As we rapidly approach the end of an unusually difficult year for investors, I would like my final column of 2022 to be on the light-hearted side. To be sure, I have been pleased with how our client portfolios have fared this year in the face of the many macroeconomic and geopolitical headwinds: rising inflation, surging interest rates and the Russian invasion of Ukraine, just to name a few. I believe that our disciplined focus on valuation and risk management has helped us avoid some of the damage that has afflicted many other market participants.
I imagine that most of you were not laughing all the way to the bank in 2022. So just to cheer you up, I am about to take a page from the hit comedy series, Seinfeld. For the sake of Gen Z-ers and Millennials who may never have seen an episode of Seinfeld, I call your attention to an episode in which George Costanza admitted to his boss that his family celebrated their own version of the holiday season with a holiday called Festivus. One of the main rituals at the Costanza family Festivus celebration was “the airing of grievances.” So as I look back at some of the financial follies and scandals over the past year, I would like to air my personal grievances against people who bear some responsibility for some of the misfortunes that befell investors this year. Let the celebration begin!
The Show About Nothing
The crash in cryptocurrencies this year was predictable, but the fallout has been devastating. In my humble opinion, Bitcoin and other cryptocurrencies are hardly “investible.” While blockchain technology has a future as a business application, the creation of a currency based on no tangible value is folly. My grievance is with so many media outlets, celebrities and politicians who proffer their “expert” advice regarding a wildly bright future for cryptocurrencies.
Let me just say this about cryptocurrencies: there is no tangible way to determine a proper valuation for them. With a very short history of performance, I find it unconscionable for crypto “experts” to predict the future prices of Bitcoin or other cryptocurrencies. Yet the media allows these “experts” to appear on television and pontificate about the wonders of Bitcoin, setting price targets in excess of $500,000 per token. What was that valuation based upon? Nothing.
Many of these “experts” like Sam Bankman Fried (aka SBF, or as I like to refer to him, the “Sophisticated Banking Fraudster”), who has apparently fooled everyone with his crypto empire and proceeded to dupe and swindle billions from clients and venture capital investors. Shame on you, SBF. And shame on all the celebrities like Tom Brady and even Mayor Eric Adams for touting an “investment” that has crushed many unsuspecting novice investors.
Ineptitude at the Federal Reserve
The Federal Reserve Bank has been consistent at one thing in recent years: being behind the curve with its monetary policy. To be sure, the Fed correctly opened the monetary floodgates to help save the US economy from collapse following the outbreak of Covid-19. While the United States experienced a sharp decline in economic activity in the first half of 2020, the economy came roaring back. Meanwhile, the Fed continued to aggressively flood the market with liquidity by artificially keeping interest rates low and purchasing trillions in debt. Worse yet, as inflation began to surge in 2021, the Fed continually insisted that rising inflation was “transitory.” Finally, when inflation accelerated in late 2021 and early 2022, Chairman Jerome Powell finally conceded that the transitory thesis was wrong.
Now with the inflation rate beginning to decline, the Fed continues to talk quite tough on monetary policy. Economic growth is slowing and inflation is beginning to ease. But Powell is standing firm, insisting that interest rates will move even higher and stay there for some time. While higher than average inflation may now be embedded in the economy for the next few years, the Fed seems willing to drive the economy into recession with its hawkish policy.
Fighting the Last War
Politicians of all stripes always seem to be late to the game when it comes to regulation. While the cryptocurrency world has been running with virtually no regulation or oversight, SEC Chair Gary Gensler has been focusing regulatory attention on tightening conventional Wall Street trading regulations including new proposals: 1,656 pages of re-regulation of traditional Wall Street trading market activities, where liquidity and competition has made those markets fair and highly transparent.
As I consider the proposed new regulations, I am dumbfounded. Let me get something straight: our regulators are more concerned about the potential losses of pennies on traditional stock transactions, while they turn a blind eye to crypto trading platforms, which could be aptly compared to the Wild West!
Now I ask: Where have politicians been when the threat of massive losses and fraud were percolating in the crypto world? They were accepting political donations (or shall I say bribes) from billionaire crypto executives. Who said that the swamp in Washington DC has been drained? Few politicians were willing to stand up and protect investors in the face of clear and present dangers. I call upon all politicians who accepted donations from the likes of FTX to turn those funds over to a restitution fund for those who were defrauded. If not, shame on you!
Getting Down From My Soapbox
Now I do not consider myself a bitter person. But someone has to say something when irresponsible behavior is wrecking our social fabric and economic vibrance.
Thank you for allowing me to unburden myself! I am feeling much better now and look forward to a better 2023. The rituals of this fake holiday of Festivus seem to have redeeming value. So let your grievances be heard during this holiday season. And to all I wish a Happy Chanukah and a very Happy Festivus. Best wishes for a successful 2023!
The views presented are those of the authors and should not be construed as personal investment advice or a solicitation to purchase or sell securities referenced in this market commentary. The authors or clients may own stock or sectors discussed. All economic and performance information is historical and not indicative of future results. Any investment involves risk. You should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice. All information is obtained from sources believed to be reliable. However, we do not guarantee the accuracy, adequacy or completeness of any information and are not responsible for any errors or omissions or from the results obtained from the use of such information.
Jonathan D. Caplan, a former Wall Street executive, is president and founder of wealth management firm Caplan Capital Management, Inc., with offices in Highland Park and Hackensack. He holds a BA from Yeshiva University and an MBA in finance from New York University Stern School of Business. You can find other recent investment articles by Jonathan at www.caplancapital.com/blog.