Merryn Somerset Webb
June 17, 2022
Trigger warning: if you are a crypto fanatic you may find this column both offensive and distressing.
Right, that bit out of the way, it is not crypto I want to start with. It is other, lesser, chaos. If you spent the past few weeks attempting to navigate stock markets — or attempting to ignore them — you might have the feeling that everything is unmapped, unprecedented and unpredictable.
But it isn’t really so. We have had no shortage of warnings from history — and from many a market old timer — about all this. We know that over easy fiscal and monetary policies lead to inflation.
We know that very low real interest rates tend to lead to capital misallocation. We know that investors mostly don’t like inflation to get over 4 per cent — although they were a little too sanguine when it hit 4 per cent this time around.
We know that long-duration stocks — the jam-tomorrow ones that soared during the pandemic years — are very sensitive to moves in interest rates. We know that long-term market valuations tend to return to the mean — and we have lots of rules of thumb that give us some hints as to when we should start worrying about that kind of thing.
Think of Warren Buffett’s focus on the ratio of total US stock market valuation to US GDP for example — the latter is currently rather higher than the former, something which suggests the US market is still unpleasantly overvalued.
We have also had lots of numbers to add to those rules of thumb — there is an almost overwhelming volume of data on stock markets. So we know, for example, that even at the end of April this year the US market was trading at somewhere between 30 per cent and 50 per cent higher than its 15-year median on pretty much every valuation method you might have thought of using — for example, 50 per cent for price to book and 33 per cent for dividend yield.
We are also aware that there was no major market globally that could be considered properly cheap. If you think of that — as Duncan Lamont, head of research and analytics at Schroders, does — as being over 15 per cent below the 15-year median in valuation terms, this represented a pretty clear and present danger to markets.
Things have eased a little over the past week — Lamont’s latest numbers have most markets showing at least some green with even US stocks, as measured by the MSCI US index — 6 per cent below their 15-year median, at least in terms of the trailing price/earnings ratio.
These numbers don’t tell us everything of course — in a world of cost-push inflation and super-stressed consumers, the e in lots of p/e calculations is likely to be too optimistic meaning valuations are actually even higher than they look.
At the same time the past 15 years have been all about the easy money macro regime that we are now leaving far behind us: over the past 15 years, for example, the US median p/e has been 19.6 times, but over the very long run it has been more like 17.5 times. Maybe 17.5 is a more relevant number to watch. Something to worry about.
We also know quite a lot about how bear markets tend to play out. We’ve seen these kinds of multiple collapse before — think the early 1970s, 1987 and the early 2000s — and we’ve also seen profit collapses of the type we might now expect.
Liz Ann Sonders, chief investment strategist at Charles Schwab, has looked at US market falls in bear markets (including those that fell 19 per cent rather than the full technical 20 per cent) with recession and without recession.
The average market fall in the no-recession group has been 28 per cent and in 34 per cent with recession — not much difference in the great scheme of things but it is worth noting that the recessionary bear markets lasted on average twice as long as the non-recessionary.
Lamont has also looked at how long losses have lasted in previous market collapses — in nominal terms. If you had stuck with stocks after the first 25 per cent fall in markets in 1970, 1974, 2001 and 2008 you would have been even after somewhere between 2 and 4.8 years.
If you had dashed for cash after a 25 per cent fall instead, that number rises very substantially — to 5.3 after the crash of 1974, and to very big indeed post-2001, as you are still under water.
More to worry about. The key point here is that we might not know quite which template to use for the crash of 2022 yet (although the 1970s look like the best place to start). But we do at least have templates to choose from. It is also worth noting that using these templates is not about recognising that there is value in listed companies — of course there is. It is about figuring out how to price that value in any one environment.
On to the offensive and distressing bit. Ready? None of the above is true of cryptocurrencies. None of it. There is no template for their behaviour — there is no history to lean on. And there is also very little to back up the idea that there is value in crypto that we can find a way to price rationally.
It isn’t a store of value — bitcoin is 70 per cent off its highs and down 25 per cent in the last five days alone. It isn’t an inflation hedge — it would be up 10 per cent this year if it were. It isn’t uncorrelated to interest rates — far from it!
It doesn’t provide a hedge to equity markets — again, far from. It isn’t better at shifting money around the place than conventional methods — for those of us not evading taxes, money laundering or fleeing war zones.
It isn’t environmentally friendly and, crucially, it isn’t easy to use. As all the fluff around it disappears it is hard to see what will be left for crypto holders.
This is the first bubble that has even been quite like this: you may have lost all your money in the tulip bubble for example. But tulip bulbs can be planted or, in extremis, eaten — they taste a bit like onions . . .
All in all, so far all that bitcoin — and the other cryptos — have proven themselves to be is temporarily turbocharged plays on money printing. I can make a case for there being residual value in almost any asset. I can’t make one for bitcoin. I’ll keep holding my £1,000 worth (once £4,000 worth) as a tiny hedge against my old-fashioned thought processes. But when I use the templates of the past to tot up the current value and the expected minimum value of my overall portfolio (this is not a happy calculation to make) I will continue to value it at £0.
Merryn Somerset Webb is editor-in-chief of MoneyWeek. The views expressed are personal.
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