Malt Liquidity

Early morning finance-oriented thoughts (over a cup of tea)

I’m an insomniac - as such, I find myself awake a lot of the time with not much to do between 3 a.m. and 5 a.m. Invariably I find myself scouring financial news and blogs as, after all, there is endless content. Some of these topics are interesting enough to speculate on - and other times I’ll just find something mildly amusing - and hopefully, eventually, some light will be shone on otherwise-banal topics.

(And yes, I am suffering from a severe lack of “Money Stuff”.)

“Passive” Index Management

A common aphorism in saving for the average person is to “passively invest” - rather than trying to actively “beat” the market measure of your choice, the suggestion is to buy market-tracking ETFs, such as SPY, which tracks the S&P 500. However, if the S&P 500 is adding and subtracting companies to its index composition, isn’t that, technically speaking, an “actively managed fund”?

This has been discussed at length on various other sites, but the particular chaos surrounding Tesla's addition to the S&P 500 adds weight to the argument that, well, if you’re adding a company that’s supposed to be the sixth-largest component of your index in a way to deaden the impact to ETF providers, isn’t this sort of active management?

It’s useful to look at financial markets from a standpoint similar to Newton’s Third Law - for every movement in a financial product, there is a product tied to it that will adjust accordingly (though not “equal and opposite” - there are far too many products built on top of products with non-linear relations for anything in finance to be this simplistic.) As such, the addition of Tesla to the S&P 500 would impact every ETF tracking the index, the futures tied to the index, the options on all these theoretically - identically moving products, the volatility measures on the index that are traded, the options on those, and so forth, due to the fact that while everything is priced according to the index, the actual shares making up the ETF must be held somewhere in the weights corresponding to S&P’s weights. Generally speaking, ETF rebalancing is a humdrum occurrence at the end of every trading day - however, Tesla is a fairly illiquid and extremely volatile stock which also requires large amounts of collateral to trade, given its weighting and market capitalization. Thus the problem arises of everyone knowing that all these ETFs do, in fact, have to buy the shares in some form, and, naturally, taking the liquidity currently being provided to front-run all the big asset managers buying it. You see this happen occasionally when products roll over or terminate - the negative oil fiasco earlier in the year was explicitly compounded due to USO’s rollover schedule being public knowledge - but Tesla split just a few months ago which one would assume made the stock more liquid, but is actually not so clear.

What does this all mean? There’s no way to conclude anything, really. Since S&P announced Tesla’s addition on November 16th, the stock is up 40% - while not directly attributable to the announcement, it is safe to say there was a pretty significant impact on the share price, along with a piling-on enthusiasm that may or may not have been motivated by front-running ETF providers. Announcements and additions that impact market prices… doesn’t sound like passive management to me.

Forecasting Human Laziness

Doordash is finally going public, and while its business model as outlined in the linked S-1 is “food delivery middleman”, I like to think of it as a large scale bet that humans will continue to grow increasingly lazy over time. While coronavirus has been outlined as a “business risk”, though, it is (in my eyes) largely responsible for the tripling of Doordash’s Q4 2019 revenue in its most recent quarter. And why wouldn’t it be? Large swathes of the highest-demand markets have been shut down to some extent, and a majority of restaurants have been forced to do exclusively takeout/delivery for months. In their highest revenue quarter ever, though, they still lost money. I won’t speculate on the economics of Doordash - there are plenty of people who have done that already. I’m not particularly interested in how much of their revenue comes from "stealing" tips. I’m more curious about whether it’s even possible for their universe of potential customers to ever grow from peak-lockdown levels. Food delivery is inherently a convenience business, but someone who optimizes for convenience above all is the embodiment of laziness. Do we really think it’s possible for America across the board to put in the effort to min/max laziness? Certainly, there are times where the convenience is useful, but for Doordash to realistically grow its business, you’d somehow need delivery ingrained in more brains on a more consistent basis in dozens of millions of Americans forced to stay at home to entertain themselves who are already ordering delivery at a much higher clip than before. In essence, you’d need Americans to become lazy habitually (yes, yes, insert berry plant* here), rather than, at best, staying tenuously coerced into it. With every fad diet and smart-mirror-masquerading-as-“health-conscious lifestyle change” trending upwards, the number of juice bars in a 4 block radius in my old SoHo neighborhood quintupling between 2015 and 2018, and traditional processed-food companies eating dirt, shouldn’t this also be a risk outlined in the S-1? Yoinking McDonald's from UberEats exclusivity was a good first step, but it’s necessary to go further. Short of an exclusive Chick-Fil-A Sunday distribution deal, I just can’t buy in to this one.

Old Yellen returns

It’s always nice to see a familiar face set themselves up to be harangued in front of Congress once more. At least one person is willingly entering the braincell-ectomy that is Congressional testimony (seriously, the number of people that have watched that clip and think Bernie was the informed one is nauseating.) In terms of recent Fed chairs, I rank her second in terms of meme-ability: while “Helicopter Ben” takes first place for sheer cojones to deal with flak from all sides, the only notable Powell memes exist as a subspace of the money printing meme plane, leaving him at a distant third.

*or your preferred variety of low hanging fruit