Bull seasons always arise out of pessimism, grow in skepticism, mature in optimism and die in euphoria. The bubbles burst the moment investors believe the climb is forever. I mean, the bubbles are bursting with greed. Although the real economy is not at its best, the financial markets are celebrating. And we owe that primarily to the monetary policy stimulus of the Federal Reserve. Liquidity increases prices, but up to a point. Sooner or later, the basics matter. Assets are obviously overvalued. The continuing rain of bills managed to postpone another crash, but until when? The key event: the presidential election in the United States.
The stock market is usually viewed as a true reflection of the economy. However, this is not entirely true. The Dow Jones Index (DJAI) comprises the 30 largest companies. And the SP 500 includes the 500 largest. These lists do not represent all companies. In fact, they exclude the vast majority. Small and medium-sized businesses are an integral part of the American economy. But they don’t make big headlines on Wall Street. Big companies make a big impact on the economy, but they are not the economy.
Read Next: 3 Ways Federal Reserve Impression Is Driving Gold, Silver, and Bitcoin Rise
We also have to take into account that not everyone has money on Wall Street. In other words, the poorest do not benefit from the profits of the stock market. This is the domain of the richest. So when you are talking about a Wall Street / Main Street divorce, you are not just talking about a sham. There is also talk of deep economic inequality in society. What we have here is a minority investing in a small group of large companies.
Here it is important to understand that the economy and markets are subject to different laws. The “economy” is usually known in hindsight. The data of today is the data of the past. Here we are all historians. In the real economy, too, everything is slower because the economy is closer to the laws of physics. In other words, the processes of producing and distributing goods and services take time.
It is different with the financial markets. This realm is much more subjective. Here psychology is more important. And perception is often more influential than reality. Investors are essentially futurists. With today’s limited information, they are trying to guess the future. Because investing pays off today in the hope of getting more tomorrow. So the market price does not reflect the current economy. It reflects what investors think about tomorrow’s economy.
You could say that the financial markets are an assumption about the future. And these assumptions are based on perceptions. For example, we know we are in a crisis and we have data for the first half of the year. Next month we will have today’s dates. But for today we have last month’s estimates. But we really don’t have much about today. We have the press. And we have the price of the stock indices. So nothing is very precise. Why the optimism? Well because we know we are bad, but we think the economy will recover. That means the future will be better. And the market is mostly about the future.
Read on: There is a “high probability” that Bitcoin will rise if the USD falls to 2008 levels
Investors currently believe that the government and the Federal Reserve are handling the crisis very well. Despite the usual critics, the general public is satisfied with the measures. In other words, liquidity drives the markets. Obviously there is trust. And optimism has raised prices. But liquidity is not everything. At a certain point, rational optimism can turn into irrational optimism. That means, greed arrives. This euphoria is the sign of a catastrophe knocking on the door.
For example, If we look at the Tesla numbers, we’re going to see not-so-good company. Today’s Tesla is essentially a big promise. Elon Musk is a snake charmer and makes everyone fall in love. But if we go into the books we will see a lot of expenses and little income. That is the stark reality. However, Musk knows how to attract investors. As an entrepreneur, he’s a genius. He knows like no other how to raise capital. But can you start productive businesses that will make money over the long term? Well that remains to be seen. That has never happened before. Tesla’s share price rose more than 300% in 2020. Why? Basically pure expectation. Everything is based on one assumption: Tesla will (in the future) dominate the gigantic cleantech market. Elon’s promise. The moment something questions this assumption, the action breaks down.
The term “bubble” is a sensationism that actually means that assets are overvalued. That means that the prices are above the intrinsic value. In the case of a company, the intrinsic value is on its books. However, when talking about a financial bubble on a global scale, the buffet indicator is usually used. The concept is simple. The point is to compare the total value of the stock market with the gross domestic product. It is believed that when we hit 100% we will face a general overvaluation. This has happened three times in the last two decades: in 2000, in 2008 and in 2018. And today we are at this magical number for the first time since 2018.
Today’s bubble is based on an assumption: Liquidity is all that matters. The moment investors, blinded by greed today, realize that the economy (fundamentals) is also important, we will have the big correction.
Read Next: Tyler Winklevoss: It’s Good For BTC When The Federal Reserve Is Printing Money
Trump is the Wall Street candidate because Trump means corporate tax cuts, deregulation, cash injections and a budget deficit. And by November attempts will be made to inflate the bubble even more as a strategy to win the elections. A second crash before the elections would be fatal for him. It then looks for a way to create more liquidity despite the brakes imposed by Jerome Powell (of the Fed) and Congress.
Joe Biden, on the other hand, is the candidate who wants to raise corporate taxes. Plus, he’s not that different from Trump. Democrats always increase spending and deficits. In this case, however, Wall Street is prone to the tax issue. If Biden wins, prices could take a hit.
In terms of Bitcoin and the cryptocurrency market, injections of liquidity favor us, and the collapse of Wall Street would hurt us. Although many Bitcoiners insist that Bitcoin is hostile to the system and profiting from crises, the data contradicts that. For ideological reasons, you always want to force an alleged correlation between Bitcoin and gold. But that is self-deception. If there are any coincidences between the two markets in a month, the next day the headlines will hit that Bitcoin and Gold are soulmates. It’s a great celebration. The correlation to the SP 500 looks embarrassing, however. And it’s quiet. However, the data is visible to everyone. For the past 10 years, the prime of the SP 500 has also been the prime of Bitcoin. That said, Bitcoin benefits from prosperity. Like this or clearer?