Bob’s Journal for 3/14

Bitcoin Hits New Record High

The new exchange-traded funds (ETFs) have been good for the price of bitcoin.

After a multi-year legal fight, ETF providers prevailed in 2023. A federal appeals court said the Securities and Exchange Commission (SEC) didn’t have a good reason to prohibit proposed ETFs that owned bitcoin.

After all, the SEC had permitted ETFs that own bitcoin futures contracts. On January 11, 2024, the SEC sanctioned 10 ETFs for roll out that quickly attracted billions of dollars. Investor interest lagged briefly after the first week of the roll out. But the lag didn’t last.

Bitcoin ETFs are proving to be a successful new class of funds. BlackRock’s bitcoin ETF reached $10 billion in assets faster than any other ETF. The bitcoin ETFs in aggregate recently passed $50 billion in assets. It is estimated that about 4% of the total bitcoin supply now is in the ETFs.

The flow of money into the ETFs boosted the price of bitcoin, which has a strict supply limit.

Bitcoin ended 2023 at around $40,000. It hit a new record of over $69,000 in March, then quickly tumbled almost 14% to less than $60,000 the same day.

But the upward move resumed. Bitcoin topped $72,800 intraday on Tuesday and closed at just under $71,500.

The new ETFs aren’t the only reason for the price surge.

Bitcoin generally has increased with the stock indexes, and stocks have been doing well since the end of October.

Bitcoin tends to rally when other speculative assets are rising, and this time is no different. Gold, small company stocks and other assets have had substantial price increases.

The major brokerage and investment management firms still haven’t approved the bitcoin ETFs for the accounts they supervise. They’re studying the issue. Most are likely to approve the ETFs at some point. When that happens, another price surge is likely.

The Search for a Stock Market Bubble

Some investors are asking if at least some stock prices are in a bubble.

The steady rise in technology stock prices, especially the run up in NVIDIA (NVDA), are the main reasons for the bubble talk. To some, recent market behavior looks a lot like the technology stock bubble of the late 1990s.

Ray Dalio, founder of hedge fund firm Bridgewater Associates, recently updated his analysis of the question.

Dalio believes that a market bubble is identified by six factors, and there will be high levels of these factors in a bubble.

Prices must be high relative to traditional measures.

There must be unsustainable conditions, usually based on irrational extrapolations of trends into the indefinite future.

The market will have attracted many new and naïve buyers.

There must be broad bullish sentiment.

Debt will be used to finance a high percentage of purchases.

Buyers and businesses will have made extended future purchases (stockpiled goods) because of expectations of continuing price increases.

These factors can be used to assess any market. The analysis isn’t restricted to stocks.

After reviewing recent data, Dalio said that we’re not in an overall stock market bubble. In fact, after the recent price increases, most of these factors are in the middle of their historic ranges for the overall stock market and nowhere near bubble levels.

When the analysis is focused on the Magnificent 7 stocks that dominated returns of the last few years, Dalio said those equities are “frothy,” but not in a bubble. For these stocks to sustain their prices, they need to continue to deliver earnings that meet expectations.

Can BOXX Deliver Treasury Bill Returns at the Capital Gains Tax Rate?

A new ETF is aimed at delivering a long-sought investor goal, earning the return of short-term treasury bills while being taxed at long-term capital gains rates.

The developers of Alpha Architect 1-3 Month Box (BOXX) say they spent years working out the details of how to achieve these goals.

BOXX attempts to deliver not by investing directly in treasury bills or similar assets. Instead, its creators believe strategies involving options, known as box spreads, will meet the objectives.

The strategies are complicated and, as I said, the creators spent years developing them. There’s a detailed explanation on the fund’s web site. I’ll simplify.

Basically, the ETF makes paired options trades that bet on opposite outcomes on an investment asset. The trades cancel each other, and the fund ends up with a return that roughly matches the treasury bill rate.

Investors don’t receive regular interest or income distributions.

Under the ETF tax rules, shareholders don’t recognize income as it is earned by the fund.

Instead, the ETF’s value steadily appreciates. The investors receive the gains by selling shares. The fund says profits on share sales should be taxed as capital gains.

For the gains to be taxed as long-term capital gains, the shares must be held for more than one year before being sold.

Some tax experts question whether BOXX complies with the tax rules and really can convert treasury bill-like returns into capital gains. Some people in the ETF business are concerned that Congress or the IRS eventually will view this as an unintended loophole and close it, hurting not only BOXX but other unrelated ETFs.

In addition, since BOXX is investing in options and not treasury bills, its shareholders take on the risks of the options markets and don’t have the safety and certainty of treasury bills.

The investors rely on the creditworthiness of the options broker and the exchange the ETF uses.

The ETF also is depending on stability in the options markets. Instability, even for a short time, could cause BOXX to lose money on some trades or drive up its expenses.

While BOXX aims to achieve “returns similar to, or better than, treasury bills,” it is not investing in treasury bills and doesn’t have the guarantees of treasury bills.

The Data

The Small Business Optimism Index from NFIB declined to 89.4 in February, its lowest level in nine months, from 89.9 in January.

Inflation replaced labor quality as the top problem of small business owners.

The Consumer Price Index (CPI) increased 0.4% in February following a 0.3% rise in January. Over 12 months, the CPI was up 3.2% through February and 3.1% through January.

The core CPI, which excludes food and energy prices, rose 0.4% in both February and January. Over 12 months, the core CPI rose 3.8% through February and 3.9% through January.

Last week’s Employment Situation reports for February were mixed and a little confusing.

The reports showed that 275,000 new jobs were created in February after 229,000 jobs were created in January.

But the number of positions created in January and December was revised lower by a total of 170,000 jobs.

The unemployment rate rose to 3.9% from 3.7% in January, the highest unemployment rate since July 2022, despite the jump in new jobs.

That’s because of an increase in the labor force, partly from people returning to the work force and partly from an increase in immigration. It is not clear how long either of those trends will last.

Average hourly earnings increased only 0.1% in February after rising 0.5% in January. Over 12 months, earnings increased 4.3% through February and 4.4% through January.

Consumer credit outstanding increased at an annual rate of 4.7% in January.

Revolving credit, mostly credit cards, increased by 7.6% on an annual basis while nonrevolving credit (mostly vehicle and student loans) rose by an annual rate of 3.6%.

Productivity increased by 3.2% in the fourth quarter of 2023, that’s down from the 4.7% increase in the third quarter.

Output increased 3.5% and hours worked increased 0.3% in the fourth quarter. Unit labor costs increased 0.4% in the fourth quarter after rising 0.1% in the third quarter.

New unemployment claims were unchanged at 217,000 in the latest week.

Continuing claims, which lag a week behind new claims, increased to 1.906 million from 1.898 million.

The Markets

The S&P 500 rose 1.89% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 1.19%. The Russell 2000 increased 0.58%. The All-Country World Index (excluding U.S. stocks) added 2.62%. Emerging market equities advanced 3.32%.

Long-term treasuries lost 0.58% for the week. Investment-grade bonds increased 0.35%. Treasury Inflation-Protected Securities (TIPS) dropped 0.31%. High-yield bonds gained 0.47%.

On the currency front, the U.S. dollar declined 0.64%.

Energy-based commodities increased 0.81%. Broader-based commodities rose 1.22%. Gold gained 1.29%.

Bob’s News & Updates

My latest book is “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here. You can be among the first to write a review.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book, “The New Rules of Retirement” on amazon.com, said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

P.S. I will be holding a subscribers-only teleconference on March 19 at 2 p.m. EST called  “The Coming Retirement Squeeze.” The event is free, but you must register here to be able to participate. Don’t miss out!