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Winter is Coming
Winter is Coming
PR Newswire
SOUTHFIELD, Mich., Oct. 11, 2022
The global auto industry faces significant risk exposure from the looming European energy crunch
SOUTHFIELD, Mich., Oct. 11, 2022 /PRNewswire/ — With energy prices in Europe skyrocketin…
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Winter is Coming
PR Newswire
SOUTHFIELD, Mich., Oct. 11, 2022
The global auto industry faces significant risk exposure from the looming European energy crunch
SOUTHFIELD, Mich., Oct. 11, 2022 /PRNewswire/ -- With energy prices in Europe skyrocketing, placing business bottom lines in triage mode, a harsh winter could place certain automotive sectors at risk of being unable to keep their production lines running.
The combined black swan events of the COVID-19 pandemic and the Russian invasion of Ukraine have already stretched the automotive supply line – especially in regard to semiconductors. Now, some OEMs and suppliers with energy-intensive manufacturing processes may face extensive pressure in terms of energy costs in the coming months.
As a result, potential manufacturing losses from Europe-based OEM final-assembly plants could reach more than 1 million units per quarter, starting in the fourth quarter of 2022 through the entirety of 2023, according to forecasts by S&P Global Mobility and S&P Commodity Insights.
Starting in the fourth quarter of 2022 through 2023, quarterly production from Europe-based auto manufacturing plants was forecast to be in the 4–4.5-million-unit range per quarter – predicting moderate growth. However, with potential utility restrictions, that OEM output could be reduced to as low as 2.75–3 million units per quarter.
As seen with past regional events – Ukraine-sourced neon shortages hampering semiconductor deliveries, and the 2011 Japan earthquake and tsunami crippling supplies for microcontrollers, mass-airflow sensors, and Xirallic paint pigments – losing one crucial piece in the global supply chain can bring the automotive manufacturing industry to a crunching halt.
The consensus forecasts for a cold, wet European La Niña winter, combined with energy shortages, could have a similar effect. The recent leaks in the subsea Russian pipelines to Europe adds to risk and the likelihood that our model is directionally correct.
S&P Global Mobility is forecasting significant supply chain disruption from November through spring. We also anticipate disruption of the traditional just-in-time supply model due to some suppliers implementing a schedule of working fractional-months on a 24/7 setup – which can be more energy-efficient than traditional weekly shifts due to the latter's higher start-up and shut-down energy costs.
We consider mandatory energy rationing to be the basis for a pessimistic scenario for the region's auto producers and suppliers. For an industry already struggling with low inventories of vehicles in dealer showrooms, an additional crisis could be incapacitating on a global scale.
European suppliers send parts, components, and modules to OEMs around the world – thus impacting all automakers, not just regional ones. And U.S. retail customers could also suffer, as EU/UK manufacturing plants are currently exporting about 7,000 units per month to American shores – but shipped 213,750 vehicles in the entirety of 2019, according to Global Trade Atlas.
"If you look through the supply chain – particularly where there's any metallic structure forming through pressing, welding or extrusion – there's a tremendous amount of energy involved," said Edwin Pope, Principal Analyst, Materials & Lightweighting at S&P Global Mobility. "Total energy usage in these companies could be up to one-and-a-half times what we're seeing in vehicle assembly today. Anecdotally, we're hearing that some of this manufacturing capacity is becoming so uneconomic that companies are simply shutting up shop."
Before the energy crisis, gas and electric costs were a relatively inconsequential component of a vehicle's bill of materials, typically less than €50 per vehicle. Now with cost increases ranging from €687 to €773 per vehicle, energy costs compound an already perilous position for the sector – given the impact raw material price increases have already had on the nascent electric vehicle value chains. Both serve to undermine margins in a market where cost increases will be difficult to pass on to customers already facing food and energy inflation.
Across the European Union, energy constraints could result in nations or regions enacting emergency policies to counter this threat. OEMs also have a certain level of countervailing power with the regional utility companies and via governmental lobbying operations.
"However, the pressure on the automotive supply chain will be intense, especially the more one moves upstream from vehicle manufacturing," Pope said. "Upstream supplier parts production constraints could impact OEM volumes. As a result, we see a risk of OEMs halting shipments of completed vehicles due to shortages of single components, which are not necessarily coupled to country-level energy policies."
S&P Global Mobility has modeled the impact of the looming energy crunch on 11 European countries – each a significant vehicle production location – to assess which countries' automotive segments are best positioned to withstand the severe energy headwinds this winter.
The model borrows from macroeconomic aggregate demand frameworks in assessing consumption, investment, and government expenditure to which an assessment of energy mix and gas storage is added. Based on a quantitative assessment of available information, six dimensions are scored on a relative basis between 1 and 5, with 5 being the best score.
The effect the energy crisis could have on a country's economic performance and societal wellbeing can also be connected to a country's industrial footprint. The most energy intensive industrial sectors are aviation and shipping, but their energy consumption is tied almost exclusively to oil, where price increases have not been of the magnitude seen in gas and electricity. Industrial sectors that see high usage of gas and electricity include chemicals and metallic products, both of which are intrinsically tied to automotive manufacturing.
Individual countries' policy responses in addressing energy imbalances will also impact comparative economic performance. Such policies will determine how a country's energy mix impacts the comparative advantage of vehicle build locations in Europe.
That impact is shown by some counterintuitive results in the S&P Global Mobility analysis. Germany has relied on Russia for its gas supplies and is phasing out nuclear power, both of which would seem to place that nation in a precarious energy situation. However, Germany benefits from its government's famous fiscal rectitude, which gives it relatively more budgetary headroom to ride out the energy storm. Further, the country benefits from a relatively low reliance on electricity generation derived from gas and from being in a decent position from a gas storage perspective.
The model also reveals how crucial government intervention in household and industry support has been for the UK. In the past few weeks, the UK government has announced measures adding up to some GBP200 billion for consumers and industry – accounting for nearly 7% of the country's GDP and more than double the level of its nearest rival Italy. Without such support, the UK would be near the bottom of the table, in a position similar to that of Italy – which suffers doubly owing to its debt and budget deficit position as well as its low energy self-sufficiency and reliance on gas power for electricity generation.
The chart also brings into focus the relative position of a country's macroeconomic position vis-à-vis energy and macroeconomic policies. Italy is one of the more vulnerable economies, and this weakness will be further compounded by the relative cost disadvantage its manufacturing base faces.
Not all countries will be impacted equally by the energy market imbalances roiling markets in Europe. That said, it is clear that an era of abundant, and cheap, energy is over – and this has shocked policymakers into varying degrees of response.
Since first quarter 2020, energy prices in Europe have soared. According to S&P Global Mobility data for four key markets – Italy, Germany, France and the UK – gas prices have increased by an average of 2,183%, a factor of nearly 23. The wholesale electricity price increased by an average of 1,230% or a factor of more than 13.
The impact of the surge in prices is shown starkly in the subsequent chart. Applying energy prices from the start of 2020 and comparing with the current situation permits a view of the additional cost that has been borne by OEMs. The subsequent chart shows the gas and electricity cost increase for a typical reference vehicle across France, Germany, and Italy.
For high-energy intensity sectors like automotive manufacturing, S&P Global Mobility has developed a methodology, leveraging proprietary data assets, to estimate the impact on vehicle manufacturing's bottom line due to escalating energy costs.
To allow for an apples-to-apples comparison in examining typical energy usage in each stage of final assembly, the single reference vehicle used was a Volkswagen Golf MKVIII, tipping the scales at a shade under 1,370 kg, and considering local energy mix.
There are some caveats to this methodology. Carmakers sometimes source their energy with different mixes than the country where they operate, while we assume identical energy sourcing in our model. Automakers also tend to lock gas and electricity prices with utilities and use different financial instruments to reduce their exposure – to the point they often end up reporting significant windfalls from these hedging bets, as seen recently with the likes of Volkswagen and Daimler. In our model, we assume they are paying wholesale spot prices.
Despite these warning signs, some OEMs protect their supplier base by indexing the price of key commodities monthly for their suppliers, which means that some suppliers are not locked into contracts at an inelastic price point through the length of the contract. However, this practice is not completely widespread.
"As you go further upstream, the sheltering the OEM provides becomes less," Pope said. "Additionally, smaller companies in Tiers 2 and 3 of the supply chain are likely to neither have the resources nor the operational sophistication required for hedging instruments, forward contracts and the like."
The situation Europe faces may be only transient. Much will depend on how the Russia-Ukraine conflict unfolds. However, a longer-term transformation of the energy picture could result in structural consequences for the industry. This would see production schedules, manufacturing footprints and sourcing strategies being discarded and replaced with a shift to locations where the energy cost burden is least. While Europe faces a winter of discontent now, more disruption could follow. This will bring fundamental upheaval to the region's auto sector and beyond.
In the way that labor cost used to be a key determinant of manufacturing location, energy mix and self-sufficiency could become key elements of future sourcing decisions.
At S&P Global Mobility, we provide invaluable insights derived from unmatched automotive data, enabling our customers to anticipate change and make decisions with conviction. Our expertise helps them to optimize their businesses, reach the right consumers, and shape the future of mobility. We open the door to automotive innovation, revealing the buying patterns of today and helping customers plan for the emerging technologies of tomorrow.
S&P Global Mobility is a division of S&P Global (NYSE: SPGI). S&P Global is the world's foremost provider of credit ratings, benchmarks, analytics and workflow solutions in the global capital, commodity and automotive markets. With every one of our offerings, we help many of the world's leading organizations navigate the economic landscape so they can plan for tomorrow, today. For more information, visit www.spglobal.com/mobility.
For media information, contact:
- Michelle Culver, Executive Director Public Relations, S&P Global Mobility
michelle.culver@spglobal.com
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SOURCE S&P Global Mobility
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Bougie Broke The Financial Reality Behind The Facade
Social media users claiming to be Bougie Broke share pictures of their fancy cars, high-fashion clothing, and selfies in exotic locations and expensive…
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Social media users claiming to be Bougie Broke share pictures of their fancy cars, high-fashion clothing, and selfies in exotic locations and expensive restaurants. Yet they complain about living paycheck to paycheck and lacking the means to support their lifestyle.
Bougie broke is like “keeping up with the Joneses,” spending beyond one’s means to impress others.
Bougie Broke gives us a glimpse into the financial condition of a growing number of consumers. Since personal consumption represents about two-thirds of economic activity, it’s worth diving into the Bougie Broke fad to appreciate if a large subset of the population can continue to consume at current rates.
The Wealth Divide Disclaimer
Forecasting personal consumption is always tricky, but it has become even more challenging in the post-pandemic era. To appreciate why we share a joke told by Mike Green.
Bill Gates and I walk into the bar…
Bartender: “Wow… a couple of billionaires on average!”
Bill Gates, Jeff Bezos, Elon Musk, Mark Zuckerberg, and other billionaires make us all much richer, on average. Unfortunately, we can’t use the average to pay our bills.
According to Wikipedia, Bill Gates is one of 756 billionaires living in the United States. Many of these billionaires became much wealthier due to the pandemic as their investment fortunes proliferated.
To appreciate the wealth divide, consider the graph below courtesy of Statista. 1% of the U.S. population holds 30% of the wealth. The wealthiest 10% of households have two-thirds of the wealth. The bottom half of the population accounts for less than 3% of the wealth.
The uber-wealthy grossly distorts consumption and savings data. And, with the sharp increase in their wealth over the past few years, the consumption and savings data are more distorted.
Furthermore, and critical to appreciate, the spending by the wealthy doesn’t fluctuate with the economy. Therefore, the spending of the lower wealth classes drives marginal changes in consumption. As such, the condition of the not-so-wealthy is most important for forecasting changes in consumption.
Revenge Spending
Deciphering personal data has also become more difficult because our spending habits have changed due to the pandemic.
A great example is revenge spending. Per the New York Times:
Ola Majekodunmi, the founder of All Things Money, a finance site for young adults, explained revenge spending as expenditures meant to make up for “lost time” after an event like the pandemic.
So, between the growing wealth divide and irregular spending habits, let’s quantify personal savings, debt usage, and real wages to appreciate better if Bougie Broke is a mass movement or a silly meme.
The Means To Consume
Savings, debt, and wages are the three primary sources that give consumers the ability to consume.
Savings
The graph below shows the rollercoaster on which personal savings have been since the pandemic. The savings rate is hovering at the lowest rate since those seen before the 2008 recession. The total amount of personal savings is back to 2017 levels. But, on an inflation-adjusted basis, it’s at 10-year lows. On average, most consumers are drawing down their savings or less. Given that wages are increasing and unemployment is historically low, they must be consuming more.
Now, strip out the savings of the uber-wealthy, and it’s probable that the amount of personal savings for much of the population is negligible. A survey by Payroll.org estimates that 78% of Americans live paycheck to paycheck.
More on Insufficient Savings
The Fed’s latest, albeit old, Report on the Economic Well-Being of U.S. Households from June 2023 claims that over a third of households do not have enough savings to cover an unexpected $400 expense. We venture to guess that number has grown since then. To wit, the number of households with essentially no savings rose 5% from their prior report a year earlier.
Relatively small, unexpected expenses, such as a car repair or a modest medical bill, can be a hardship for many families. When faced with a hypothetical expense of $400, 63 percent of all adults in 2022 said they would have covered it exclusively using cash, savings, or a credit card paid off at the next statement (referred to, altogether, as “cash or its equivalent”). The remainder said they would have paid by borrowing or selling something or said they would not have been able to cover the expense.
Debt
After periods where consumers drained their existing savings and/or devoted less of their paychecks to savings, they either slowed their consumption patterns or borrowed to keep them up. Currently, it seems like many are choosing the latter option. Consumer borrowing is accelerating at a quicker pace than it was before the pandemic.
The first graph below shows outstanding credit card debt fell during the pandemic as the economy cratered. However, after multiple stimulus checks and broad-based economic recovery, consumer confidence rose, and with it, credit card balances surged.
The current trend is steeper than the pre-pandemic trend. Some may be a catch-up, but the current rate is unsustainable. Consequently, borrowing will likely slow down to its pre-pandemic trend or even below it as consumers deal with higher credit card balances and 20+% interest rates on the debt.
The second graph shows that since 2022, credit card balances have grown faster than our incomes. Like the first graph, the credit usage versus income trend is unsustainable, especially with current interest rates.
With many consumers maxing out their credit cards, is it any wonder buy-now-pay-later loans (BNPL) are increasing rapidly?
Insider Intelligence believes that 79 million Americans, or a quarter of those over 18 years old, use BNPL. Lending Tree claims that “nearly 1 in 3 consumers (31%) say they’re at least considering using a buy now, pay later (BNPL) loan this month.”More telling, according to their survey, only 52% of those asked are confident they can pay off their BNPL loan without missing a payment!
Wage Growth
Wages have been growing above trend since the pandemic. Since 2022, the average annual growth in compensation has been 6.28%. Higher incomes support more consumption, but higher prices reduce the amount of goods or services one can buy. Over the same period, real compensation has grown by less than half a percent annually. The average real compensation growth was 2.30% during the three years before the pandemic.
In other words, compensation is just keeping up with inflation instead of outpacing it and providing consumers with the ability to consume, save, or pay down debt.
It’s All About Employment
The unemployment rate is 3.9%, up slightly from recent lows but still among the lowest rates in the last seventy-five years.
The uptick in credit card usage, decline in savings, and the savings rate argue that consumers are slowly running out of room to keep consuming at their current pace.
However, the most significant means by which we consume is income. If the unemployment rate stays low, consumption may moderate. But, if the recent uptick in unemployment continues, a recession is extremely likely, as we have seen every time it turned higher.
It’s not just those losing jobs that consume less. Of greater impact is a loss of confidence by those employed when they see friends or neighbors being laid off.
Accordingly, the labor market is probably the most important leading indicator of consumption and of the ability of the Bougie Broke to continue to be Bougie instead of flat-out broke!
Summary
There are always consumers living above their means. This is often harmless until their means decline or disappear. The Bougie Broke meme and the ability social media gives consumers to flaunt their “wealth” is a new medium for an age-old message.
Diving into the data, it argues that consumption will likely slow in the coming months. Such would allow some consumers to save and whittle down their debt. That situation would be healthy and unlikely to cause a recession.
The potential for the unemployment rate to continue higher is of much greater concern. The combination of a higher unemployment rate and strapped consumers could accentuate a recession.
The post Bougie Broke The Financial Reality Behind The Facade appeared first on RIA.
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Bitcoin on Wheels: The Story of Bitcoinetas
Meet the Bitcoinetas, a fleet of transformative vehicles on a mission to spread the bitcoin message everywhere they go. From Argentina to South Africa,…
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You may have seen that picture of Michael Saylor in a bitcoin-branded van, with a cheerful guy right next to the car door. This one:
That car is the Bitcoineta European Edition, and the cheerful guy is Ariel Aguilar. Ariel is part of the European Bitcoineta team, and has previously driven another similar car in Argentina. In fact, there are currently five cars around the world that carry the name Bitcoineta (in some cases preceded with the Spanish definite article “La”).
Argentina: the original La Bitcoineta
The story of Bitcoinetas begins with the birth of 'La Bitcoineta' in Argentina, back in 2017. Inspired by the vibrancy of the South American Bitcoin community, the original Bitcoineta was conceived after an annual Latin American Conference (Labitconf), where the visionaries behind it recognized a unique opportunity to promote Bitcoin education in remote areas. Armed with a bright orange Bitcoin-themed exterior and a mission to bridge the gap in financial literacy, La Bitcoineta embarked on a journey to bring awareness of Bitcoin's potential benefits to villages and towns that often remained untouched by mainstream financial education initiatives. Operated by a team of dedicated volunteers, it was more than just a car; it was a symbol of hope and empowerment for those living on the fringes of financial inclusion.
Ariel was part of that initial Argentinian Bitcoineta team, and spent weeks on the road when the car became a reality. The original dream to bring bitcoin education even to remote areas within Argentina and other South American countries came true, and the La Bitcoineta team took part in dozens of local bitcoin meetups in the subsequent years.
One major hiccup came in late 2018, when the car was crashed into while parked in Puerto Madryn. The car was pretty much destroyed, but since the team was possessed by a honey badger spirit, nothing could stop them from keeping true to their mission. It is a testament to the determination and resilience of the Argentinian team that the car was quickly restored and returned on its orange-pilling quest soon after.
Over the more than 5 years that the Argentinian Bitcoineta has been running, it has traveled more than 80,000 kilometers - and as we’ll see further, it inspired multiple similar initiatives around the world.
Follow La Bitcoineta’s journey:
Twitter: https://twitter.com/labitcoineta
Instagram: https://www.instagram.com/bitcoineta/
El Salvador: Bitcoin Beach
In early 2021, the president of El Salvador passed the Bitcoin Law, making bitcoin legal tender in the country. The Labitconf team decided to celebrate this major step forward in bitcoin adoption by hosting the annual conference in San Salvador, the capital city of El Salvador. And correspondingly, the Argentinian Bitcoineta team made plans for a bold 7000-kilometer road trip to visit the Bitcoin country with the iconic Bitcoin car.
However, it proved to be impossible to cross so many borders separating Argentina and Salvador, since many governments were still imposing travel restrictions due to a Covid pandemic. So two weeks before the November event, the Labitconf team decided to fund a second Bitcoineta directly in El Salvador, as part of the Bitcoin Beach circular economy. Thus the second Bitcoineta was born.
The eye-catching Volkswagen minibus has been donated to the Bitcoin Beach team, which uses the car for the needs of its circular economy based in El Zonte.
Follow Bitcoin Beach:
Twitter: https://twitter.com/Bitcoinbeach
South Africa: Bitcoin Ekasi
Late 2021 saw one other major development in terms of grassroots bitcoin adoption. On the other side of the planet, in South Africa, Hermann Vivier initiated the Bitcoin Ekasi project. “Ekasi” is a colloquial term for a township, and a township in the South African context is an underdeveloped urban area with a predominantly black population, a remnant of the segregationist apartheid regime. Bitcoin Ekasi emerged as an attempt to introduce bitcoin into the economy of the JCC Camp township located in Mossel Bay, and has gained a lot of success on that front.
Bitcoin Ekasi was in large part inspired by the success of the Bitcoin Beach circular economy back in El Salvador, and the respect was mutual. The Bitcoin Beach team thus decided to pass on the favor they received from the Argentinian Bitcoineta team, and provided funds to Bitcoin Ekasi for them to build a Bitcoineta of their own.
Bitcoin Ekasi emerged as a sister organization of Surfer Kids, a non-profit organization with a mission to empower marginalized youths through surfing. The Ekasi Bitcoineta thus partially serves as a means to get the kids to visit various surfer competitions in South Africa. A major highlight in this regard was when the kids got to meet Jordy Smith, one of the most successful South African surfers worldwide.
Coincidentally, South African surfers present an intriguing demographic for understanding Bitcoin due to their unique circumstances and needs. To make it as a professional surfer, the athletes need to attend competitions abroad; but since South Africa has tight currency controls in place, it is often a headache to send money abroad for travel and competition expenses. The borderless nature of Bitcoin offers a solution to these constraints, providing surfers with an alternative means of moving funds across borders without any obstacles.
Photo taken at the South African Junior Surfing Championships 2023. Back row, left to right:
Mbasa, Chuma, Jordy Smith, Sandiso. Front, left to right: Owethu, Sibulele.
To find out more about Bitcoineta South Africa and the non-profit endeavors it serves, watch Lekker Feeling, a documentary by Aubrey Strobel:
Follow Bitcoin Ekasi:
Twitter: https://twitter.com/BitcoinEkasi
Fundraiser: https://support.bitcoinekasi.com/
Europe: Bitcoineta Europa
The European Bitcoineta started its journey in early 2023, with Ariel Aguilar being one of the main catalysts behind the idea. Unlike its predecessors in El Salvador and South Africa, the European Bitcoineta was not funded by a previous team but instead secured support from individual donors, reflecting a grassroots approach to spreading financial literacy.
The European Bitcoineta is a Mercedes box van adorned with a prominent Bitcoin logo and inspiring messages, and serves as a mobile hub for education and discussion at numerous European Bitcoin conferences and local meetups. Inside its spacious interior, both notable bitcoiners and bitcoin plebs share their insights on the walls, fostering a sense of camaraderie and collaboration.
Follow Bitcoineta Europa’s journey:
Twitter: https://twitter.com/BitcoinetaEU
Instagram: https://www.instagram.com/bitcoinetaeu/
Ghana: Bitcoineta West Africa
Embed: https://youtu.be/8oWgIU17aIY?si=hrsKmMIA7lI6jX4k
Introduced in December 2023 at the Africa Bitcoin Conference in Ghana, the fifth Bitcoineta was donated to the Ghanaian Bitcoin Cowries educational initiative as part of the Trezor Academy program.
Bitcoineta West Africa was funded by the proceeds from the bitcoin-only limited edition Trezor device, which was sold out within one day of its launch at the Bitcoin Amsterdam conference.
With plans for an extensive tour spanning Ghana, Togo, Benin, Nigeria, and potentially other countries within the ECOWAS political and economic union, Bitcoineta West Africa embodies the spirit of collaboration and solidarity in driving Bitcoin adoption and financial inclusion throughout the Global South.
Follow Bitcoineta West Africa’s journey:
Twitter: https://twitter.com/BitcoinetaWA
Instagram: https://www.instagram.com/bitcoinetawa/
—
All the Bitcoineta cars around the world share one overarching mission: to empower their local communities through bitcoin education, and thus improve the lives of common people that might have a strong need for bitcoin without being currently aware of such need. As they continue to traverse borders and break down barriers, Bitcoinetas serve as a reminder of the power of grassroots initiatives and the importance of financial education in shaping a more inclusive future. The tradition of Bitcoinetas will continue to flourish, and in the years to come we will hopefully encounter a brazenly decorated bitcoin car everywhere we go.
If the inspiring stories of Bitcoinetas have ignited a passion within you to make a difference in your community, we encourage you to take action! Reach out to one of the existing Bitcoineta teams for guidance, support, and inspiration on how to start your own initiative. Whether you're interested in spreading Bitcoin education, promoting financial literacy, or fostering empowerment in underserved areas, the Bitcoineta community is here to help you every step of the way. Together, we will orange pill the world!
This is a guest post by Josef Tetek. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
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Digital Currency And Gold As Speculative Warnings
Over the last few years, digital currencies and gold have become decent barometers of speculative investor appetite. Such isn’t surprising given the evolution…
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Over the last few years, digital currencies and gold have become decent barometers of speculative investor appetite. Such isn’t surprising given the evolution of the market into a “casino” following the pandemic, where retail traders have increased their speculative appetites.
“Such is unsurprising, given that retail investors often fall victim to the psychological behavior of the “fear of missing out.” The chart below shows the “dumb money index” versus the S&P 500. Once again, retail investors are very long equities relative to the institutional players ascribed to being the “smart money.””
“The difference between “smart” and “dumb money” investors shows that, more often than not, the “dumb money” invests near market tops and sells near market bottoms.”
That enthusiasm has increased sharply since last November as stocks surged in hopes that the Federal Reserve would cut interest rates. As noted by Sentiment Trader:
“Over the past 18 weeks, the straight-up rally has moved us to an interesting juncture in the Sentiment Cycle. For the past few weeks, the S&P 500 has demonstrated a high positive correlation to the ‘Enthusiasm’ part of the cycle and a highly negative correlation to the ‘Panic’ phase.”
That frenzy to chase the markets, driven by the psychological bias of the “fear of missing out,” has permeated the entirety of the market. As noted in “This Is Nuts:”
“Since then, the entire market has surged higher following last week’s earnings report from Nvidia (NVDA). The reason I say “this is nuts” is the assumption that all companies were going to grow earnings and revenue at Nvidia’s rate. There is little doubt about Nvidia’s earnings and revenue growth rates. However, to maintain that growth pace indefinitely, particularly at 32x price-to-sales, means others like AMD and Intel must lose market share.”
Of course, it is not just a speculative frenzy in the markets for stocks, specifically anything related to “artificial intelligence,” but that exuberance has spilled over into gold and cryptocurrencies.
Birds Of A Feather
There are a couple of ways to measure exuberance in the assets. While sentiment measures examine the broad market, technical indicators can reflect exuberance on individual asset levels. However, before we get to our charts, we need a brief explanation of statistics, specifically, standard deviation.
As I discussed in “Revisiting Bob Farrell’s 10 Investing Rules”:
“Like a rubber band that has been stretched too far – it must be relaxed in order to be stretched again. This is exactly the same for stock prices that are anchored to their moving averages. Trends that get overextended in one direction, or another, always return to their long-term average. Even during a strong uptrend or strong downtrend, prices often move back (revert) to a long-term moving average.”
The idea of “stretching the rubber band” can be measured in several ways, but I will limit our discussion this week to Standard Deviation and measuring deviation with “Bollinger Bands.”
“Standard Deviation” is defined as:
“A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of the variance.”
In plain English, this means that the further away from the average that an event occurs, the more unlikely it becomes. As shown below, out of 1000 occurrences, only three will fall outside the area of 3 standard deviations. 95.4% of the time, events will occur within two standard deviations.
A second measure of “exuberance” is “relative strength.”
“In technical analysis, the relative strength index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator (a line graph that moves between two extremes) and can read from 0 to 100.
Traditional interpretation and usage of the RSI are that values of 70 or above indicate that a security is becoming overbought or overvalued and may be primed for a trend reversal or corrective pullback in price. An RSI reading of 30 or below indicates an oversold or undervalued condition.” – Investopedia
With those two measures, let’s look at Nvidia (NVDA), the poster child of speculative momentum trading in the markets. Nvidia trades more than 3 standard deviations above its moving average, and its RSI is 81. The last time this occurred was in July of 2023 when Nvidia consolidated and corrected prices through November.
Interestingly, gold also trades well into 3 standard deviation territory with an RSI reading of 75. Given that gold is supposed to be a “safe haven” or “risk off” asset, it is instead getting swept up in the current market exuberance.
The same is seen with digital currencies. Given the recent approval of spot, Bitcoin exchange-traded funds (ETFs), the panic bid to buy Bitcoin has pushed the price well into 3 standard deviation territory with an RSI of 73.
In other words, the stock market frenzy to “buy anything that is going up” has spread from just a handful of stocks related to artificial intelligence to gold and digital currencies.
It’s All Relative
We can see the correlation between stock market exuberance and gold and digital currency, which has risen since 2015 but accelerated following the post-pandemic, stimulus-fueled market frenzy. Since the market, gold and cryptocurrencies, or Bitcoin for our purposes, have disparate prices, we have rebased the performance to 100 in 2015.
Gold was supposed to be an inflation hedge. Yet, in 2022, gold prices fell as the market declined and inflation surged to 9%. However, as inflation has fallen and the stock market surged, so has gold. Notably, since 2015, gold and the market have moved in a more correlated pattern, which has reduced the hedging effect of gold in portfolios. In other words, during the subsequent market decline, gold will likely track stocks lower, failing to provide its “wealth preservation” status for investors.
The same goes for cryptocurrencies. Bitcoin is substantially more volatile than gold and tends to ebb and flow with the overall market. As sentiment surges in the S&P 500, Bitcoin and other cryptocurrencies follow suit as speculative appetites increase. Unfortunately, for individuals once again piling into Bitcoin to chase rising prices, if, or when, the market corrects, the decline in cryptocurrencies will likely substantially outpace the decline in market-based equities. This is particularly the case as Wall Street can now short the spot-Bitcoin ETFs, creating additional selling pressure on Bitcoin.
Just for added measure, here is Bitcoin versus gold.
Not A Recommendation
There are many narratives surrounding the markets, digital currency, and gold. However, in today’s market, more than in previous years, all assets are getting swept up into the investor-feeding frenzy.
Sure, this time could be different. I am only making an observation and not an investment recommendation.
However, from a portfolio management perspective, it will likely pay to remain attentive to the correlated risk between asset classes. If some event causes a reversal in bullish exuberance, cash and bonds may be the only place to hide.
The post Digital Currency And Gold As Speculative Warnings appeared first on RIA.
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Digital Currency And Gold As Speculative Warnings
Bougie Broke The Financial Reality Behind The Facade
NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism
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