Today’s economic news seems undeniably strong. Despite the crisis in India, our own health officials believe that we may be emerging from the darkest hours of the pandemic. Pennsylvania has announced it will be open for business in less than a month. The Dow has taken us from 30,000 on New Years’ to 34,500. A few days ago, I wrote about pricing silver coins in $1,000 increments and when I looked today those same coins are worth $3,000 more than they were three weeks ago. I also did a piece on the crazy escalation in bitcoin values on April 21, 2021. Cryptocurrencies are garnering everyone’s attention. Something called a Dogecoin, which is a poor man’s bitcoin, has almost doubled in value since April 21.
So, let me pause here. Do you think there are sound economic reasons for our nation’s industrial average to grow 15% in four months? Better yet, do you think our economy is 19% stronger than it was as 2020 started and no one seemed ill? Can some illusive cryptocurrency that was dismissed as a hoax and traded for 8 cents thirteen months ago really be worth 7x that amount today? What made the coins my grandmother set aside for me in 1965 increase in value by 19% in three weeks? Tell me that silver coins prevent COVID or can recharge my Tesla and I might understand.
On my drive to work every day I drive through an old town that had a steel mill until 1984. Young people are flocking to these places today because homes are cheap, and the towns are walkable. In 2017 new townhouses started to pop up on lots that had long sat vacant. In late 2017 these new 2,200 square foot townhomes were selling for $280,000. A little more than three years later, they are selling for $350,000. Thus, real estate prices appear to be rising 7% a year.
While lawyers are crummy investment advisers, we do hear clients talk every day about investments and opportunities. What I am noticing is that clients actually agree with my theory that this market is too brisk. But they also cannot overcome the temptation to grab an investment without really evaluating it. After all, this fellow who started a crypto exchange in 2012 called Coinbase took it public last month for $100 billion. That’s a good bit more valuable than General Motors is worth and GM sold almost seven million cars last year, despite 10% of our population being afflicted with a pandemic disease.
My point: economics and physics share a common theme. What goes up, must come down. In 2008 the Dow fell by almost 50% in five months. Last year it fell 35% in about five weeks. In 1987, 23% in a single day. All of that in our lifetimes.
So, caution is worth considering. While pursuing herd immunity we may find ourselves overrun with herd mentality. It is undeniable that a lot of money has come out of the wings since last March when the Dow closed below 19,000. Bargain hunters came out and brought us back to 29,000 by mid-November 2020. And, lest we forget, the Treasury has juiced the economy with just under $5,000,000,000 (that’s trillion) in stimulus. That money had to go somewhere after it paid rents and put food on tables.
If you are younger than 40, you may be able to lose it all and make it back later. But, as we counsel clients over 40, your age and your health need to be respected. Yes, Warren Buffet is still working at 90. The rest of us may not be so fortunate, leaving us prey to accidents, illness, and the more recent malady, “downsizing.” While it is exciting to seek fortunes, the wise person makes certain that financial security does not fall prey to the pursuit of riches.