Much of the recent discussion of financial markets has focused on the yield curve and what it signals. In order to understand the theoretical signals it tells us one must first understand what the yield curve is. It is a line of the yields of Treasury debt of different maturities, from the short-term 3-Month T-Bill to the 30-year Treasury Bond. Maturity is when a debt instrument comes due and the creditor reimburses what was borrowed.
Financial theory dictates that a normal yield curve is characterized by long-term rates that are higher than short-term rates. This signals that investors expect future economic growth that will result in inflation, so they expect to be compensated with higher yields in the long-term.
A flat yield curve is characterized by short-term rates and long-term rates that are about equal. It signals that investors expect little to no economic growth.
An inverted yield curve is characterized by short-term rates that are higher than long-term rates. It signals that investors expect a recession is forthcoming.
At this moment we are experiencing a flattening yield curve. It is not yet flat but as time passes it is becoming a flat yield curve. Even if it becomes flat, it will need to continue the relative decline of long-term yields compared to short-term yields in order to eventually invert. In my experience, this sign of an upcoming recession does tend to eventually ring true, but it is prudent to look at other common signs and consider the big picture of what is going on in financial markets and economics. To put this all simply, it does not appear a recession is yet likely in the near future. But as time passes more storm clouds appear to be forming over the horizon. So be vigilant.
One of the biggest investment stories since 2017 has been cryptocurrencies. Everyone has heard of Bitcoin but there are many other cryptocurrencies available for purchase. What had started out in 2009 as an alternative form of exchange has blossomed into an alternative market characterized by mystery and risk.
One economic argument for cryptocurrencies is that it is a potential substitute for fiat currency, administered and printed by central banks of nations. These are more commonly known as the U.S. Dollar, Russian Ruble, Argentinean Peso, and the Canadian Dollar to name just a few. Just as ancient civilizations created gold and silver coins to trade and barter, and those coins were replaced by either other forms of currency or currencies of other nation states, economic theory dictates that cryptocurrencies are a substitute for currencies.So what is the true value of these cryptocurrencies? Oftentimes those who are skeptical of cryptocurrencies validly state that there is nothing backing them up. True, but there is nothing backing up the U.S. Dollar or any of the other national currencies, certainly not gold as we have discontinued the Gold Standard for decades. Instead, it is the full faith that one has in the currency. Honestly, while I value developed economies, I think a truly precious metal such as gold, silver or platinum would make me feel more at ease in a time of economic crisis. But faith is all we have to go on.The way I view the value of cryptocurrencies is that they defy standard financial valuation techniques so one should look at them as simple economic supply and demand. But then one has to view the cryptocurrency market and see that what started out with Bitcoin has grown to include hundreds of coins. Not to belittle the complexity of this topic, but I view this as a market as ripe for depreciation. When Bitcoin was $2,000 I felt it was too expensive and could crash. Same at $5,000, $10,000, and eventually $20,000. Now it is trading at approximately $7,100. Do I think it is worthless? No. Do I think it is worth $100,000? No. I do not even think its value is as a substitute to common currency. I think the value of cryptocurrencies is in the blockchain technology. It allows a decentralized ledger to be created that finalizes a transaction between 2 parties anonymously.The way I see it, this is a new technology. Just like the internet was new when it was commercialized in the 1990s. The first iteration of utility is never the most efficient. Think of the World Wide Web and AOL. Think about how much has changed since then. I can see the same sort of change when it comes to blockchain technology. The future is not Bitcoin, but the underlying technology. Expect blockchain technology to become more ubiquitous in our everyday lives over the next 10 years. I cannot predict the exact end products, but think of this technology not for financial transactions but for tracking shipments at UPS and the many products in Walmart. There are many uses to be thought of that we cannot even see at this very point in time. Just like few were thinking about Facebook or Snapchat in those AOL days. Even if Bitcoin crashes, which I think it will, the technology behind it is in its nascent stages. As for an investment, I would keep my distance and look elsewhere.