You are never are sure its a bubble till it bursts

 The bitcoin continues to mystify the established investment community and now they start to wonder or question after the meteoric rise, is this a bubble and if so when and if the bubble will burst? Comparisons are now being drawn between Tulips in the 1650’s and bitcoins. Many theories have been created over the years as to what causes a bubble and what then causes it to burst. Bubbles often burst with no apparent catalyst, the supply and demand dynamic changes, or when investors decide better value alternatives come along. As every analyst concedes, the timing is impossible to predict for obvious reasons, and why, like a school of fish, investors change direction in a unit. The equity bubble in 1987 could have burst on any day for weeks before it did. Eventually one day in October en mass the investment community decided the gap between risk-adjusted returns between bonds and equities became so great, like fish, decided to change tack on one late windy Friday afternoon. The tech bubble burst when the valuations between old value, and tech growth became so great the bubble burst. The thing about a bubble is you don’t really know it is a bubble until it bursts and the prices fail to reach the same heights years into the future. Nasdaq announcing, they intend to introduce bitcoin futures, will only lead to an increase in speculators, this can be the sort of event that could tell us if we are getting closer to finding out.

One of our recent themes has been sterling and how negative sentiment seemed to be towards our currency. We pointed out that often asset prices tend to travel in the direction that causes the most pain. As sterling continues to rise as there appear to be the signs of daylight in the Brexit negotiations, the one thing history tells you is that once momentum changes in a currency it can keep going.  Last year sterling investors were given a boost by the weakness in sterling, this year it may prove a drag on returns. The FTSE 100 tends to trade inversely to the pound due to the overseas exposure of many of the companies in the index. Due to the lack of economic growth this year in the domestic economy, investors looking for growth are also forced to look overseas. This, in turn, increases the exposure to movements in the pound. Buying stocks that are less exposed to the currency gives a greater exposure to the domestic economy which carries its own difficulties. It’s a dilemma, but it goes to remind every investor that currency can play an important part in the performance of your portfolio.

Posted on November 30, 2017 .