Two Reasons Why The Markets Will Grow Increasingly Abnormal Going Forward
Introduction
By speculative I mean stock prices being increasingly divorced from earnings. If you look at a century-old very large company whose products are consumer goods and whose value is very much in a strong brand, like Coca Cola, calculating whether its stock is under or overvalued should be be relatively easy. But a technology company in some entirely new field developing cutting edge technology doesn't have to be profitable at all for a long time as long as it grows. The very nature of what such companies do involves a lot of uncertainty and thus speculation. All the tech giants of today used to fall into this category. There are countless startups developing something new that have potential to grow into something significant.
The accelerating growth of the technology sector relative to everything else
The fundamental reason for the faster growth of the technology sector relative to the rest of the economy is the accelerating gains of technological development. Each generation of tools is more powerful than the previous one. The combined effect of every technology in existence follows an exponential curve.
This has been going on for thousands of years. What's special about our age is that technology has become so pervasive that the exponential growth curve has become noticeably exponential within a single human lifespan - and it is accelerating.
The macroeconomic environment forces central banks to continue ultra light monetary policy
One of the fundamental reasons for that is that the baby boomer generation did not replace itself fully. Another is fast technological development causing high structural unemployment owing to the mismatch in skills that the labor force has and what is demanded by the global market. What that resulted in was heavy strain on social services, a tax burden and lackluster growth in a lot of developed countries. Governments have been forced to take on a lot of debt to pay for the welfare programs and to make up for the shortfall in tax revenue caused by the slow growth. After the financial crisis of 2008, interest rates have been kept artificially low by central banks in order to prevent imminent defaults of nation states and other large players and thus systemic collapse. A vicious circle has followed because in a low interest rate environment corporations with heavy debt loads have been allowed to survive contributing to the misallocation of a lot of capital and slow growth.
Central banks buying debt owed by governments and corporations has pushed interest rates down which in turn has resulted in increasing amounts of money chasing after assets. The reason why the relentless money printing hasn't resulted in any higher consumer price inflation is that there are several sources of deflationary pressure at play. One is technology driving down costs across the board. Another is outsourcing production to countries with lower cost of labor. The world is not going to run out of countries with cheap labor for a while despite the fact that in China the cost of labor has already gone up so much that Chinese companies are looking for new countries to outsource production to. A third factor is the shrinking work force in the developed world.
Conclusion
Ultra-light monetary policies and cost inflation will increase money pursuing investment vehicles. The equities market is where most of this money has gone and will continue to go. The waning confidence in governments may cause bond yields to go up as demand for government bonds goes down but my bet is that central banks will do everything in their power to prevent major governments from defaulting for as long as they can. They can and will flatten the yield curve (interests paid on bonds as a function of bond maturity) if necessary. The Fed did it between 1942 and 1946 to help the federal US government to pay for the cost of war and the Bank of Japan has been at it since 2016.
What that means is more loose money to chase after speculative gains. Cryptocurrencies are a completely new speculative asset class, the timing of whose introduction in late 2008 and launch in early 2009 is probably not a co-incidence.
Bitcoin is like a black hole sucking money out of the dying galaxy of the legacy system. It started out as a microscopic one and after surviving the perilous early period it has started to devour entire star systems, growing in size and power. The investing space as the typical value investor knows it is already noticeably bent out of shape.
To finish this post, I'll post a link to this fantastic video entitled Timelapse of the future: A Journey To The End Of Time by Melodysheep that summarizes the understanding of current physics as to what the fate of the universe will ultimately be. The part that discusses the so-called Black Hole Era begins at 12:00. (The whole video is very much worth watching but that's a topic for another community.)
https://www.youtube.com/watch?v=uD4izuDMUQA
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