Faith-Based Investing: Will It Be Rewarded?

Eric Fry By Eric Fry, Macro Strategist, The Oxford Club

Market Trends

Editor’s Note: If you’ve been a reader of Energy & Resources Digest for any amount of time, you know how fond Energy and Infrastructure Strategist David Fessler is of his Tesla. But it’s not just his Model X that he loves… it’s the company’s ambitious business model, as well as CEO Elon Musk’s vision to revolutionize the energy grid and reduce carbon emissions to zero.

It’s all admirable stuff, and it’s not hard to see why the markets have looked at Tesla so favorably over the past couple of years.

But our Macro Strategist (and “America’s Top Trader”) Eric Fry shares a slightly different perspective…

Eric has a reputation for being a bit of a skeptic and a contrarian when it comes to investing in commodities and energy… and he’s been remarkably successful at it in the process.

So I wasn’t too surprised when this analysis came across my desk. It’s pretty compelling stuff…

What role should faith and promise play in investing? Depends on who you ask. Keep reading to see what Eric thinks… and enjoy!

– Patrick Little, Managing Editor


Today’s topic is faith – the kind that moves mountains… or at least the kind that moves mountains of capital into profitless companies and intangible cryptocurrencies.

The chart below shows the price trajectory of two unidentified financial assets. Based on their similar price paths, you might assume that these two assets share some sort of connection. And you would be exactly correct.

The identical investment impulse is lifting the prices of both of these financial assets toward the heavens. That impulse is faith… perhaps even cult-like faith.

Neither of these assets even existed 15 years ago. Neither one produces a nickel of profit. And yet together they have obtained a market value of more than $100 billion!

That’s faith! Perhaps it’s not enough to walk on water, but it’s more than enough to float on air.

If you haven’t guessed by now, the two unidentified assets in the chart are bitcoin and Tesla (Nasdaq: TSLA). In round numbers, all the bitcoin in existence are now worth about $40 billion, while Tesla’s market value is a little more than $60 billion.

Perhaps these lavish valuations are exactly as they should be. Or perhaps they should be even more lavish. I have no idea. That’s the market’s job.

I’ve never owned a single share of Tesla or a single bitcoin – not because I believe them to be bad investments but simply because I lack the faith that would enable me to make a confident bet on either one of them.

My philosophy is to put very little faith in mere faith alone. We don’t commit capital to “things hoped for” or “things not seen.” We commit capital to things known and seen… like earnings, for example.

And when it comes to money and other stores of value, we place our trust in things we can touch, like real estate and precious metals.

Bitcoin is not a tangible thing; it is a formula, an algorithm. It doesn’t glitter in the sunlight. It doesn’t make a clinking sound when you drop it on a table… and it doesn’t possess a multimillennia history as a currency.

It possesses zero intrinsic value, which means that it derives all of its value from the faith of its adherents. Of course, the same could be said of gold. In fact, the same has been said of gold… over and over and over again.

“Gold will never produce anything,” Warren Buffett once declared. “Gold has two significant shortcomings, being neither of much use nor procreative.

“This type of investment,” Buffett says, “requires an expanding pool of buyers who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.”

Gold, like bitcoin, is a monetary asset whose value relies on faith. But the main thing gold always had going for it was its long history as a currency. Perhaps this history is what gold now has going against it. Gold has become “your grandfather’s store of value.” It is money for Luddites.

Bitcoin is not gold. That’s very clear. This Johnny-come-lately not only is better than the U.S. dollar, according to its fervent apologists, but it’s also superior to every other currency known to man, including the money known as gold.

And the financial markets seem to agree. Currently, this sexy new algorithm is twice as valuable as gold is.

The faith that inspires confidence in bitcoin is not simply faith in a specific technological innovation… it is faith in a revolutionary new technological order.

Throughout the millennia, humans have always placed a certain amount of faith in technology. They have always believed that technological innovation could enhance their quality of life.

But this new faith in technology that is powering bitcoin is different. Technology is no longer the means to an end: It is the end itself.

Bitcoin is not the technological means to money. It is technological money. And by becoming actual money, this technological marvel delivers salvation from the old order of government-sponsored currencies.

In other words, to embrace bitcoin is to embrace a new faith and reject the established one.

Technologically, Tesla is perhaps less revolutionary than bitcoin. On the other hand, the faith in technology that inspires individuals to buy Tesla shares is not so different from the faith that inspires a purchase of bitcoin.

To Tesla’s naysayers, the company is simply a money-losing auto manufacturer with big dreams. But to the faithful, Tesla is a technological revolutionary dressed in the modest garb of a car company.

Yes, it loses billions of dollars every year – if you care about that sort of thing. Then again, Rome wasn’t built in a day… and Earth’s climate won’t be rescued in a day either.

According to the buzz and mythology that has become the Tesla narrative, the company’s cutting-edge electric vehicles are not simply a new way to get around town. They are the first enlistees in the war against climate change. Tesla’s current and future clean energy technologies are going to save the planet.

So what price does one put on the “Tesla Revolution”? The mark-to-market answer to that question is $62 billion… and growing.

During the last few months, Tesla’s market value has soared above the market values of Ford (NYSE: F), General Motors (NYSE: GM) and BMW (ETR: BMW).

To be clear, I am neither suggesting that Tesla deserves a lower valuation nor that it deserves a higher valuation. I have no idea. Nor do I have any idea what the price of one bitcoin ought to be. I am merely pointing out that both bitcoin and Tesla seem to derive their vitality from a similar strain of faith-based investment.

Certainly, faith can be a powerful positive force, but it can also be a very unpredictable and unreliable one.

All faiths get tested from time to time, and this one will be no different. When that day arrives, Tesla and bitcoin might fall together, just as they have soared together. If, for example, investors become somewhat less infatuated with tech stocks in general, I would expect both Tesla and bitcoin to suffer disproportionately large sell-offs.

Tesla and bitcoin both represent the cutting edge of technological upheaval – an overhaul of the established order. They are both messengers of creative destruction.

That means that the road ahead for both of these world-altering assets is sure to be a fascinating one, but it is also sure to be a rocky and volatile one.

Once the powers of creative destruction are unleashed, there’s no telling exactly how or where the creativity will flourish… or exactly how or where the destruction will leave its mark.

Good investing,

Eric