It’s time to sit back, relax and enjoy a little joe …
Welcome to another rousing edition of Black Coffee, your off-beat weekly round-up of what’s been going on in the world of money and personal finance.
We’ve got a little more than three weeks until Christmas.
And with that, let’s get this party started!
“How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?”
–Alan Greenspan
Credits and Debits
Debit: Did you see this? Nearly 1 in 4 Italian banks — 114 in all — have non-performing loans (NPLs) that exceed their tangible capital. And if that ain’t bad enough, 24 of those Italian banks have NPLs that total 200% (!) or more of tangible assets. Then again, I’m sure it’s nothing that more central bank money printing can’t fix.
Credit: Speaking of central banks, last week, Russia’s Central Bank announced that the BRICS countries are considering a single gold trade system early next year. The announcement is yet another sign that the US dollar’s days as the world’s reserve currency is officially on borrowed time.
Credit: In other news, at 8.7 years, we’re approaching the longest bull market for balanced 60/40 equity/bond portfolios since the Roaring 20s, when 9.1 years passed without a 10% total drawdown. Could this mean another Great Depression is just around the corner? Well, maybe … if history is any guide.
Debit: One worrying sign is that the top 10 contributors of the S&P 500’s bull run accounted for 33% of its performance. Even more alarming is that all of those companies have seen their respective price-to-earnings ratios expand this year — in some cases dramatically. That suggests there aren’t enough high-performing companies left to keep the party going much longer. We’ll see.
Debit: Stock and bond prices aren’t the only assets that are soaring. Home prices are too. In fact, the average US home price just topped $400,000 for the very first time. If only wages would rise fast enough to keep pace. The average US home, at $400,000, now costs almost seven times the average US household income of $59,000.
Debit: Purchasing power — at least with respect to houses — has a long way to get back to the 1960s, when the median home price was less than three times median household income. Today, it takes almost 4.5 years of work to afford the same home.
Debit: Homes today are more expensive than ever, but when it comes to a lack of affordability, they can’t hold a candle to Obamacare. Oh, sure; the troubled “healthcare” law may be a good deal for those who are being subsidized — but the hard working folks who are actually required to foot the full premiums can’t afford it.
Debit: Meanwhile, pop superstar Katy Perry posted a picture of her and investing legend Warren Buffett on Twitter this week with this caption: “nbd asking Warren Buffet [sic] his thoughts on cryptocurrency.” Shortly thereafter, bitcoin reached yet another all-time high this year: $11,395. Yes, that’s kind of pricey … but it’s still $280,000 cheaper than shares of Buffett’s Berkshire Hathaway Class A.
(click to enlarge)
Credit: For those of you not keeping score at home, bitcoin ended November up 49% — after posting a 52% gain in October. For the year, the cryptocurrency has delivered a return of more than 900%. And now pop singer Katy Perry is jumping on the bitcoin bandwagon. Nope … no bubble there!
Credit: If it does turn out that Katy Perry’s cryptocurrency tweet was the catalyst that led to the ultimate top of the bitcoin bubble, I suppose that will officially make her “the Queen of Pop.” I know. So sue me.
Debit: With bitcoin’s mania currently in full bloom, it’s no wonder that bitcoin mining is now using more electricity than 159 individual countries. Furthermore, if it keeps increasing at this rate, bitcoin mining will consume all of the electricity in the world by February 2020. No, really.
Credit: Of course, bitcoin’s gains pale in comparison to two other cryptocurrencies; litecoin is up 1900% in 2017, while ethereum has a year-to-date return of nearly 5000%. What’s that? No … the “zero” key on my keyboard isn’t stuck.
Credit: By the way, if you’re looking for bargains, you can still get a troy ounce of gold — that barbarous relic! — for just $1300. And if that busts your budget, an ounce of silver can be had for under $17. No, really. Considering silver was selling for $50 an ounce in 1980, it’s no wonder many people consider silver to be the most undervalued asset in the world. Best of all, unlike bitcoin, it’s wealth insurance par excellence.
By the Numbers
Bitcoin certainly seems to be in the manic stage of a classic bubble. Here’s how many days bitcoin took to reach each $1000 milestone on its frantic journey to $11,000:
1789 $0 – $1000
1271 $1000 – $2000
23 $2000 – $3000
62 $3000 – $4000
61 $4000 – $5000
8 $5000 – $6000
13 $6000 – $7000
14 $7000 – $8000
9 $8000 – $9000
2 $9000 – $10,000
1 $10000 – $11,000
Source: Zero Hedge
The Question of the Week
[poll id="191"]
Last Week’s Poll Results
How much do you plan to spend on Christmas gifts this year?
- $100 to $1000 (65%)
- More than $1000 (24%)
- Less than $100 (11%)
More than 1200 people responded to last week’s question and almost 1 in 4 of them say they will be spending more than $1000 on Christmas gifts this year. Hopefully, they won’t still be paying for them by the time next Christmas rolls around.
Insider Notes: The Real Reason Why Bankers Hate Cash
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Other Useless News
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Letters, I Get Letters
Every week I feature the most interesting question or comment — assuming I get one, that is. And folks who are lucky enough to have the only question in the mailbag get their letter highlighted here whether it’s interesting or not! You can reach out to me at: Len@LenPenzo.com
Ashley had this to say after reading my post explaining why you’ve got nobody to blame but yourself if you can’t live on roughly $40,000 per year:
You, sir, are an idiot.
If you say so, Ashley … but you know I’m right.
I’m Len Penzo and I approved this message.
Photo Credit: brendan-c
Forgive me if I don’t take financial advice from Katy Perry. I remember when the super model married to quarterback Tom Brady wanted all of her salary to be pad in Euros. Wonder how that’ s working out for her..
Regarding home prices, ….I live in an upscale subdivision in central Illinois. We have 5 spec homes for sale for over $400K and 2 have been on the market over a year. The other three are a little newer but they aren’t moving because the employment situation isn’t great around here. Most jobs are in the medical community and due to lack of a state budget (until recently) medical practitioners are owed a backlog of over $250 MILLION in unpaid Medicaid bills. Even the doctors are buying houses more in the $250K range. Duplex condos are selling great because they fit in the price range that people feel more comfortable spending.
Thanks for the report on real estate conditions in your neck of the woods, Kathy! Prices increases appear to be stalling here in Southern California, but it all depends on what part. Prices at the high end seem to have stopped rising, while those at the lower end aren’t. At least that how it seems to me.
The key to keeping the party going, as you infer, is income. First there has to be jobs available, and then those jobs have to offer wages that keep up with rising home prices. Without those two conditions, the bubble will run out of steam eventually and prices will fall back to a level that people can reasonably afford.
“Ashley had this to say after reading my post explaining why youve got nobody to blame but yourself if you cant live on roughly $40,000 per year:
“You, sir, are an idiot.”
Well, if Len is an idiot, so am I. Our household is one of those that do OK on less than 40K per year of monetary income.
Last night, the Senate passed an income tax reduction bill which contraindicates our idiocy.
It implicitly favors taxpayers living in low local tax areas and carrying low levels of debt with limited monetary income.
It does it by by limiting deductions for local taxes and mortgage interest, lowering the tax rates in all brackets and doubling the standard deduction to 24K per couple.
Now, regarding the major subject of this article, a peculiar fiat currency called bitcoinn: A good place to start, I think, is to consider Alan Greenspan’s use of the word :valuation”.
I insist he misuses that word. He means “pricing”.
Why, because bitcoin does have a “price” in terms of other fiat currencies which I recognize, but no value at all in my private fiscal world!
Precious metal does have some intrinsic value in my world, but not as much as my productive land and lifestyle here in the mountains.
The nice thing about productive land is its ability to provide an income stream to its owner. Precious metals have zero yield — which isn’t all bad when real interest rates are actually negative. However, the main role of gold and silver is, first and foremost, wealth insurance.
Excellent point, Dave. As someone living in the high-tax liberal utopia of California, I suspect I’m going to end up worse off — or break even, at best. That being said, I am happy for those the new tax cuts are going to help and look forward to the bill’s passage.
More and more people have elevated bitcoin into a religion. Have you noticed? The higher it goes, the more they buy into it. Complete opposite of buy low sell high. Meanwhile gold and silver are going nowhere.
Yes, I have noticed, Oscar. There are bitcoin bugs, just as there are gold bugs. The difference, at the moment, is that most gold bugs understand the difference between wealth insurance and a speculative investment. That’s not to say there aren’t gold bugs who also own bitcoin (see Jared further down the thread) — I think most of those folks actually do understand the difference.
Bitcoin may not be in a bubble, but nobody can deny the price action is now completely controlled by speculators looking for quick gains.
Some bitcoin pumpers out there are actually calling for bitcoin to reach $50,000 in the not-too-distant future. Check out this guy on CNBC:
https://www.cnbc.com/video/2017/10/23/bitcoin-price-could-hit-50000-in-a-few-years-analyst-says.html
So, Bitcoin has gained more value in dollar terms in the last 2 weeks than gold has in a few thousand years! I still havent heard any of Bitcoins proponents give a reasonable explanation as to why it has any value at all.
Bitcoin has value because it is decentralized and has a ledger that’s immune from hacking. If buyers are willing to accept real goods with it then Bitcoin is money. All money is is a social contract between two parties.
If Bitcoin is money it has to be convenient. Right now its not. The biggest flaw I see is that it can only process about 10 transactions per second. The proof is in the pudding as there are few very places Bitcoins can be spent. (Despite the claims of Bitcoin pumpers.)
Yes … I can’t remember where I heard this, but it is my understanding that bitcoin holders are limited to weekly withdrawals of $15,000 on the Coinbase site, which I believe is the main trading hub for bitcoins. If true, that could be problematic for folks with large bitcoin holdings.
I accept bitcoin at my farmers market stand, I had two transactions last year. Received the satoshi instantly. It is the currency of the future.
Instantly? Consider yourself fortunate because it typically takes at least 10 minutes — and often hours — to confirm a bitcoin transaction.
You are correct about money being anything two parties agree to; there was a time when people used seashells as money too. Eventually, the population realized that wasn’t such a good idea.
1936R,
Can’t be hacked ? Maybe not the coin itself IF you keep it secure in your possession as much as possible. But there is a whole big ole long list of exchanges that have lost huge amounts of it.
Mt Gox exchange. 1st hack, 6/2011, they lost 2609
‘coins’. 2nd hack, they lost 750,000…..at a time when they were handling 70% of BC business, and it bankrupt them.
Bitfloor exchange: 9/2012. Got hacked out of 24,000 BC.
Poloniex exchange: 3/2014. Amount not released. Hackers exploited faulty withdrawal code of Poloniex.
Bitstamp exchange: 1/2015. Lost 19,000 BC to hackers.
Bitfinex exchange: 8/2016. Lost 120,000 BC to hackers.
Then add to that there are around 1300 OTHER crypto currencies out there, with apparently no limit to create more….why would anyone value one brand over another ?
There sure aren’t 1300 different kinds of silver out there…ahahaaaaa
I love that observation, Jack! Very astute. (I just may have to steal that one!)
Len,
I love Cryptos!!! It allows me to make fast money to enable my stack of Gold and Silver to grow faster, you just cant beat that!!!
Love this upside down world!
Jared
Jared,
I hope you are paying capital gains taxes on your fast money. Coinbase got a summons from the IRS last week asking for names. There is no way the government will let cryptos bypass taxes or become a threat to their fiat system.
While I am truly very happy for those who are making lots of profits from their bitcoin investments, I can’t say that I am happy living in this upside down world, Jared.
In the long-run everyone will be better off with the end of central banking and a fiat-based monetary system. Of course, we’ll all have to get through the pain required by the inevitable reckoning first.
Bitcoin? I’ll stick with my silver, thank you.
Thanks for another great edition of Black Coffee!
Sara
Thanks for being a loyal reader, Sara! Keep spreading the word by sharing this column with your friends and family!
You say bond prices are soaring. Don’t you mean falling? Have you noticed how low rates are today?????
Stu: When bond prices rise, the yield falls. In other words: interest rates and bond prices move in opposite directions.
Gold hasn’t “gone nowhere.” It’s up more than 10% this year. Even unloved silver is up a couple percentage points.
You’re right, John … but it sure feels like gold has gone nowhere — and that silver has lost ground this year, even though it hasn’t!
It’s getting to the point where one has to make a choice between food or health insurance. If everyone REALLY wants to cut medical costs, then get rid of O-care, remove the barrier to interstate competition and implement tort reform.
Couldn’t agree with you more, Shaun … allowing interstate competition would be a huge help in bringing down insurance costs.
This idea that bull markets are based on arbitrary timeframes from periods of very different fundamentals is odd. I am not saying that I have a better idea but this one still is odd to me.
Nobody is saying bull markets are based on arbitrary timeframes, TSR; only that bull markets can’t run indefinitely, and by historical measures, the current bull markets in stocks and bonds are long in the tooth.
The other point is that the fundamentals for both stocks and bonds are poor, which is not going to help extend their respective bull markets — although, admittedly, bull markets can run for a very long time in spite of those poor fundamentals.
Great minds aren’t necessarily greatly successful at escaping bubble psychology.
This article includes a chart showing Issac Newton’s misfortune with a bubble:
https://riggedgame.blog/2017/12/02/youre-just-not-prepared-for-whats-coming/
Newton was human too!
It is crazy to think about when the median home price was less than three times median household income. Nowadays, the easy credit and banking have made home prices bubble like never before. (Oh yeah, right, it just did bubble in 2008)
Everything — and I mean everything — went off the rails for good when we broke the dollar’s last tie to gold in 1971.
Xyz, “Nowadays, the easy credit and banking have made home prices bubble like never before.” Do you think this is why college costs have ballooned so outrageously too? The government entered the student loan market, gave out unlimited loans to anyone who asked and their parents. Then the colleges saw that so much new money was available that they raised their costs. The students also borrowed more money than they needed, many using the money for foreign travel and other non essentials. Once the government gets in the business of handing out money, things go downhill. We were better off with college costs BEFORE the government got involved in loans. In the dark ages when I went to school it was possible to self fund as I went along with a couple of jobs and working all summer vacation, Christmas vacation and a at Easter / spring break.
You are spot-on with the reason behind the ridiculous rise in college costs. Take the government loans out of the equation and universities would have no choice but to lower tuition costs to a level that people could afford.
Farmers have seen the same phenomenon with government cost sharing programs.
A few years back, soil conservation was all the rage and USDA paid half the cost of fertilizer, which promptly doubled in price.
Hey Len, if this GOP tax bill gets pushed through with a new 20-22% corporate tax rate, doesn’t that make equities instantly cheaper due to the lowering of their forward-looking PE ratios? That may ease the bubble pop or at least delay it for a while?
Yes, Scott, it certainly does. But I have no idea if it will delay the inevitable market downturn that eventually has to come.
Hey, I know you guys don’t have a lot of love for cryptocurrencies. Let me explain why I do… and yes, I do pay taxes on the capital gains.
As you say, it’s hard to pin down the “value” of a cryptocurrency. (Then again, what is the “value” of a dollar?) As I see it, the value lies in these characteristics: (1) utility — it may be exchanged globally for goods and services (not there yet, but getting there); (2) may be held in an individual “wallet” that is virtually unhackable and impossible to confiscate or expose to negative interest rates; (3) independent of government- and central bank-manipulated fiat currencies; (4) in some cases, like Bitcoin, has a predetermined maximum number of coins, so is deflationary instead of inflationary; (5) provides a “free market” of currencies (let the best currency win).
These characteristics are why cryptocurrencies are so popular among libertarians. As for having value, bitcoin is widely used in Venezuela as a guard against their currency’s hyperinflation. Do you want to try to tell them bitcoin has no value?
There are problems, to be sure, such as scalability for quicker transaction times. It remains to be seen whether these will be overcome.
I am a big fan of diversifying my portfolio as much as possible. I don’t take an either/or approach with PMs, crypto, or anything else. The thing is, I want to retire early, so I need investments that will grow in value/pricing. What to invest in? Dollars tend to inflate, so they shrink. PMs are great wealth insurance, but won’t grow unless/until there is an economic crash. Stocks and bonds are growing right now, but seem to be greatly overvalued and could lose big in the future.
So if all those things will only shrink or stay the same in the long run, what’s left to invest in? Cryptocurrencies.
Is bitcoin overvalued right now? Perhaps. Then again, the folks who ignored that in the past and bought anyway, are now making quite the profit.
Er… Sorry for the book I just posted. 🙂
Those who bought in early are making a fortune. As time goes on it takes more time and work to get one bitcoin. So the early adopters got more bitcoin for less time and work. Is that not the definition of a Ponzi scheme?
I would observe that those who bought in early to things like Amazon and Facebook are also making a fortune. That’s what happens when disruptive technology and ideas hit the market. Are you saying that Amazon is a Ponzi scheme as well?
Not a ponzi scheme, this is the future. Silver will never be money again, the majority of the population in US doesn’t own a single ounce. Gold and silver has failed as money more than succeeded the last 5000 years.
Aaron, are you being sarcastic? I say that because your assertion is flat-out incorrect. It is pretty funny though!
I appreciate you taking the time to provide your comments, Carrie. Nice job!
I just have one comment and one question for your consideration:
1) Until the bitcoins are sold, no profits are realized — and I am very happy for anyone who has cashed out at least a portion of their gains to-date!
2) What will one bitcoin be worth when the dollar finally implodes and returns to its intrinsic value of zero?
Hi Len! And thank you for your ever insightful and entertaining Black Coffee posts!
Those are good observations that you make. Ultimately, it will depend on what happens to the dollar, and on how widely bitcoin or other cryptocurrencies are adopted. Crypto is definitely a high risk/high reward venture. I have no delusions about that.
Like you, I see the dollar as very vulnerable in the long run. I believe we need a better currency. Gold and silver do have their advantages and have proven their worth over time. On the other hand, for daily transactions in the modern world, most people want something you can use electronically. I believe that bitcoin or other cryptocurrencies might end up filling that particular need in the future. They could end up replacing fiat currencies in many countries, possibly even being used alongside PMs.
Since I don’t have confidence in the dollar, I almost don’t care what the dollar value of a crypto is, nor do I plan to cash them all in for dollars. If the dollar goes bust before I retire, what would be the point? If cryptos are the next disruptive technology and become the new standard for currency, I am more interested in how much crypto I can get for my dollars. (I hold a similar attitude toward PMs, by the way.)
From what I understand Gold and Silver backed Cryptos are in the works so says Rob Kirby. He is very knowledgeable on Gold and most likely knows what hes talking about. Andrew McGuire is saying this as well, yep I see the world realizing its mistake and returning to a true money standard of gold and silver, what form who knows?