Malt Liquidity 12
Year-end recap and musings
On a personal note…
It is particularly vexing to me what society will describe as ‘innovation’ nowadays. The internet, considered the most revolutionary invention of the 21st century, has brought us endless idling mechanisms such as YouTube clickbait, social media filter bubbles, cheap, undercutting listings of actual products to buy, and a barrage of autogenerated formulaic streaming content that the average consumer will coerce themselves into watching through in-group mechanics. These are reflected in the companies that are the top in market capitalization as well. The largest companies in the world are no longer reflective of the Industrial Revolution (the GEs, the Exxon/Chevrons, etc.) but of our acquiescence to be peddled with insulting-to-the-intelligence “targeted” advertising (I am convinced that most retail-scale targeted advertising is really just optimizing to push us right to the threshold of annoyance/anger) and payment processors. (Indeed, ANT Group’s entire leverage - and why Jack Ma hasn’t been scrubbed from existence - is that they process payments in a massive insulated ecosystem.)
Financialization followed the same path. Now that many of Enron’s accounting principles are legal (just scroll through the myriad of custom non-GAAP ways to state revenue that every hot ‘tech’ IPO employs) and all types of futures are commoditized to the point that I can trade them from my desk whenever I want to, the only easily available edge left is to simply relocate to further optimize taxes. Goldman Sachs, the company that essentially invented the modern-day underwriting architecture, now makes credit cards. The firm that created the ‘Innovation ETF’ just bought Tesla and Roku with a major percentage of various funds - a trade that is also the most popular with Robinhooders - and now ‘manages’ the most assets of all active ETFs. Cryptocurrency, for which advocating for the adoption of is almost equivalent to financial terrorism, created another highly volatile price medium of nebulous value that erodes any sort of energy efficiency “going green” helped with.
I’m not sure if there is a point to this monologue, but reading this article combined with the lack of insight into what Robinhood is actually doing to people’s returns makes me feel like this is the endgame of a highly levered virtual gold rush and an existential threat to a generation’s wealth, and nothing like the oft-invoked ‘dot-com bubble’:
“Before, I wasn’t doing particularly well financially. Now, I’m well beyond where I wanted to be for retirement,” said Mr. Burnworth, who added that he also sold his own home and used some of the proceeds to buy more Tesla options.
Investors borrowed a record $722.1 billion against their investment portfolios through November, according to the Financial Industry Regulatory Authority, topping the previous high of $668.9 billion from May 2018.
I would wager that most adults have heard the phrase “correlation does not imply causation”, but very few truly understand attribution error - indeed, post-hoc rationalization and ‘seeing patterns’ is how humans are wired (see: all those stock articles attributing news to stock movements after the movement has already happened.) Likewise, even though people tell you earnestly that ‘markets are not reflective of the economy’, on some level, most people believe that the stock market must be tethered to the economy in some way.
But these things are correlated - there is no causality. As wealth creation occurs, naturally more money will flow into markets, causing them to rise. However, this does not imply the opposite - that markets rising must be indicative of some sort of wealth creation - and what you see right now is a market divorced from the reality that the people who don’t have the capital to borrow against to lever up are doing awfully. The hospitality industry has been eviscerated, and eviction moratoriums are only temporarily delaying the reality that a significant chunk of people cannot pay their rent or mortgage.
With interest rates so low and bond/alternate market liquidity increasingly backed by governments, and with the popular retail perspective of ignoring every asset class other than publicly traded stocks and ETFs, a feedback loop of sorts is created due to a combination of how the ETF share creation/redemption process works, market movements that are pure speculation rather than tethered to reality in any way, and an actively managed index that is sold as “passive” manipulating market caps further (if you choose to read one paper sourced in this article, read this one), among other things. Companies are exploiting this by increasingly borrowing against or selling stock against their exorbitant valuations, knowing that money is cheap enough to borrow to cover any potential funding gaps.
Another oft-repeated saying is markets can stay irrational longer than you can stay solvent. While this is true - theoretically, something like negative yield debt is just a net inflow policy for the government to encourage growth, as I’ve highlighted before - it is also true that what matters at a systemic level is very different from what matters to individuals. If variance in retirement projected rate of return widens, more individuals will be reliant on the government for retirement, potentially ruining decades of planning, but that doesn't necessarily translate to any systemic level impact, much like how it doesn’t matter much to the economy at a macro level whether 70% of the empty restaurant space in SoHo gets filled with a Chipotle or a Carbone or a Chase Bank. Bond liquidity will be constantly supplied federally, but for the mortgage delinquent people, here’s a kick of the can down the road, a prayer for things to work out, and $600. Like markets and the economy, quality of life and the economy are correlated, not interdependent.
So, to end the year, I’d like to offer some practical, actionable thoughts (and, as the legal disclaimer goes, not financial advice):
All those insane returns you see being posted online, talked about by your buddies on zoom, by that annoying kid from high school, wherever, are a result of higher variance, not skill. Trading is zero-sum; wealth creation happens over time, not through short-term volatility. Someone had to lose for each one of those posts you see, so avoid the envy and the FOMO.
The losses aren’t evenly distributed between institutional and retail traders: retail traders lose at much higher rates. It is incredibly hard to attribute trading returns to skill - one year of returns is not indicative of anything, especially given that the popular, large cap tech stocks are driving much of the returns this year.
Robinhood is employing the same tactics used by social media companies to get you hooked. It absolutely is not scare media when they report on the marketing that results in people trading far more than they should, and their “Robinhood Year-End Recap” version of “Spotify Wrapped” is absolutely appalling for a brokerage that purportedly has your fiscal interests at heart to do.
While this year has been trying, it certainly has been illuminating, and I plan to continue expounding that finance and markets are about a lot more than just picking stocks. Thanks for reading!