The Melt Up

Brent Carlson |

“The thing we call money is just an information system for labor allocation. What actually matters is making goods & providing services. We should look at currencies from an information theory standpoint. Whichever has least error & latency will win.” Elon Musk after purchasing Bitcoin

2020 was one for the books. We faced a total shutdown of the U.S. economy, a stock market crash, more than 30 million lost jobs, and an economic recession. Then the market came roaring back. It hit new all-time highs along the way. And while it might surprise you to hear this, the gains we've seen in recent months are not that out of the ordinary. That's because no matter how rough 2020 felt, it set up the stock market for what I like to call a, “melt up.” The actions of 2020 are similar to what we saw in the 1930s after the great depression. We had a shock to the financial system followed by massive stimulus from the US government and Federal Reserve. The difference today is that the money being poured into the system not only dwarfs what we saw in the 1930’s, it completely dwarfs TARP and the stimulus from the financial crash in 2009. Below I have a chart showing the M1 Money Stock, this chart represents the total value of money available in the economy at a point in time. As you can see, 2020 was an unprecedented year for expansion of the money supply as the number rose exponentially. 


St. Louis Federal Reserve Economic Data


To understand what is happening now, we need to study the history of our monetary system. The Great Financial Crash of 2009 was one of the worst in most of our lifetimes. Ben Bernanke was the Chairman of the Federal Reserve at the time, and he did everything in his power to make sure it didn’t turn into another great depression. He fueled the fires of recovery and asked Congress to do even more. Bernanke was a student of the Great Depression and his studies told him that the problem was that the Federal Reserve didn’t do enough to fuel recovery. You see, money dries up during a crisis. And if companies can't borrow money, more and more find themselves unable to fund short-term operations. Bernanke wasn’t going to let a depression happen so he cut interest rates to zero for the first time ever. He also asked Congress to spend $700 Million to bail out the banks who were largely responsible for the crash. After that, he started “quantitative easing” which is basically just a fancy term for the Federal Reserve spending money and increasing their balance sheet. You can see that uptick in the chart below in 2009. As dramatic as that spending seemed at the time (it started the Tea Party movement), the spending the Federal Reserve did in 2020 made 2009 look like nothing. Both times, the spending and low interest rates worked and the economy recovered. Due to these policies, money is currently more abundant and cheaper than it has ever been, and the Fed doesn’t seem close to stopping. Therefore, the ingredients are there for a continuation of the market and asset boom. I want to be clear that I don’t think this is necessarily a good thing and the long-term ramifications could be dire, but it is important to be aware of where we are in the cycle and why this is happening. 

St. Louis Federal Reserve Economic Data


The Federal Reserve still has interest rates near zero and has a target inflation rate of at or greater than 2% per year. This means that if you have money sitting in cash, you will be losing 2% or more per year. And if you are sitting in short-term treasuries, you will be earning a negative real rate of return. You may wonder why I am diving so deep into Federal Reserve policy in this letter, but it is because the Federal Reserve is the bank that has the most control over our monetary policy, fiscal policy, and overall economy. When the Fed’s policies make cash and bonds unattractive with negative yield; equities, real estate, and tangible assets are some of the best things to protect your wealth from inflation.


All of this inflation has led to what I call a “melt up.” The melt up is a powerful idea and it is based on one simple premise. Stocks tend to have their biggest gains at the end of major bull markets. In short, before a big “melt-down” arrives we have the big melt up. The most recent example of this phenomenon is what happened at the end of 1990’s when the NASDAQ was up 86% alone in 1999. Typically, melt ups happen after a time of fear. 1998 had the Asian Financial Crash and stocks were hammered. After the fear extreme was reached, the NASDAQ rose 200% in 18 months during the dot-com bubble. I am not saying this will happen again but there are a lot of similarities in market conditions to what we saw back then. We have been in an extended bull market since the crash of 2009. 



With the recent price action in Bitcoin and other crypto currencies, my office has been receiving a lot of calls on what we think of all the craziness. If you have watched any financial media this year, the talk of Bitcoin has essentially been unavoidable. Bitcoin started the year 2020 around $7,000 per coin, dropped to around $5,000 briefly from the COVID scare and finished the year in the $29,000 range. 2021 has been an been even better as it rallied over $48,000 per coin on the news Tesla would be adding it to it’s balance sheet and then to over $56,000. Now before I go any further, I need to stress that I am securities registered and I cannot recommend the purchase of Bitcoin or facilitate in any transactions regarding Bitcoin. I am only bringing this to your attention due to all of the questions I have been receiving and to educate you. Bitcoin is not a stock, it is not a security, but rather it is a currency. It is theoretically no different than the US Dollar, the Euro, or any other global currency. As a currency, Bitcoin is now being broadly accepted as a form of payment as many companies now accept it as legal tender. Bitcoin is not just being accepted but fiat currency is also being rejected. In 2012, the European Central Bank came out and said, “Bitcoin could have a negative impact on the reputation of central banks, assuming the use of such systems grows and in the event that an incident attracts the press, the public may perceive the incident as being caused by the central bank not doing it’s job.” This goes with what I have been saying about the Federal Reserve and their monetary policy of broad expansion and spending. Clearly Bitcoin is working and many are using it as a bet against fiat currency and political monetary policy. The former Federal Reserve chairwoman and current Treasury Secretary Janet Yellen has called Bitcoin “speculative” and that it “is used to facilitate criminal activity.” To me, that sounds like someone who is threatened by a rival currency.  


Just like stocks and crypto. Commodities are also on the move. Crude oil, cotton, lumber, soybeans, corn, copper, and platinum. They all trade at, or just shy of, one-year or multiyear highs. This kind of coordinated rise in commodities prices has been rare in recent years. In fact, any kind of rise in commodities prices has been rare. As a group, commodities have been trading lower since the top in 2011 and if you have been a commodities investor or had your income based on the prices of commodities, it has been a long decade. But with easy money and inflation taking place, commodities are heating up and are an area we will be focusing on for year 2021. 

Congress is currently working through Biden’s $1.9 Trillion Covid Relief package and while the details are not worked out yet, many Americans can expect another larger check and municipalities are corporations across the country will also be benefactors. This may continue to bode well for the market. There will be corrections as they are natural, and we have even had some red days in the market recently. However, every time we have a red day, the Federal Reserve chairman seems to come on and say they are committed to being accommodative to the markets. I have never seen anything like this.  

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Bruce Carlson, CFP®


Carlson Asset Management