The current bull market has been called the “everything rally” as we have seen a strong price appreciation in a wide array of assets including equities, housing, bitcoin and NFT digital art. Kim Parlee speaks with James Orlando, Sr. Economist, TD Bank, about investors’ apparent insatiable demand for assets.
- I want to start off with just the tremendous rally we have seen in equities since last March. I think in the last year, we've seen the S&P up over 70% from the bottoms, TSX approaching 70%, the global Dow Jones index up 72%. And what's interesting is, if we bring up the chart and you take a look at this, the profits have not yet recovered to verify or validate, I'll say, these valuations.
- Yeah, thanks, Kim. So we're seeing a huge increase in equity prices, as you mentioned. And this is typical. That happens when we're coming out of recession, where equities are forward-looking, they lead the profit cycle. But what happens is, and what we're showing in the chart, is that the price to earnings ratio, which is a pretty popular valuation metric, has gotten to pretty high levels.
And you know, this doesn't mean that equities are going to go down, but what it does mean is that investors are very optimistic, pushing equities higher. And it also means that we're in a situation where earnings are going to have to increase pretty substantially to be able to justify those high equity prices. And the optimism in investors is very strong. They're putting their money to work. And but they're also playing a situation that the environment we're in right now is really incentivizing that risk-taking.
So it's incentivizing people to move up the risk spectrum. And that's because, if you're an investor looking to, say, plan for retirement, or if you're someone looking to buy a home, or even just to improve your financial well-being, you're not able to do that as well in safe assets because, you know, with yields lower than 2%, you're really not even keeping up with inflation. And so you need to move out the risk spectrum to be able to improve your financial well-being. And the way that people are doing that right now is through increasing their allocation to equities.
- James, it's not just with equities. I mean, you and I have talked about the fact and you've used this phrase insatiable demand means cheap money. And we're seeing that show up everywhere, and even in housing.
- Yeah, so housing has seen incredibly strong demand. In Canada, we love housing. We love talking about it. And the narrative has gotten pretty strong lately. We talk about how equity markets have done very well. And so a lot of people, when they're trying to buy a home or trying to, say, upgrade their home, they have a down payment account, and they might buy equities in that. So some people, they've seen their down payment fund increase substantially.
At the same time, mortgage rates have gone down. And that means you can just-- you can actually take on more of a mortgage with the same level of income because your interest rates are lower. And so the fact that some people might have bigger down payments, they can carry a bigger mortgage, that goes into housing. That means they go to that bidding war sometimes with a huge amount of money that they have available to spend on housing.
And plus, we're in a situation right now where we've reassessed and reprioritized what housing means for us. It is still a place where you sleep and eat, but it's also a place where you work. And not just one person working under a household. It's also the place where we're educating children. And so because we're reassessing what we do with our housing, we're reassessing what it means to us, we're placing greater value on it, and we're willing to spend more money on housing. And I think those are the stories that are really pushing house prices higher.
- You're forgetting the yoga classes and everything else that goes on and that we're all doing at home right now, but yeah, everything is happening there. What about some other assets which have kind of emerged on the scene, cryptocurrencies, the Bitcoins and the Ethereums and all the other ones that are out there? I mean, they've seen huge spikes in prices this year.
- Yeah, absolutely. Things like Bitcoin have gone up multiple-folds over 2020 and the first little bit of this year. I think what happened was, in the early 2020, when prices of things like Bitcoin started going up, the narrative behind the decentralization and the known supply of Bitcoin was really captivating. You know, especially during that time when we were seeing central banks around the world doing unconventional monetary policies such as quantitative easing, which all of this does is it increases the money supply.
So on a relative basis, when people compare what's happening with the money supply of US dollars, for example, relative to the decentralized nature of things like Bitcoin, that was attractive. And truthfully, you can't compare-- it's apples and oranges comparing Bitcoin to the US dollar, but you know, that was a narrative that took hold. And then we started seeing prices increase. And if you want incentive for people to jump into things like Bitcoin, higher prices usually lead to more people being incentivized to jump in there.
And so I think this train just started taking off. And so the supply nature, the demand nature, there was really just-- it's taken the world by storm as a result. And plus, we're in a situation, I mentioned earlier, a lot of money out there. The same money that was going to maybe the equities, maybe to housing, that money finds its way to Bitcoin, as well. The potential for greater returns was pretty high.
- We'll have to see how that one pans out. Let's talk about the-- I think we're kind of moving up the risk spectrum as we're talking right now. The last one are Non-fungible Tokens, affectionately known as NFTs. I've only got about a minute here, James, but what-- just, can you educate us on what these are? And should we be paying attention? What do they even mean?
- Yeah, well, I think people should be paying attention to these. What's happening right now is you're taking the technology that's really popular in things like Bitcoin or Ethereum, that blockchain technology, and you're applying it to a whole bunch of different kinds of assets, a lot of digital assets like music or art or collectibles. And what it does do is say like you have a musician, and they create a song. They're able to upload it, put it on the blockchain, and mint it.
And then that process actually creates a record of ownership, a record of price, a record of transaction. And that ownership is really important in the world right now. Like, we live in a digital world where there's so much transactions going on with digital items, like streaming music or watching movies. We don't realize, but we rent this stuff. We rent these things. We don't own them. And so in a world where digital content creation is huge, the ability to determine ownership over that content is important, as well. And the valuations that some of these things are going for, it-- I can't comment on the proper price or the proper fundamentals, but if something is valuable in the world to some people, then it's going to have a price.
And we're in a situation where there's a lot of money out there. Because there's a lot of money out there and you're able to have ownership over, essentially, a digital asset, that ownership is able to create royalties for people and have other incentive structures in place. So I think there's a lot of money out there. It's chasing a lot of assets. And it's very important to follow this trend.
- James, always a pleasure. Thanks so much.
- Thank you.