Market Perspective

Digital exuberance: the £1,000,000 banknote revisited

Kevin Gardiner and Victor Balfour, Global Investment Strategists


“Yes it’s a million-pounder, as you see; but it never made but one purchase in its life…”
Mark Twain, The £1,000,000 banknote, 1893

Western output is surging, even after most of the covid-related fall has been made good. Governments are offering further fiscal encouragement to rising consumer confidence. Inflation risk is surely rising, but not as quickly as headline rates and high-profile supply bottlenecks suggest. The big central banks remain unlikely to raise official interest rates any time soon.

Setting aside our misgivings at these overly generous policy settings, this all seems to continue to favour business assets.
A lot of good news must now be priced in, however, and there is some distinctly fanciful thinking at large. In the digital realm, for example, the echoes with late 1999/early 2000 are hard to ignore.

New technology is exciting and enriching. But just as the winners from the internet’s profound impact were not those that were most vocally championed, so the impact of digital currencies and ‘tokenisation’ may not be what today’s promoters predict.

Back in 2000, those who ‘got it’ said the internet had abolished scarcity. Now, we’re told the only scarce asset is one provided online. But scarcity is no guarantee of value, or of monetary usefulness, particularly when expensively over-engineered in environmentally damaging ways. Nor does it necessarily offer an inflation hedge.

Digital coins are more divisible than Twain’s £1,000,000 banknote. But illiquid as it was, his note was valuable collateral because there were many more pounds outside it than locked up within it. If today’s big coins are mostly held by a handful of people, what practical use can they be to everybody else?

Some of the digital exuberance must have leaked into stocks. However, while overall equity valuations are full, they are still not outlandish. With profitability rebounding faster than most expected, stocks’ run is based largely on substance, not froth.

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