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The Biggest Misconception in the Markets? Thinking We’re Dealing With a Sound Currency

Massive government intervention in markets is underway, but what happens to Bitcoin as a result?

Apr 3, 2020April 3, 20202 min read2 minutes read

Massive govern­ment inter­ven­tion in markets is underway, but what happens to Bitcoin as a result? 

In a recent episode of The Break­down, host Nathaniel Whitte­more inter­viewed “We Study Billion­aires” host Preston Pysh about it. Along the way, Pysh spoke (below) about what he sees as the biggest miscon­cep­tion in the markets today.

Preston Pysh: When you get into how the market’s been pricing things for the last 10 years, you have to look at Discounted Cash Flows/CAPM models and what’s taught at every business school in the world. And the one funda­mental flaw with these models is they’re based on the assump­tion that you’re dealing with a sound currency. All these valua­tions assume you’re dealing with a sound currency. 

“The one funda­mental flaw that every one of these models has is it’s based on the assump­tion that you’re dealing with a sound currency.” 

 — Preston Pysh

When you price this stuff, it all goes back to the bond market. Let’s go back to the 2008 timeframe: They were yielding around 5 – 5.5% back then before the crash. So if the bond yield is 5%, well your Discounted Cash Flow models on how stocks are valued are based on a premium to those interest rates. Well, as those interest rates go lower and lower, guess what happens to the asset price under this CAPM model that they teach in business schools? The value goes up. 

So as these bond prices get pressed to 0%, the asset prices of every­thing in the globe, whether it’s a bond or a stock, goes up. But no one in those models is assuming that the currency is about to fail in those models. That is the biggest miscon­cep­tion in the markets today.

Listen to the entire episode. This segment begins at 43:55.

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