Q: Is it time to fight the Fed?
The market seems to think so: The sharp rally in equities since yesterday afternoon is not the reaction Powell was hoping for. His still-hawkish message seemed to fall on deaf ears.
I expect FOMC members will try to make their intent clear by shouting an even more hawkish message at us in upcoming interviews and speeches.
But it may not have much effect, because I don't think the market has misinterpreted Powell's comments. Instead, I think the market is now operating on a different time frame than the FOMC.
Even with its stated intention for "ongoing increases," it's hard to imagine the FOMC still raising rates any later than the May meeting (Markets are even starting to question whether they will definitely do so at the March meeting.)
The May meeting is less than four months away — which is not much, given that financial markets are discounting mechanisms. Risk assets aren't priced for how we think things are right now, they're priced for how we think they'll be in, say, eight or nine months' time.
This creates a natural tailwind for equities: Next year's earnings estimates are almost always higher than this year's.
So, the stock you buy in February may be trading on, say, 15x 2023 earnings. But by June, people will be thinking about 2024, and on 2024 estimates that same stock is only on, say, 13x earnings.
As soon as people stop thinking about this year and start thinking about next year, stocks get cheaper.
That doesn't work with crypto, because crypto earnings are scarce, and for the few cryptos that do have them, they're just as likely to be down from one year to the next as they are to be up.
But we're not thinking about next year yet.
We're looking five or six months out and what we see is a much less hawkish Fed.
Q: Should the US ban crypto?
Investing legend Charlie Munger thinks so, and I will say that I find some logic to his argument.
He argues that "a cryptocurrency is not a currency, not a commodity, and not a security," which immediately makes me think he's thought more deeply about it than the SEC.
"Instead, it's a gambling contract."
I'm not exactly sure what a gambling contract is, but "ban crypto because it's gambling" has more rationale behind than the usual "ban crypto because they're unregulated securities."
Regulating securities is about disclosure, and all relevant information about a crypto is by its transparent nature already disclosed, so regulating them doesn't change much.
But if you think crypto is purely gambling, then, sure, banning it makes sense.
But, buying stocks on anything less than about a 10-year view is also gambling, so you'd have to ban that, too.
I'm a huge fan of Charlie Munger, but the man is 99 years old and has spent his recent years designing and funding student dormitories with no windows.
Dubbed "dormzillas" by their light-deprived residents, a dissenting architect declared them "unsupportable from my perspective as an architect, a parent and a human being."
So, legendary as he is, we maybe don't have to listen to him quite as much as we used to.
Q: Can I get a slightly younger person's take on crypto?
On CNBC this morning, 73-year-old Ray Dalio panned both Bitcoin ("it has no relation to anything") and everyone that pays attention to it ("It's a tiny thing that gets disproportionate attention.")
He then proceeded to make the case for both Bitcoin and paying attention to Bitcoin: "We are in a world in which money as we know it is in jeopardy, right? We are printing too much and it's not just the United States… And so in that world, the question is, what is money and how's that going to operate?"
Dalio squares his circle by explaining that what he wants is neither a volatile cryptocurrency nor a fiat-linked stablecoin, but something in between: "What would be best is an inflation-linked coin."
That is, indeed, crypto's holy grail. And all of finance, really. Except that crypto may be the only place where people are thinking that big.
The industry might be thinking too big: My guess is that the only way to successfully peg a coin to inflation is to back it with the real-world assets that inflation indexes measure.
That would require tokenizing a lot of off-chain things, which won't be easy.
But you have to start somewhere. And Bitcoin is where we started.
Q: OK, can I get a MUCH younger person's take on crypto?
Sure.
The youngsters at Ark Invest published their annual Big Ideas report this week and — despite the rough time their investors have been having — Ark's ideas are as big as ever.
"Cryptocurrencies and smart contracts could command $20 trillion and $5 trillion in market value, respectively, during the next ten years."
Today's total crypto market capitalization is $1.1 trillion, so that would mean crypto is nearly 25-fold bigger by 2033.
That optimistic view is mostly based on a gargantuan rally in the OG crypto: "The price of one bitcoin could exceed $1 million in the next decade."
The math on that seems suspiciously round to me ($1 million * 20 million bitcoin = $20 trillion market cap). And if Bitcoin is 4x larger than the rest of the crypto industry in 10 years, I'm not sure we'll have accomplished much.
But they do also see "decentralized applications and the smart contract networks that power them" generating $450 billion in annual revenue and hitting $5.3 trillion in market value by 2030.
If so, even 106-year-old Charlie Munger will be happy crypto was invented.
Q: Ok, that's TOO young. Can I get something in between?
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