US

THE BOTTOM LINE: Bitcoin mania, a Nobel Prize-winning economist talks Trump, and a deep dive on unstoppable tech stocks

This week:

  • Business Insider CEO Henry Blodget discusses the meteoric rise of bitcoin. He references a recent research note published by former Merrill Lynch chief investment strategist Richard Bernstein, who refers to the cryptocurrency as “bitcon.” Blodget walks through Bernstein’s assertion the bitcoin meets all five characteristics of a bubble: available liquidity, leverage, democratization, new issues and turnover. The good news for bitcoin speculators is that Bernstein thinks the rally will continue until the Fed siphons off liquidity.
  • Business Insider editor-at-large Sara Silverstein, who is generally a bitcoin enthusiast, recognises that it could be a bubble, but nothing like past catastrophic ones like the tulip bubble. She says it could end up drawing some parallels to the tech bubble, however, because after that market blowup, tech remained a large asset class and a big part of the market. Blodget then points out that there’s no real way to value bitcoin, and that efforts to do so are absurd. In the near to medium term, Silverstein still sees lots of money flowing into bitcoin and the cryptocurrency space at large.
  • Blodget and Silverstein then discuss the argument that we’re nearing “peak media” in the US. According to a recent study, the average US adult spends 12 hours a day consuming tech and media, and Blodget says that’s been driven by the rise of the internet. He doesn’t see the amount of time used to consume media increasing meaningfully going forward.
  • Business Insider senior editor Josh Barro sits down with Paul Krugman, a Nobel Prize-winning economist and distinguished professor of economics at the City University of New York. They start by addressing the one-page sheet released by the Treasury department this past week, which argued that President Trump’s economic policies – including the tax bill – will shrink the government deficit. Krugman says that the gross domestic product (GDP) growth forecast put forth was pulled out of thin air, with no backup. He notes that the projections are roughly nine times that of the Joint Committee on Taxation’s forecast. Krugman says that even the most ideal policy in the world would fail to boost GDP by 7%.
  • Barro asks if the tax plan as proposed will boost economic growth at all, and Krugman says he’s not particularly optimistic about it. He notes that many of the studies that have been done don’t touch on the impact of the national deficit on growth, and says that many of those organisations are using an inexact definition of growth. Krugman says that even if GDP ends up being positive, gross national product could end up being negative.
  • Barro then poses the question of whether corporate tax cuts will significantly benefit US workers. Krugman says that there will probably be some positive impact, but only in the longer term, not in the immediate term. He predicts that US workers won’t see a noticeable wage increase in the next five years. Krugman then goes on to say that, overall, the tax bill won’t have a pronounced negative effect on conditions in the US. He thinks that when the economy is near full employment, we should pay down debt and not run up additional obligations, but ultimately doesn’t see any sort of crisis resulting from it.
  • Krugman doesn’t attribute the recent run up in stocks to the GOP tax bill. He notes that stocks are up about the same amount all around the world, which is certainly not specific to Trump. In terms of the economy, he doesn’t think Trump deserves credit for how strong it is, considering no actual policies have been put into place. He also mentions that the economy has been adding jobs at a steady rate for years now.
  • Krugman shares his thoughts on the Fed, and says that while he saw no reason to push out Yellen, that Jerome Powell will be an adequate replacement. However, he says he’s afraid of Fed board appointments, considering the GOP has been defiantly wrong about everything monetary for the past decade. He does note that the board hasn’t historically had much impact on policy, with the chairman controlling a great deal of it.
  • Barro asks Krugman for his thoughts on Trump’s threats with regards to global trade, including a withdrawal from NAFTA. Krugman says something like that would be a huge issue, and points out that there’s no such thing as American manufacturing – that it’s more accurately described as North American manufacturing, considering how interconnected the US has become with Mexico and Canada. He says disrupting NAFTA would be very costly, and says that trade will be the way we can tell whether there’s any Trump unorthodoxy left. From a labour perspective, Krugman says that immigrant workers aren’t competing with US-born ones anymore, but rather other immigrants.
  • In the Fidelity Insight of the week, Silverstein sits down with Matt Fruhan, a portfolio manager at the firm, about where there are opportunities in equities. He says that his funds have started tilting a little more towards value in the last couple years. On a three- to five-year basis, he says he looks at earnings growth and yield, relative to valuations. Fruhan notes that growth has picked up in the last few years, with tech leading the way. He says that quantitative easing has led to an abundance of capital in the market, something he doesn’t see as particularly sustainable.
  • Fruhan shares his thoughts on FANG stocks, which he says are loved by consumer and are offering a great deal of growth. He notes that companies like Facebook and Google have done a great job penetrating the online ad market and taken a lot of share. Fruhan then says that in order for the companies to hit current estimates, they’re going to have to gain even more advertising market share. He thinks that until we see slower growth or different capital costs, it’s going to be tough to change how the market values these mega-cap tech companies.

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