Don’t blame low interest rates for post-Covid tech speculative boom

A common narrative is that forever-low interest rates are to blame for the post-Covid speculative frenzy, such as in Tesla, Uber, crypto currency, SPACS, meme stocks such as GameStop, and so on.

Josh Brown posits such a link between low interest rates and speculation, writing:

It won’t all work if rates keep backing up. Look no further than how Bitcoin fell apart during the third Federal Reserve interest rate hike in December ’17 and then continued to spiral downward during the rate hikes of 2018. The Fed raised rates three times in 2017 and then four times in 2018 and Tesla’s share price churned back and forth, ultimately going nowhere over two full years. When rates were cut to zero last spring, it exploded. That was the starting gun for high growth / no cash flow investing. Free money matters to market psychology and market psychology determines stock prices. Fundamentals do not determine stock prices, they merely nudge the price-setting psychology in this direction or that from day to day. There’s an argument to be made that stock prices actually determine fundamentals these days (my software company’s stock is making all-time highs therefore I can use it to hire and compensate great engineers and attract customers to it as though ’twere a banner on a battlefield), but that’s a different blog post.

Except that:

Bitcoin boomed in 2013 despite the fed announcing the start of tapering of QE, which hurt the bond market as interest rate forecasts surged from 0-.5% to 2-3%. By Josh’s logic, Bitcoin should have fallen in 2013.

Bitcoin surged in 2017 despite interest rates rising and forecasts in late 2016 of higher interest rates following Trump’s win. Interest rate and inflation forecasts spiked after Trump pledged massive spending following his surprise win. All asset classes surged–such as stocks and crypto–despite forecasts of higher interest rates.

If low interest rates are supposed to induce risk-taking behavior, how does one explain the 2 lost decades in Japan despite decades of near-zero or negative interest rates? Or the lost decade in Europe? Germany has had negative interest rates for years yet there is no speculative frenzy over there.

Second, the dotcom bobble in the 90s occurred during a backdrop of high interest rates (5-6%). Same for the tech boom of the 80s, despite interest rates being as a high as 10-12%. For the cover image on his blog post is picture of Beanie Babies as being the sort of posterchild of mindless speculation, yet Beanie Baby craze peaked in the late late 90s and early 2000s when interest rates were much higher than they are today. Same for the bubbles in baseball cards, video game companies, and comic books in the 80s. So evidently the link between interest rates and speculation is weak. The explanation is pretty obvious: if the expectation for a speculator is to make a substantial real return, what difference does it make if the interest rate is 0%, 1%, or even 10%, when gains of 50-100% or more are expected?

Is Chamath really that smart? In 5 years he will be probably be as irrelevant and forgotten like Garry V. who was a big deal in 2013-2016 but hardly anyone talks about him anymore. Mark Cuban has longevity but has the charisma of, well, an angry guy yelling from the sidelines of an NBA game. These gurus come and go. Remember Bill Miller–the investor, not the baseball player–who had one of the longest streaks beating the S&P 500, until it all fell apart in 2007-2008?