- Globalization of capital markets has increased the ‘speed’ of economies to a pace never seen before.
- Capital markets are dangerously in track for the next mother of all “asset bubbles” the “bitcoin boom”.
- Quantitative Easing policies have opened-up money-making opportunities in hard asset markets.
Enabler for Disaster
As it goes, we are living in a period when growth has been fueled by debt, which now stand at a staggering 256% as a share of the total global economy. While most indebted governments face mounting pressure and difficulties in paying back money owed, global central banks have had little or no choice but to accelerate the process of printing money.
Chart 1: Debt to GDP ratio (1980-2016) Source: Forbes 2016
This has resulted in various boom and bust cycles experienced by the global economy due to relentless Quantitative Easing (QE) policies introduced. Why has all this excessive printing of money taking place without any regulatory supervision?
The answer lies with the fact that since the 1980’s most developed nations such as the US, EU and Japan have all accumulated too much debt to run its respective economies (refer Chart 1 above). And to pay off for your debts, you issue more money; it is as simple as that!
Chart 2: Asset Life-Cycle (Source: Investopedia)
With “cheap money” being made readily available by central banks, comes the added risk of the creation of economic or asset bubbles. As money floods the market, it tends to naturally flow into a particular classes of asset, resulting in a superficial increase of prices, i.e. creating an asset bubble in the process (refer Chart 2 above).
Throughout history, the creative greed behind global financialization has created various “dangerous speculative bubbles”. For instance, the “tulip and bulb” craze in Holland in 1637, the Dow in 1929, and the silver bubble of the late 1970s, the tech bubble in the late 1990s, the hosing bubble of 2008 and now to the most recent “bitcoin bubble” , all share a similar tale. It’s always asset prices reaching its absolute peak and inevitability will plummet or also known as “bubble bursting” or a “price crash”; leaving an economic mayhem in its aftermath
To make matters worse, as the global economy recovers from its last great recession in 2008, the continuous process of creating more “cheap money” to solve past problems is now being blamed for the next biggest financial market bubble in world history; the “Bitcoin boom”!
The Next Financial Bubble
Chart 3: Bitcoin Vs Other Asset Bubbles (Source: Bloomberg)
In a study recently published, bitcoin now looks to be bigger and more speculative than any of the other market bubbles studied in history (refer Chart 3 above). Bitcoin, the original crypto-currency, was first valued at $.08 in July 2010; $8100 on November 20, 2017, and $17,900 on Dec.15 2017. The sky is apparently the limit and so are the hidden risks!
The danger of course, is not on “how” but more “when” at some point, the bigger fools, the last purchasers of bitcoin and the long-term holders will lose some or all of their money. That would be regrettable but like straight forward pump and dump market manipulations of a stock some will win while others loose.
As in all past asset bubbles, the greed of speculators are not only creating a “over inflated” bitcoin but over-pricing other newly introduced crypto-currencies such as Litecoin and Monero in the market. As investors pile into markets as buyers, there is a real believe among market watchers that the emerging threat of bitcoin is dangerously similar to the “dot com” crisis of the 1990’s.
Chart 4: Similarity of Tech and Bitcoin Bubble (Source: Bloomberg)
The current “bitcoin boom” must be viewed as another “toxic concept” as it has identical properties for a crash (refer Chart 4 above). Investors need to be aware that this crypto-currency is highly leveraged and complex, similar to the tech stocks that were also actively traded in unlimited volumes with no limits based on the actual number.
With all this massive amounts of money sloshing around the financial system, it only has driven the speculation in obscure financial assets like crypto-currencies such as bitcoin, that have risen eleven-fold this year alone (refer Chart 4 above).
However, the true intent of those driving the explosion of bitcoin prices is not a desire to use crypto-currency as a low cost or reliable medium of exchange but more as a magic carpet to wealth! Say if you had bought $100 worth of bit coins in 2010, they would be worth $1.79 million as of Dec. 15. 2017! This is paradoxical that crypto-currency, allegedly meant to free us from fiat currency, finds its liquidity and value in the all mighty dollar.
What Goes Up, Will Come Down
Chart 5: Money Printing “Frenzy (Source: Bloomberg)
In the past for instance, the implosion of the financial house of cards in 2008-2009 was swiftly addressed which resulted in the surge of capital markets throughout the 2012-16 period. The market rally was solely down due to the essential and much needed content of the “money printing” programme (refer Chart 5 above).
This policy initiated by the Feds in where they reduced interest rates to historically record lows and pumped trillions of dollars into the US and other global financial markets, even leading to Warren Buffet commenting that Wall Street was gripped by “frenzy irrational exuberance” from excess capital
Chart 6: Bitcoin’s Past Crashes (Source: CNBC.com)
And if you fast forward today, as the financial orgy continues, the abundance of “cheap money” make financial assets a dangerous “ticking time-bomb”; ready to blow in your faces. History has already proven that in the past that there have already been at least two major bitcoin crashes and in both times interestingly, bitcoin transaction costs had peaked (refer Chart 6 above).
So say one fine day, if bitcoin successfully develops its own Exchange Traded Funds (ETFs), compounded with high transaction cost, the “crypto-currency bubble” could very easily “crash and burn” again. However this time with its “over-inflated” prices, the spill-over to other global stock and bond markets can prove far too damaging beyond rectification.
Another possible related contagion effect from the bitcoin crash may occur within the operations of clearing houses themselves. As an intermediary between buyers and sellers of financial instruments clearing houses are in the frontline of a potential collapse. If trading in Bitcoin and other crypto-currencies becomes particularly large and price collapses at a rapid rate, it will raise issues of availability of funds in clearing houses or even a worst-case scenario; a total wipe-out of its balance-sheet.
Another major concern of a crash suggests that exchange legitimization makes bitcoin “somewhat dangerous” for investors, given what analyst described as a lack of “intrinsic underlying economic value” to this asset.
Thus, any sudden fall in bitcoin’s price may put pressure on exchanges – companies converting Bitcoin to state-sponsored currency like dollars or pounds – with hordes of coin-owners trying to cash out of their bitcoin’s before a further slump in value. This reverse stampede, compounded by many exchanges’ notorious lack of liquidity, might leave more than a few casualties on the field.
Finally when the bitcoin market crashes, one can only guess that the remaining policy response available is to further turn on financial taps to inject more capital which in turn leads to future financial speculation. As in the past, systemic risk will build-up fueled by people getting into more debt to fund their investments.
Remember, to have any major financial bubble all you’ll need is a lot of lending and credit to build-up!
Tectonic Shift towards Real Asset
Chart 7: Decline in Financial Asset Demand (Source: Investopedia)
Is this a new normal? In this a new investment world gripped with uncertainty, heightened volatility and unsustainable growth in asset prices, what still remains as your only savior?
Perhaps the answers lies with savvy investors who are now beginning to seek-out and invest strategically in “real assets” as it has proven to constantly deliver compared to the demand for all other financial assets that have all dropped substantially (refer Chart 7 above).
As a fairly new asset class, “shipping containers” is fast gaining acceptance as an essential portfolio component, alongside equities and other fixed income assets such as bonds. Thus, without doubt containers being a part of the wider “hard or real asset” family remain as a tangible investment that provide investors the safest option in a world that’s shrouded with uncertain financial bubbles such as the bitcoin.
The attractiveness of container investment lie in the fact that it’s proven asset that serves as a stable source of income even when other markets remain volatile. When holding hard assets in their portfolio, investors have found an excellent way to hedge against inflation much more effectively than with stocks or even the latest digital currency craze.
In the last decade alone, shipping containers have proven to provide a steady payment structure that served as a reliable base for mid to long-term returns by contributing to price appreciations in capital markets. As a high yielding asset, shipping containers offer adequate cover (i.e. complete capital preservation) from other volatile financial assets and serves as a natural hedge against growth of “irrational financial bubbles” such as the current the bitcoin frenzy.
Unlike term-deposits or bonds that pay out regular fixed returns until `they reach maturity; container investment carries an “intrinsic value” and provide stable monthly investment payouts that can grow in-line with your cash flow. Thus, if you choose to invest in shipping containers, you are indeed making a strategic investment decision to “preserve your capital” compared to parking your cash in unrealistic assets such as the bitcoins that’s prone to “boom and bust” cycles.
In reality, an investment in hard asset such as shipping containers is fast becoming a popular trend. This is solely down to the global investor community coming to grips with the continuing turmoil and speculative nature of past and current financial assets. As a niche investment, returns from shipping containers have never failed to sustainably outperformed other assets in returns by a mile (refer Chart 8 below).
Chart 8: Various Asset Performance
Benefits of Container Investment
There has been no other sector globally that has a more profound effect on the global economy than the shipping industry. Firstly, around 90% of total world’s consumer goods are shipped by sea. And secondly, major ports around the world create and sustain thousands of regional jobs and contribute greatly to their local economies.
Identifying these potential opportunities, various container leasing companies’ have offered investors a unique opportunity to invest directly in shipping containers. The investment offered provides ownership of a tangible hard asset (compared to over-the-counter stock purchase) with value while you generate steady passive income in US Dollar revenue while providing a cover from other erratic asset classes.
Investing in real assets such as containers can be considered as an investment in non-traditional asset. Usually hard assets are not correlated to other financial assets such as shares bonds or even crypto-currencies. Among other “pull-factors” includes the fact that investing in hard assets such as containers offer enormous economic benefits to investors (refer Factbox above)
Sustained Demand and Returns
The world shipping container demand is growing at approximately 12% per annum twice the rate of world GDP. The current projections expect this trend to continue until 2020 due to fleet replacement and new demand for larger vessels.
Please remember that in order for economies to improve their performance they must consistently raise their GDP. This can only accomplished with the help of trade, i.e. the need for a steady supply of shipping containers. Cargo containers are needed to accommodate the demands of importers and exporters, and most importantly support their respective economic growth.
Chart 9: Global Demand for Containers (Source: Eurostat)
To meet the rising worldwide demand for intermodal shipping services, 2015 saw the largest ever influx of container capacity, as the world’s fleet grew by approximately (net) 1.55 million TEU (refer Chart 9 above). This astounding figure eclipses the previous record of 1.35 million TEU, established in 2006 and marks the highest inflow of new capacity ever!
Chart 10: Global Trade Growth (Source: World Economic Forum, 2016)
With an explosive trade growth projected over the next decade, shipping containers being in the forefront has proven to be the only solid investment one can make. The robust overall trade growth over 2012-16 period have excited the imaginations of carriers and analysts alike, raising their expectations for 2018 and beyond (refer Chart 10 above).
With numerous benefits as an asset, investors have slowly but surely been opting to channel large pools of money to invest directly in containers. They are beginning to realize that containers generate higher yields, are safer and will surely out-perform other asset classes.
Over the years, with its stable “passive” like payment structure, container investment has served as a reliable source for stable mid- to long-term total returns by contributing to price appreciation. Another huge advantage of holding these “metal boxes” as it’s a tangible asset and comparatively easy to price, therefore providing sustainable income earnings and the ability to successfully hedge against inflation or even unsustainable financial asset bubbles.
While bonds or term-deposits may payout a regular fixed coupon until they reach maturity, shipping containers payouts can grow in line with cash flow growth. Hard asset investment also provides geographic diversification, and, perhaps most importantly, they come with total return targets that have still remained competitive.
With all this being said, container leasing companies have offered investors a proven “investment formula” that has demonstrated the delivery of long-term income, regardless of economic uncertainty, political unrest or turmoil. This investment option has become more appealing as your containers being your “tangible assets” are insured against loss or damage. In most cases, leasing companies take full responsibility for the care, repair, maintenance and operational costs of your shipping containers.
Therefore, it is no surprise that investing in hard assets such as containers generate the highest possible investment returns for many happy investors.
To conclude, asset bubbles like current bitcoin frenzy was created only trough excessive “money printing”. It scars an economy, and the healing process is far too long and painful. Just look at the US, Japan and the euro zone economies. Although its policymakers have attempted to increase regulation to partially depress asset bubbles, they still have a difficult time in accurately identifying core issues let alone implementing any effective policies.
Thus, as investors in this uncertain environment, you don’t much choice but to make choices between dangerous “speculative economic bubbles” like the bitcoin. However, the only safe route remains investing in hard asset as it will certainly guarantee its status as a safe-haven for decades to come!