Myth Of Money: Are We In A Stock Market Bubble?

Welcome to this week’s edition of the Myth of Money, a weekly newsletter on all things money, economics and technology read by 10,000+ investors, curated by Tatiana Koffman.

Disclaimer: The following is not intended as investment advice. Do your own research.

Ray Dalio published an essay this week discussing six “bubble indicators.” Dalio defined a bubble as an “unsustainably high price.”

  1. How high are prices relative to traditional measures?

  2. Are prices discounting unsustainable conditions?

  3. How many new buyers (i.e., those who weren’t previously in the market) have entered the market?

  4. How broadly bullish is sentiment?

  5. Are purchases being financed by high leverage?

  6. Have buyers made exceptionally extended forward purchases (e.g., built inventory, contracted forward purchases, etc.) to speculate or protect themselves against future price gains?

    Each of these six influences is measured using a number of stats that are combined into gauges. In the stock market we do it for each stock that we are looking at. These gauges are combined into aggregate indices by security and then for the market as a whole. 

Dalio concludes that we are around the 77th percentile today for the US stock market overall, but at a much higher percentage for emerging tech companies.

We are seeing a size-able divergence across sectors, with tech being in a clear bubble and other industries still in recovery.

Why is this important?

With Bitcoin becoming an institutional asset, if we see a correction in other assets, it is likely margin calls and other coinciding factors could drag Bitcoin down in price, not too dissimilar to what we experienced last March.

Motley Fool has further noted 3 factors that could contribute to a correction:

1. Valuations are at nearly two-decade highs

2. COVID-19 variants/vaccination holdouts are slowing down recovery

3. Rising Treasury yields portend trouble for homeowners and prospective buyers

Why am I pointing this out?

If you have taken advantage of exorbitant stock market and crypto profits over the last 12 months, this may be the time to stash away some cash to take advantage of the next correction.

This Week By the Numbers 📈

On Saturday, Congress passed Biden’s $1.9 trillion stimulus bill. The bill will now go to the Senate, where it is likely to face strong opposition from Republicans. The stock market took a nose dive and will likely continue in the red until stimulus is settled.

Bitcoin experienced a 24% correction this week, the third of this bull cycle. Most experts agree that Bitcoin will likely climb to $100k-$400k range by the end of the year.

Top Stories  🗞 

Square buys $170 million worth of bitcoin

The company said it purchased approximately 3,318 bitcoins, expanding on its October 2020 purchase of 4,709 bitcoins. Square said it represents about 5% of the company’s total assets as of the end of 2020. “The investment is part of Square’s ongoing commitment to bitcoin, and the company plans to assess its aggregate investment in bitcoin relative to its other investments on an ongoing basis,” the company said in its earnings release. Its CEO, Jack Dorsey, as also been an advocate of the digital currency. Tesla announced earlier this month it bought $1.5 billion worth of bitcoin for “more flexibility to further diversify and maximize returns on our cash.” Tesla’s share price is now directly linked to the price of bitcoin, according to Wedbush analyst Daniel Ives. Read Full Story.

MicroStrategy Bets Another $1B on Bitcoin

MicroStrategy announced the purchase of another $1.026 billion in bitcoin Wednesday, turning mountains of zero-interest debt into one of the single largest (dollar-denominated) bitcoin investments ever executed by a publicly traded company. CEO Michael Saylor’s business intelligence firm bought the 19,452 BTC at an average price of $52,765 per coin. It now holds 90,531 BTC worth $4.78 billion at press time, almost certainly bolstering its perception among Wall Street types as a de-facto bitcoin exchange-traded fund, albeit one wildly overpriced. Read Full Story.

Cryptocurrency firms Tether and Bitfinex agree to pay $18.5 million fine to end New York probe

Cryptocurrency firms Tether and Bitfinex reached an agreement with the New York attorney general’s office to pay an $18.5 million fine to settle a closely-watched legal dispute. The state’s top law enforcement official had been investigating the firms over allegations that they moved hundreds of millions of dollars to cover up the apparent loss of $850 million of commingled client and corporate funds. Tether and Bitfinex will be required to cease trading activity with New Yorkers and submit quarterly transparency reports, the attorney general’s office said. It’s a major development in the crypto industry and concludes a long-running legal battle that started in April 2019. Read Full Story.

The Fed’s system that allows banks to send money back and forth went down for several hours

The Federal Reserve’s system that allows financial institutions to send money back and forth electronically went down for several hours Wednesday, but appeared to be coming back online later in the afternoon. The “operational error,” as the Fed described it, impacted multiple services, including its pivotal automated clearinghouse system, which connects depository and related institutions sending electronic credit and debt transfers. There were no initial indications that foul play was suspected. Along with the Fed ACH service, other systems impacted included Check 21, FedCash, Fedwire and the national settlement service. Read Full Story.

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Thank you for reading this week’s edition of the Myth of Money.🚀

Until next week,

Tatiana Koffman

By Tatiana Koffman

Hi there and thanks for reading. If you stumble upon my newsletter, you will notice that I write about money, economics and technology. I hold a JD/MBA and spent my career in Capital Markets working across Mergers & Acquisitions, Derivatives, Venture Capital and Cryptocurrencies. I believe in empowerment through closing the financial education gap and creating equality of opportunity for the next generation. Check out my articles in Forbes here.

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