January 8, 2018

Blockchain , Distributed ledger technology , bitcoin concept. Electric circuit graphic and infographic of Block chain , network connect , security , binary coded icons.

Weekly Market Commentary
January 8, 2018

The Markets

I am happy to report that 2017 was one of the better markets we have seen in some time. It was very gratifying to see the consistent gains that built up throughout the year and in fact it was a period of time where the market increased each month of the year. I would also point out that it was a great opportunity to observe how a change in asset allocation at the right time can really benefit your bottom line. In prior years I had spent significant efforts into calming down portfolios and protecting them from volatility so that when this year arrived we would have our nest egg intact to participate. As the markets began to move up after the election I redesigned a lot of portfolios and consistently reduced the bond holdings and moved those proceeds into stocks. The allocation decision to broadly invest in the market paid off with outstanding returns.

U.S. stock markets delivered their own version of fireworks to celebrate the New Year. During the first week of 2018, the Dow Jones Industrial Average hit a new all-time high, moving above 25,000 for the first time ever. The NASDAQ Composite and Standard & Poor’s 500 Indices also rose again.

2018 is off to an impressive start, but let’s pause for a moment and take a look back at 2017. It was a memorable year for global markets, but there are other reasons it was interesting, too. Here are the highlights of a few of The Economist’s most popular articles during the year:

• The world’s most valuable resource is no longer oil, but data (May 6). One-half of the most valuable companies in the world are American technology firms. Some, including The Economist, are concerned about tech companies’ market power and dominance of consumer data.

• The world’s most dangerous cities (March 31). Despite a declining murder rate, San Salvador remained the world’s most dangerous city, as measured by homicides per 100,000 during 2016 (the latest figure available). Acapulco ranked second. Several cities in the United States made the list including St. Louis, Baltimore, Detroit, and New Orleans.

• Governments may be big backers of the blockchain (June 1). Blockchain may seem complicated and difficult to understand, but it may become a part of everyday life. “…a blockchain expert at the Massachusetts Institute of Technology argues that governments will drive its adoption – an ironic twist for something that began as a libertarian counter model to centralized authority. Backers say it can be used for land registries, identity-management systems, health-care records, and even elections.”

• The death of the internal combustion engine (August 12). Rapidly changing battery technology and electric motors, in tandem with self-driving systems and ride sharing, may mark the beginning of a slowdown for the internal combustion engine. It’s a change that is likely to disrupt markets and industries. The silver lining may prove to be less traffic and improved air quality.

• How to keep cool without costing the earth (February 11). Scientists at the University of Colorado in Boulder have “…invented a film that can cool buildings without the use of refrigerants and, remarkably, without drawing any power to do so. Better yet, this film can be made using standard roll-to-roll manufacturing methods at a cost of around 50 cents a square meter.”

There is a theme that appears to run through many of these articles. They explore new ways of doing things, such as cooling buildings and transporting people. The articles discuss the growing value of consumer data, which many people provide to companies for free, as well as technologies that may allow people to protect and monetize their data in the future (blockchain).

These new developments may be part of a process called creative destruction, which is a process of innovation that includes the introduction of new products and services that may eclipse existing ones. You don’t have to look far to find examples. Just think about the evolution of movie rentals, photography, or phones during the past couple decades.

Creative destruction was introduced in 1942 in Joseph Schumpeter’s book, Capitalism, Socialism and Democracy. He believed it was the essential fact about capitalism. More recently, MIT Professor Ricardo Caballero wrote, “Over the long run, the process of creative destruction accounts for over 50 percent of productivity growth.”

It seems, as Schumpeter suggested, we live in a gale of creative destruction.

CRYPTOCURRENCY MAY BE EXPENSIVE IN UNEXPECTED WAYS. If you’re like many investors, you have probably spent some time thinking about the latest innovation in money: cryptocurrency. Cryptocurrencies, or digital tokens, are ‘mined’ using computer networks to solve complex puzzles. The Economist provided an example:

“A huge aircraft hangar in Boden, in northern Sweden, big enough to hold a dozen helicopters, is now packed with computers – 45,000 of them, each with a whirring fan to stop it overheating. The machines work ceaselessly, trying to solve fiendishly difficult mathematical puzzles. The solutions are, in themselves, unimportant. Yet by solving the puzzles, the computers earn their owners a reward in bitcoin, a digital ‘crypto-currency.’”

A hangar of computers is a lot of overhead expense, and it’s not all that’s needed to mine digital tokens, either. Experts in the field told The Washington Post mining a popular cryptocurrency, “…probably uses as much as 1 to 4 gigawatts, or billion watts, of electricity, roughly the output of one to three nuclear reactors.”

Focus on the Positive and Humor
With this newsletter being so focused on technology it seems only appropriate to recognize my favorite source of quotes and humor Yogi Berra who proclaimed “the future ain’t what it used to be”

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