High-risk assets are gambles for novice investors
Nothing good happens when too much money gets concentrated in too few hands and ends up invested in madcap ideas, personality cults or volatile assets.
Wealthy and middle-class Americans who kept their jobs during the COVID-19 pandemic reportedly are hoarding cash. About a third of upper-income Americans say they have increased their savings rate, while almost a quarter of the middle class is growing rainy day funds, according to the Pew Research Center.
The challenge is generating returns higher than the inflation rate. The 10-year Treasury note, the safest of all investments, yields around 1.6 percent, while inflation is 1.8 percent.
The Federal Reserve has squashed the interest rates on bonds, money market accounts and savings accounts in the name of boosting the economy. It wants Americans to put their savings to work in high-risk assets such as stocks.
So much money has gone into the stock market, though, that prices are high when compared with corporate earnings. Low yields have sent investors into cryptocurrencies, extremely speculative stocks and even digital art that exists only on blockchain computer programs.
Bitcoin, the original gangster of cryptocurrencies, has rallied from $5,165 a token to more than $60,000 in less than a year. Evangelists no longer claim bitcoin will replace sovereign currencies; instead, they offer it as a hedge against misguided central bank decisions.
Rising inflation is a big worry for many investors since governments have borrowed trillions to stimulate the global economy during the pandemic. Even JP Morgan Chase has advised wealthy clients that bitcoin deserves a limited place in their portfolios.
However, the cryptocurrency revival does not change the fact that tokens have no underlying or physical value, economists warn. Ether, dogecoin or any of the cryptocurrencies are only worth what someone else is willing to pay for them. They do not have a sovereign government guaranteeing them.
Too many young investors are interested in momentum rather than value, and their mobile apps encourage them to treat their portfolio like a video game. Dogecoin, for example, has climbed from less than a penny to 8.2 cents per token just because Tesla
CEO Elon Musk started tweeting about it and young people bought it.
Dogecoin’s market capitalization is about $7.5 billion, with investors trading $1.3 billion worth of tokens on average every day. But did I mention that dogecoin’s inventor created it as a joke to mock the crypto-craze? The last laugh will be on those who end up with this worthless currency once it crashes.
A far more serious but still speculative investment is the special purpose acquisition company, or SPAC. While SPACS have been around for decades, the new ones have a 21st century twist that has turned them into a fad.
Venture capitalists, celebrities and retired executives are offering shares in SPACS on public markets with the promise that they will use the cash to buy a promising startup within five years. Some startup executive teams prefer merging with a SPAC to paying for their own initial public offering.
SPACS have shown particular interest in electric vehicles that have yet to make money, including Fisker and Faraday Future. But to make a real upside, investors need to put their money into the SPAC before it acquires a company. Investors are betting on nothing but the executive team.
While average investors have poured into SPACS, many professionals are betting against them. Short sellers who profit when a stock loses value have placed $2.7 billion in bets against some of the most popular SPACS, according to the Wall Street Journal.
Hindenburg Research shorted Lordstown Motors and then released a report claiming the company misled investors about future orders. The SPAC’S stock dropped 17 percent, sending the management team scrambling to refute the report.
The most controversial of this year’s hot investments is the nonfungible token, or NFT, which provides proof of ownership of a digital artwork or asset.
NFTS are stored on cryptocurrency blockchains, but unlike a standard token, they have no face value.
NFTS started in 2015 to allow players to trade assets within a video game in a verifiable way. But the NBA took it to another level by offering what are essentially digital trading cards featuring images and videos. The NBA’S partner, Dapper Labs, reports $230 million in sales so far.
Makers of digital art turn their work into NFTS to guarantee authenticity and prevent knockoffs. An anonymous buyer recently paid $69 million for a collage made by the artist known as Beeple.
Economists have always known that the search for returns can result in dangerous financial bubbles. Cryptocurrencies, SPACS and NFTS look overinflated and represent huge risks for inexperienced investors.