly have no idea how to invest in the underlying asset. The lack of supply due to the share creation process and an increase in demand over the past 6 months has led to a much higher premium lately. The volatility in said premium is the result of rapidly fluctuating Bitcoin prices, investor demand, and folks such as me who like to trade the premium.

Final Thoughts

The point of this is that there are investors waiting on the side lines with Bitcoin. The last “crash” was eaten up quickly at $3000 which would have been considered remarkable just 3 months ago. While I can’t tell you if Bitcoin is a bubble definitively, I can say there is no shortage of investors in the market for riskier assets based on current asset valuations (despite how cautionary many guests are on CNBC). I can also tell you that it’s a baby right now relative to the other asset classes we are comparing it to, which invalidates some of the comparisons made.

As institutional investors begin to support it, more businesses will as well. The name Bitcoin has made its rounds across Wall Street, but it still has a long way to go until it is in the households of ma and pa (just like e-mail back in the 90s). Many investors today are betting that we will reach that point.

There are other factors in play as well such as the fact that the largest demographic of cryptocurrency investors are millennials, who, thanks to the Great Recession, generally do not trust the banks or the government. To them, the value of Bitcoin goes beyond transaction speed and ease.

Loose monetary policy has inflated the values of all asset classes. In this environment, it becomes more difficult to analyze whether or not Bitcoin is a bubble, or if all risky markets are being impacted by chasing return and yield. Alternative investments have surged in popularity and while Bitcoin leads that pack right now by returns, it is certainly not alone. As with all markets, it comes down to a matter of opinion. All I hope is that everyone can give it a fair thought, rather than echo chambering what they hear off the media which is usually heavily biased either for or against Bitcoin. Happy investing everyone!

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