FANG, Bitcoin, and the Housing Market All Point to an Irrational Market

Image result for zuckerberg

We’re all taught that markets are efficient. Yes there are times of irrational exuberance, but we can’t know when those times are, so we should keep investing and weather the storm no matter what.

I’m really concerned right now about the state of the economy and markets in general. The FANG stocks (hence my leadoff pic of Zuckerberg), real estate, and especially bitcoin are really ebullient right now. I look around, and everything I see points to danger.

Bitcoin’s Price Went Up Like 40% Since I Wrote my Last Blog Post

About 2 weeks ago, I wrote about the inevitable fall of bitcoin, and I look like an idiot. It rose from about 2200 to 1 to about 2900 to 1 as I write this article.

I saw an article on LinkedIn a couple days ago heralding that Bitcoin is going to go up to $10,000. Another ‘cryptocurrency expert’ said it has the chance to go to $1 million.

I’ve seen companies that specialize in helping physicians diversify into bitcoin as an ‘integral part of their portfolio.’ Others have said how they can help you get bitcoin into your Roth IRA.

Bitcoin’s Definitely the Next Gold, Except Drug Trafficking and Tax Evasion are Among its Primary Uses

I totally admit there’s a lot of legit reasons cryptocurrency could be useful. Unfortunately, two of those top reasons are drug trafficking and tax evasion. Oh yeah, ransomware developers also prefer payment in bitcoin.

Right now if you wanted to sell a bunch of synthetic heroin, would you request cash or bitcoin? Which one is the government more likely to catch onto? If I’m a bank and somebody brings in $100,000 in cash there, that’s going to get looked into. 50 bitcoins swapping hands in a Starbucks? Not nearly as likely.

And that Starbucks example is real. I know of folks who have bought bitcoin in inconspicuous ways like this. When something is untraceable and there’s very little reporting infrastructure, it’s a lot easier to evade taxes. Anybody who bought some bitcoin and has been able to hide them from the authorities could be sitting on tens of thousands of dollars that they probably won’t pay capital gains taxes on.

Additionally, what if somebody pays you for your services in bitcoin? What if they do it secretly? Evading income taxes on cash is possible too, but it’s a lot harder. If you receive a monthly $10,000 in cash for your salary, eventually the government will find out. If you’re a coder who gets paid in bitcoin, you could be paying nothing in taxes.

Once the government catches onto this, I think there would be a huge drop in bitcoin. Alas, I’m somewhat ignorant on the matter. However, I do know when a bunch of random people show up trying to tell doctors to put bitcoin in their retirement accounts, it’s time to get freaking scared.

What’s FANG and Why Does It Matter?

FANG stands for Facebook, Amazon, Netflix, and Google. Sometimes I’ve seen FAANG too, with Apple included. The performance of these large cap tech stocks has been nothing short of incredible this year.

All of them fell about 3% this past Friday. Supposedly their price earnings multiples justify their price. There’s clearly a lot of good news built into their valuation.

If you had something major happen to these stocks, the S&P 500 index could be in for some trouble as they make up such a large percent of the index.

Oh Yeah, and Real Estate in Austin, TX is Up about 50% Since 2012

In the WSJ this weekend, I found a story about the housing market in Austin, TX and how it’s up close to 50% in five short years. I know that Austin is the new hot place to be, but 50%? Have houses in Austin truly become that much more valuable to own for 30 years or more?

There are no constraints in Austin to building like there were in South Florida at the height of the housing bubble. Sure there are some rules and regulations, but it can always grow outward.

I have Facebook friends posting about Seattle homes getting a dozen bids above offer price and the winner bid like 40% more than list. I continue to see ludicrous pics of 1000 square foot houses in San Francisco somehow worth over $1 million.

Heck, even St. Louis where I live is a hot market right now.

We Haven’t Had a Major Drop in Markets Since 2009, And We’ve Got This Guy in Office

Image result for trump

To be fair to Mr. Trump, I think all these things would’ve happened with Secretary Clinton as President too. The economic forces at work were in place long before this current administration, and they started before President Obama too.

The Federal Reserve has used artificially low interest rates to punish savers, reward consumption, keep cost of debt low (to encourage more consumption), and to inflate asset prices so people feel like they’re rich and will spend more money.

It’s worked!!!! And it’s worked really well. Remember that the DOW was almost below 6500 and eight years later it’s at over 21,000. A blind squirrel would’ve made money these past eight years so long as he picked a portfolio by dropping acorns on a giant list of US stocks.

React Around the Edges, Not In a Drastic Way

If you look at the worst of the Great Depression, US stocks took a couple decades to recover. I don’t think we’ll have another one of those anytime soon, but stocks are still better than bonds long term even in that apocalyptic scenario.

So I plan on keeping my aggressive equity allocation in my personal portfolio. However, for the people in my life who are older and closer to retirement, I’ve urged them to rebalance towards bonds closer to a 50%-60% stock amount.

When I reviewed my how my family and close friends’ money was invested, even the 60-90 year olds had more than 70% in stocks. This happens in long term bull markets when you don’t do anything to your portfolio and puts you at greater risk of loss.

So be careful right now. PLEASE DO NOT BUY BITCOIN IN YOUR ROTH IRA!!!!!! If you’re going to buy a house, please keep it less than 2 times your joint income if you are a 2 income household. Otherwise no more than 2.5 times your income. If your portfolio is heavy on tech stocks, consider selling some down.

2 thoughts on “FANG, Bitcoin, and the Housing Market All Point to an Irrational Market”

  1. Wow, it’s actually a thing to put Bitcoin in retirement accounts? On the high level face of it all Bitcoin is a currency. You wouldn’t put currency trading in a retirement plan as it’s a zero sum game with little guarantee of appreciation. Bitcoin is the same thing but worse since at least a dollar is backed by the full faith of the US government. Still, its common to see irrational exhuberance near the end of a long bull… The problem is there is also evidence of negativity towards the market (huge numbers of investors all in cash, articles like this one). Who knows what will happen next.
    FullTimeFinance recently posted…Of Charm and PursuitMy Profile

  2. Always appreciate your balanced and reasonable perspective Travis. I totally agree that the cryptocurrency situation is pretty crazy. I’m surprised to hear people are trying to hold it in their registered retirement accounts.

    Good point as well about the heavy index-weighting of the FANG stocks. A shift in momentum could certainly make itself felt given their big market caps. Thanks for sharing your thoughts on the markets and have a great week.
    Jay recently posted…Trend Following Trade Ideas for June 2017 (Part 2)My Profile

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