The new Tesla? And other big stock market questions answered

US stocks rose, pushing the S&P 500 to a record high, as investors applauded encouraging data on the economy, a strong batch of corporate earnings and the prospect of up to $ 1.8 trillion in news government spending. Investors spent much of the month grappling with two competing dynamics: signs of a strong economic rebound, particularly in the United States, and worsening cases of Covid-19 elsewhere in the world that threaten to hamper global recovery. Speaking to BizNews, to help understand developments for investors, the US expert on stock cycles is Dr Richard Smith, CEO of The Foundation for the Study of Cycles. He says Coinbase could easily become the Tesla of the crypto world and explains why there has been a seismic shift in the digital world. He also looks at the improving S & P500 – and warns that the risks of investing in US stocks are now very high. – Jackie Cameron

Dr Richard Smith on whether this will be a good year for the US markets:

I think it’s probably going to be a good year, at least for another two months. I have some concerns about the end of summer and fall. The Federal Reserve continues to inject a lot of liquidity into the markets and this continues to overtake many cycles that might otherwise occur. But we also have the first year of a presidential cycle – which is often bullish – especially during the summer. Longer term, however, I have structural issues. There is also, of sorts, a 20-year cycle that often experiences a significant decline in the first two years of each decade.

You may remember what happened in the year 2000 with the dot-com bust. It pissed me off a bit. The environment we find ourselves in right now seems familiar to anyone who has lived through the dot-com boom and bust. [There’s] a lot of speculation going on right now, a lot of crazy numbers in terms of sentiment, call option ratios and debt to margin. It’s an exciting time in the markets, but I think it’s also a time of high risk. I think we all have to agree if we are to stay in the markets with a significant correction over the next 12-18 months.

On what investors should do now:

I think it’s a tough time to put in a lot of new money to work in the markets at these prices. Those of us who have been in the markets for a while, it is very difficult to time a market peak. If it’s not broken, don’t fix it. Daniel Kahneman and Richard Thaler point out that we usually seek risk with our losers. When we lose, we take more risk because we don’t want to sell – because selling means losing. We doubled, tripled, and turned a short-term trade into a long-term hold. Everything except take the loss.

But when we win, the fact that we hate losing attaches to our profits and we become anxious about losing our profits. During this time the markets sometimes go crazy and we have to learn to look for risk with our winners. We must learn to avoid risk with our losers and seek risk with our winners. Because markets are counterintuitive, normally we look for risk with our losers and risk averse with our winners. I don’t mean sell even though I’m scared of the markets [and] on the potential for an accident. I think it all comes down to saying we need to be more vigilant at this time. You need to stay on top of things a little bit better. You need to make sure that you manage your risk. You need to be on the lookout for major cracks in the market that could turn into something more serious.

On his assessment of the cryptocurrency:

I think cryptocurrencies are part of the speculative fever that is manifesting in many areas of the markets right now. PSPCs (Special Purpose Acquisition Companies) are important – crazy things are happening in [that space]. There is serious speculation and a lot of new people in the markets don’t really know what they are doing and investing with the herd. I think cryptocurrencies and blockchain are a serious technological revolution, on par with the internet twenty years ago. I really think what you are seeing is really creating a digital economy.

The internet – as it has been so far – is not really a digital economy, in which people own and trade digital assets for value. I call the Internet as it is today, television 2.0. It’s real-time television, that’s how it is. Facebook, Google and Apple [are] really monetize the ability to grab our attention and drive [it] to things that generate income for them – mostly advertisements. This is really what the internet has developed over the past 20 years. I think blockchain and crypto, they’ve created a digital scarcity. So you saw it for the first time with Bitcoin, where you have the option of saying, “I control a Bitcoin. It’s mine, it’s nobody else’s and I can prove it.

It was really new. Now you have that with the NFTs. These have been around for some time, but they are starting to enter the public consciousness. Think about patent and intellectual property NFTs. I think crypto and blockchain are really the basis of a new version of the internet. I think we are in the early stages. It really opens up digital property rights. Personally, I am not entirely comfortable with a purely digital economy. I still love the analog side of life. I have some concerns about moving to a purely digital economy – but this genius is out of the bottle. At this point, I think it’s more about how to structure it so that it doesn’t consolidate power in highly centralized institutions – including large corporations, multinationals, and governments.

On Coinbase:

I think Coinbase is great. I am a big fan. They have 56 million users and they are profitable. It’s incredible. I think Coinbase is a great diversification game when it comes to the cryptocurrency space. I think they’re going to become the Spotify, Apple, or Tesla of the crypto world. They have an amazing brand [and] incredible brand loyalty. Why couldn’t they capture the NFT market? I think they could easily. I think Coinbase has done a great job. I think it’s definitely a good diversification game for a lot of people who want to dip their toes into cryptocurrencies – in this new economy – who haven’t had a chance to do so yet.

It is much easier to buy Coinbase shares than it is to go out and buy cryptocurrency, although it is quite easy to open an account on Coinbase and buy yourself Bitcoin. I think everyone should – just make sure you don’t do it with more money than you’re comfortable seeing 50%, 75%, or 95% drop next year. That’s not out of the question – it happened to Amazon in the dot-com bust and look at where Amazon is at today. I think these things are long term games, but you have to have a 10 year mindset.

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