Malt Liquidity 37
The Curious Case of Cranial Correlation, pt 2
She said she had no exit plan/Her name was the Bank of Japan (RIP “Old Tiesto”)
A few months ago, I wrote about the fact that the Bank of Japan owned around 6-7% of the entire Tokyo market:
…to cash out on the 11-12% profit the BoJ has made without losing any money on the execution, somehow 6% of the total market would need to eat this trade, a practical impossibility.
…when a central bank is buying, naturally, investors note that an institution with unlimited funds can endlessly purchase. Thus you will get a lot of piggy-backing, which purportedly was the intention of this program. However, who would buy if the central bank is selling? If the economy is strong and the market is going up, then the central bank has just as little incentive to sell as everyone else does - clearly, they are still trying to turn a profit, and selling into any rally with this sort of position size has a decent probability of killing the rally entirely - in effect, they have sort of become the market buy/sell indicator.
So how is it going for them?
When the wealth creation mechanism becomes the source of wealth itself, it rests on the faith that the currency has some innate, tangible value that cannot be replaced with a denomination of any other kind. Japan in particular has had the relative homogeneity and cultural reinforcement over the past couple of decades for this to have at least existed though it hasn’t encouraged natural growth particularly successfully. However, as I noted the other day, when even the Japanese are randomly bidding up stocks, you really have to wonder what the shift in mentality towards cash has converged to.
Matt Levine wrote about a month ago that
…There have been bubbles, and corners, and short squeezes, and pump-and-dumps before. It happens; stuff goes up and then it goes down; prices are irrational for a while; financial capitalism survives.
But I tell you what, if we are still here in a month I will absolutely freak out. Stock prices can get totally disconnected from fundamental value for a while, it’s fine, we all have a good laugh. But if they stay that way forever, if everyone decides that cash flows are irrelevant and that the important factor in any stock is how much fun it is to trade, then … what are we all doing here?
and at the time of writing this morning, GME looks poised to break back up towards the 230-400 range that the initial surge set. Surely there is the “if he’s still in, I’m still in” angle of people being rejuvenated upon DFV buying in after his objectively fantastic congressional testimony (where it was abundantly clear that he was the only person present who did not consult a crisis PR firm - truly the people’s hero.) And certainly there is something to be said about price targets themselves, which are just vacuous price-lagging reports put out by the type of bankers that both Wall Street themselves and Main Street tend to forget about. But we have covered the “hey screw these dudes named Melvin” hypothesis (and if you haven’t checked out Yung Quant you absolutely should), the squeeze hypothesis, and the Elon North Star effect, which are all directly tied to GME. So let’s do what our grade school English teachers always encouraged (and unfortunately graded us on too) and read a bit more into the situation.
A question I posited a few days ago as a testable market hypothesis was “what is value denominated in, if not dollars?” But the inverse of this is “what do people do when they are afraid of value not being denominated in dollars?”
I think even the most die-hard GME believer would admit that the stock valuation means nothing in and of itself at these price levels. Market mechanics (real or imagined) aside, the stock does in fact trade at a very high valuation. What if the implicit logic of buying in now to any asset (not just GME, which happens to be the most ridiculous stock I’ve ever seen in my life, but any “overvalued volatile growth stock”) is that of a quasi runaway inflation hedge?
While Levine attributes such investment activity to the dollar being denominated in “fun” or pandemic-reinforced “boredom avoidance” rather than, well, a dollar, I think it is also interpretable as a spreading belief that with this much subsidized capital being flooded by governments around the world into liquidity, stimulus, infrastructure, and markets themselves (as the aforementioned BoJ continues to do) that there is no guarantee assets ever return to their “fair value” price, as there is no guarantee there is any intention to pay this debt back. Which, objectively, is a terrifying thought to have! If I am afraid that if I don’t buy in now that my money will be worthless, I am not buying stocks due to boredom or greed, but rather straight fear. And as I have said before, ZIRP requires people believing in infinite liquidity provision to continue to work without causing seriously weird externalities.
However, this fear is not just borne from a condescending “common man retail-driven stimulus check punter” place - remember who has to assume that the dollar has value because they manage billions or are worth too much to do anything otherwise as they cannot invest in any other manner or operate without the assumption of “the dollar is worth a dollar”. While high-net-worth people benefit the most from the cheap leverage (and thus make the largest mark-to-market returns from self-reinforcing wealth creation markets), they also a) have a liquidity issue in realizing this net worth and b) suffer from hyperinflation (or “relative devaluation” as I am wont to call it) at a much higher rate. Thus the only logical action becomes accounting for this sentiment that "the dollar is not worth a dollar” by ironically attempting to outpace hyperinflation through sheer returns.
I would not be surprised to find out that there is genuine HNW flow into GME this time around. The dispersion of cash assets into crypto, Pokemon cards, ammo, Hypebeast resale etc. is thus not true dispersion, but rather a convergence in the “fear” mindset across all parts of society with investable assets and an immediate flight into anything that could generate a higher rate of return. As such, the volatility is priced asymmetrically - in the “fun” hypothesis, the downside of busting out was that you just had to stop playing the game. In the “fear” hypothesis, well, the money wasn’t going to be worth anything down the line anyway. With extreme index dispersion setting in (where, somehow, the entire sector rotation from tech growth to value happened in one day), I begin to suspect people’s FOMO is increasingly fear-adjacent rather than greed-adjacent.
The obvious argument against all of this, and what the Fed’s policy seems to be, is that “things will go back to normal”. This is also what people had been saying about oil since peak oil - “oil will have to come back” - and is kind of an aphorism indicating a belief in reversion without any reason as to why it should play out that way. But given the extreme market distortions and movements (after all XOM, a literal dinosaur stock, is moving like a pre-2010 tech stock that just IPO’d) and the skew of the game towards the people with the assets to leverage rather than the people with nothing to lever off of, I find it very hard to believe that things can return to normal for the people who speculated out of the hopelessness of rent backlog piling up (because eviction freezes and rent moratoriums without sufficient immediate liquidity provision to both the residents and the levered landlords is just kicking the inevitable liquidity crunch down the road) or for the tens of millions of people missing mortgage payments or undisbursable-through-bankruptcy student loan payments.
As far as I can tell, if things do not “go back to normal”, there are essentially three core scenarios:
Runaway inflation, which we already covered
Random wealth transfers, where the hyperinflation never comes, but the zero sum game of trading transfers money from the people who bet too large on the wrong sides to the people who had the net worth/followed Kelly criterion and were able to outlast the others
A bubble pop where everyone suffers a draw-down of wealth that bought in, where the savings of the median net worth individual get nuked to a much higher degree than, say, this guy who happened to liquidate as much as he could:
Though you could claim that runaway inflation is a psychological phenomenon - a lack of faith rather than having faith in central bank liquidity - crowding effects are quantifiable to a degree. This is shown in financial history when Ben Bernanke quantified the risk of Great Depression-esque bank runs to essentially save the global financial system
and, more practically, in how meme stocks are tradable by front-running the thought convergence network effect. So in conclusion, while valuation is not a short thesis, relative valuation is probably a long happiness thesis, and hedging off mental hyperinflation-worry risk by finding an SO in the commodities or tech sector or…well, finding a different hobby (in case things do just go “back to normal”) is probably a prudent counter-contrarian hedge.
On that (somber) note…
On top of it all, he’s an incredible memer as well
SEC continues to go for lay-ups and the “important stuff” (also, this essentially was the common practice for decades - analysts used to be more “accurate” than others by just shifting their estimates up a slight bit because companies habitually under-reported expectations to sell-side research analysts)
A bit of SPAC Satire I wrote over the weekend. Finance Satire! it’s a thing!