Greed has returned

Since the election last November, the Dow Jones Industrial Average (DJIA) has rallied from 18,000 to 25,000. This extraordinary move is nothing compared to the 1,000% rise in Bitcoin from $1,000 to $10,000+ over the same period. The investing atmosphere has become speculative. Warren Buffett’s famous quote is very applicable to current market conditions, “Be fearful when others are greedy, be greedy when others are fearful”.

Even though I’ve become a bit more fearful, I’m still very positive on corporate earnings for U.S. companies next year. Tax reform should help to boost U.S. GDP growth in the next few years. I believe that the stock market is still underestimating the tax saving windfall for many U.S companies. Now what the management of these companies do with the tax savings is the wildcard. I’ll write more on this subject if tax reform is passed.

Bitcoin fever has infected the nation. CNBC and other financial news outlets are parading analysts on TV to predict the next move in Bitcoin. There is no difference between the dot-com bubble when analysts were predicting the opening price of a worthless IPO and an analyst predicting Bitcoin rising to $40,000 next year. Many of these technology IPOs were opening up over 100% higher and subsequently moving even higher. I wrote a few months ago that Bitcoin could rise to $10,000 or fall to $1,000. It’s impossible to predict the price of anything that can’t be valued. Bitcoin is a bubble that could continue to grow exponentially or fall back to $1,000. Since Bitcoin can’t be valued, I resort to the greater fool theory. A Bitcoin buyer hopes that the next greater fool will come along and magically take the price higher. If you’re asking yourself, “Can I still get in on this, or is it too late?”, you might have been infected.

The investors who own the most Bitcoin are the ones making the most outlandish predictions. These fortune tellers are “anchoring” higher prices to make people believe it’s still early. If enough people “believe” that Bitcoin is worth $40,000, then new Bitcoin buyers will put their hard-earned money (real money) into a fake currency. This is nothing more than a giant wealth transfer machine from millions of small bitcoin holders into the pockets of the large bitcoin holders. All of the Bitcoin are concentrated in a few accounts. 1% of Bitcoin holders own 78% of all the Bitcoin. Some very smart people figured out that since they can go to jail for counterfeiting real money, they could create a new currency and excite people to transfer real money into it.

There were over 100,000 new Coinbase accounts opened during the Thanksgiving holiday. The leading search on Google last week was how to buy Bitcoin with a credit card. As a financial planner, I cringe when I read that many young people are trading Bitcoin with credit cards. The Federal Reserve is not regulating Bitcoin even though it’s their job to help protect people from themselves. For now, there are no implications to your investments, but it is a sure sign that the investing public’s mood is feeling greedy.

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