Your Love Keeps Lifting Me….

The first week of 2021 picked up much where 2020 left off, with the small cap Russell 2000 strongly outperforming both the S&P 500 and the Nasdaq 100. It seems as if the more speculative the investment the more outsized the returns are relative to other similar investments. For example, this week saw strong performance across the board from investments which benefit from higher inflation. Oil futures rose over 7%, soybean futures gained over 5%, and copper futures gained over 4.25%. Much of this seems like a rational response to the prospects for increased fiscal spending following the victories by the Democrats in the Georgia Senate races. However, the moves in these commodity prices pale in comparison to the over 39% gain in Bitcoin.

While it is difficult to always know the forces that are driving asset prices at any given time, understanding the forces driving Bitcoin are nearly impossible all of the time—namely because it is almost impossible to know what it really is. If it’s a currency it has limited use. If it’s a store of value it has tremendous volatility. Whichever of these two purposes it serves it would seem to defeat either intended purpose. What it seems to be extremely good at is providing an outlet for speculative players to gain and lose tremendous amounts of money (i.e. a good gambling instrument). While I’m not here to argue for or against gambling, it is simply important to call things by their name. To me gold and Bitcoin should serve a similar purpose:  to protect against the eroding value of fiat currencies. However, with gold down over 3.25% this week and Bitcoin up a whopping 39%, it would seem I’m alone in this opinion.

Therefore, it would seem that Bitcoin is resides more in the camp of momentum trading. Bitcoin’s return this week is more in line with other hyped momentum plays du jour. Tesla was up over 23.4% this week, making Elon Musk the richest man in the world at the moment. Alternative energy stocks such as Sunrun and Plug Power were up 35.7% and 55.2% respectively, continuing to ramp higher after last year’s impressive returns. While these moves may or may not prove to be justified, only time will tell that, what is clear and obvious is that there is a tremendous appetite for risk at this time. The moves taking place in the stock market are very reminiscent of the moves over 20 years ago. While it is impossible to know when this will end, we do know nothing grows to the clouds. And eventually all things succumb to gravity. Markets are always difficult to predict, but what is not difficult to understand is that the higher they climb the riskier they get.

Thanks for reading,

Zach and Dave  

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