Entering a new phase of economic time
Sorry guys, this one is going to be a big pill to swallow. In a one-week period, investors in the U.S. experienced new all-time high levels in major stock market indexes such as the Dow Industrials, the S&P 500 and the NASDAQ composite, all-time high prices in gold, silver and major cryptocurrencies, as well as an all-time high value in the Case Shiller Home Price Index reflecting residential real estate values.
If we broaden out our perspective a bit to look at major overseas financial markets as well, we see recent new all-time highs in a number of European stock market indexes, as well as all-time highs in Japan, Australia and other major Asian stock markets.
I don't remember any other time in my career (going back to 1993) when such a spread of divergent asset types correlated together to all-time highs in the same period. When I see these markets moving together like this, I feel like maybe I am unattuned to the exuberance driving these divergent markets from around the world all higher at once. Is there something I'm missing?
Turns out there might be, and it could be something so huge in scope it might be impossible to perceive from inside the financial system where we all live. That's because the insight I may be missing could actually be the very financial system I am using to observe this phenomenon.
The entire world financial system is built on a concept known as fiat currency. Examples of fiat currency are the U.S. dollar, the Euro, the Canadian dollar, the Japanese Yen, the Chinese yuan and every other currency issued by central banks for use in commerce and financial markets in their respective national or regional markets. Central banks, like the U.S. Federal Reserve, issue these fiat currencies for purposes of conducting economic activity -- buying and selling between companies and individuals -- and for taxation, meaning when taxes are owed to the government, the taxes are owed in the fiat currency issued by the nation's central bank.
These central banks can simply keystroke this fiat currency into existence (yes, out of thin air), while when we as individuals and businesses want to obtain the same currency, we either must borrow it, work for it, create and provide valuable goods or services for it, sell something we own for it, or pull from a benefit program we contributed to through taxes or savings. Doesn't seem entirely fair that the central bank can just create something which we must spend a lifetime chasing, but this is the system we were born into.
While a central bank can create fiat currency by keystroke, no central bank can produce gold or silver, no central bank can create organizations capable of producing valuable goods and services (business enterprises), no central bank can produce a home to live in, and at this time no central bank can create Bitcoin. Yet while a central bank cannot create any of these assets, these same central banks do control the mechanism of assigning value to these assets -- all these assets have a stated value in the bank's fiat currency, which we call the price. And perhaps the price of all these assets is going up at the same time because in reality the value of the fiat currency used to measure them is actually going down.
We are all familiar with the concept of inflation in that we have all experienced the price of goods and services changing, usually going up, over time. Inflation as a trend is easy to observe in goods like bread, steak, eggs, cars, gasoline, and many other goods consumed on a day-to-day basis. No one likes to pay more for food, energy and entertainment, but at the same time no one typically complains about their 401(k) or home value going up -- yet both are flip sides of the same coin. Understanding this concept may help in navigating the fiat currency road ahead.
In my opinion, the global correlation of asset prices indicates the world's fiat currency financial system may have entered an interesting new stage. This new stage could require a new understanding of how consumer prices, asset values and financial instruments all interact together for purposes of experiencing and managing inflation. There will be a lot to learn, and some new rules may apply, but for those willing to expand their understanding of these issues, challenges may be met by opportunities as we move forward into an intriguing period of economic time.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
