Investors double down on stocks, pushing margin debt to record
wsj.com
wsj.com
By July I realized a couple things (and adjusted my investments accordingly):
1) The shifts to online delivery of food and products was 10 years of change pulled forward in 6 months
2) Unprecedented liquidity of the money supply is giving any individual or business access to $$ to invest, spend, etc. It's unequal, but it's there and it's driving the economy right now.
3) We're witnessing one of the greatest wealth transfers in the history of our country, from the less fortunate to those with means, from stagnant businesses holding on to dear life to the quick and nimble, and from the legacy businesses to the already prepared distribution channels.
4) The fundamental shift of where people work has been upended, resulting in massive dislocation of where dollars flow to residential and commercial real estate.
Those that study economics must have thought they stumbled into a gold mine of topics to study this year. It's absolutely fascinating and heartbreaking at the same time.
I'm assuming (b) & (c) will soften the outcome when the governments stop pumping money into the economy.
You're definitely making valid points, but this sounds like a whole lot of hindsight bias: you're rationalizing something that was rather unpredictable (the full impact of the pandemic on the economy, and whether that would surpass the market's expectations or not).
How did you possibly adjust your investment strategy based on these "learnings"? It sounds like this can only lead to the same forms of losses you've had with your initial risky investment (overly confident that pandemic = stock market crashing).
1) Focusing on the winners (FAANG and those that sell shovels to the gold miners)
2) Momentum driven companies where tons of liquidity is flowing to (TSLA etc)
To be clear to the three instant downvoters, I'm saying parent is deluded and is going to lose repeatedly, not that active investing is a losing proposition in general:
> 2) Momentum driven companies where tons of liquidity is flowing to (TSLA etc)
Put the money in the money thing! Yea! Parent is the portrait of sad hype-driven retail investor.
Someone is.
Realize that part of active investing is you have to beat the returns of VTI + your current job / biz income.
Careful on the investment lectures.
If that was true everyone would be doing it, and then the advantage would go away.
In short: if you think there's a "tried-and-tested strategy" that outperforms over anything but the short-term, then you either reject the efficient markets hypothesis--which would be pretty remarkable--or you don't understand it.
You seem to be doing the opposite.
Most of my positions were already closed out last month. So all the above thesis’ that said I was doing the wrong thing were.... wrong.
I also have significant positions that are DCA boring stuff, angel investments, real estate, all across the board. As well as I do a lot of selling premium in the options markets (theta gang).
It’s funny how folks are quick to lecture... :)
Piling onto an investment trend late is the classic retail investor mistake - because most of the upward movement already happened and that leaves limited upside and large downside potential.
I don't recommend that as an investment strategy. It would be safer and likely better to just buy the index instead.
If you want to make money actively investing you really need an insight that most other investors don't yet have.
In a bull market you can make money picking stocks with darts, but that doesn't make it a good strategy.
The problem is how long price discovery takes is never known.
But one is certain, the market can stay irrational longer than you can stay solvent trying to await that price discovery to finally happen.
Not to make the connection, I don't think we're at any risk of hyper inflation, but the Caracas stock exchange went up 200,000 percent in 2018. Had nothing to do with value creation.
The big difference in Caracas is that the price of a cheeseburger may have risen by the same amount when priced in the same currency. That isn't nearly as much the case in the US of 2020.
elaborate?
(To be clear, the wealth transfer is from those who already had very little (too little to invest) to those who already owned massive amount of stocks and real estate.)
It's not "the quick and the nimble," it's the connected and the too-big-to-fail. Our local Mexican restaurant which used to host salsa dancing every Friday and Saturday was doing a thriving business until they were ordered to close for indoor dining. Meanwhile Target, Home Depot, and the Amazon warehouses are allowed to remain open (essentials, donchaknow), and other giant corporations which might otherwise have been in trouble, like the airlines, will be allowed to borrow whatever they need at 0% interest rates to last until the lockdowns are lifted.
It is not driving the economy. That's the problem that is being addressed by the continuing printing of money to issue bonds. The banks have every incentive to lend, but they don't. Why? You can see that the banks have a rather simple calculation.
Make money via:
* Lend small amounts to people at a relatively low rate who have an unqualified risk value due to covid and justify the administration of that loan that might get written off at 50% value. Profit, hopefully.
* Buy some sub 1% bonds. Profit a little.
* Buy equities (like mortgages) that are the most reliable (of the other unreliable lending) payoffs. Profit...until people start losing their housing and properties all at once. The govt helps indemnify against this a bit, but in the end of the day you get your inflated property if the little people can't tough it out.
* Buy stocks (like their own) because of the massive debt bubble inflating tech and financial stock portfolios that grow as the massive bond purchases prop it up (every company tries to diversify by buying a couple million here and there). Profit.
* others that are not lending related...
> (3) We're witnessing one of the greatest wealth transfers in the history of our country,
Yes, for the reasons listed. Small banks are doomed. Even credit unions are combining.
> 4) ...resulting in massive dislocation of where dollars flow to residential and commercial real estate.
I'm not sure why you were so vague. Residential real estate has been inflated and commercial real estate has cratered.
These trends will continue as long as there are covid fears and lockdowns. The economy is already so damaged, it will not recover in our lifetime and will likely result in an alternative currency...that is also strictly controlled by the central banks, of course.
YMMV
Institutional players are increasingly warming to Bitcoin and it seems like that’s where things are headed imo.
In the current situation the central banks has been buying assets from the banks in order to increase the reserves available, so banks have a lot of reserves and don't need to borrow. In fact, I don't think they know what to do with so much liquidity because there are not enough demand of credit in the economy.
Isn’t most of this stock market gain from new wealth that is being created? Much of it goes to people wealthy enough to own stocks, but if it’s new wealth that’s not a wealth transfer, plus not all of it does. Companies with higher stock prices will tend to hire more, reinvest into growing the business which requires more employees. Amazon has been on a hiring tear all year, for example.
Then there was also the whole CARES act this year, and the follow-up package that should be passed any day now. Which offered an unprecedented level of unemployment insurance for laid off workers and actually reduced the poverty rate in the country over this summer to lower than pre-pandemic levels.
This Cares act also appropriated most of the money for corporate welfare and only a small portion for ordnirary people.
The CARES Act was a joke for everyone except the large corporations to which it made $5 trillion available. A single $600 check and some meager UI for everyone else, and for small businesses, coverage for a measly 10 weeks of payroll.
The labor class is not generally directly seeing the fruits of this liquidity. Even when progressives channel these funds to say low income housing, it's still trickle-down, much of it winds up in the pockets of, e.g. construction firm contracted to build it, politically connected solar panel company because these projects must fulfill green bona fides, etc.
Homeowners will not be able to evict them during / post Covid ( especially in the Bay Area ).
I think we’ll see squatting in a home until it becomes yours more common as well.
The example you chose is a particularly bad one though because rents are down a lot this year in high cost of living areas.
Also, just in general there’s no reason housing should be a “supply constrained resource” by definition like you seem to be taking as a basic fact. Take a look at Tokyo for example.
The mistake is actually thinking that wealth is never zero-sum. Although the myth is so pervasive among HN circles, it's almost like an old wive's tale and extremely hard to combat at this point. It's also just a very incorrect generalization.
Anyone who's had more than a rudimentary brush with economics should have no trouble understanding why that is.
To give a few reasons why that statement is usually either outright false or a gross oversimplification to the point of being useless:
1. Whether something is zero-sum or not depends on the period of time you're looking at. Always. When you say something is or isn't zero-sum, you need to specify what time period you're referring to. Good place to start is here.
https://www.economicshelp.org/blog/glossary/short-run-long-r...
In this particular case, I'd consider the COVID-19 lockdowns to still be short-run. And it isn't particularly evident if the wealth during this time has increased, is zero-sum or negative-sum
2. Many things that traditionally generate or store wealth for the people are indeed zero-sum. Desirable land within a certain zip-code, for example. Or in an area with high economic activity, e.g. downtown of a city. These things are both explicitly zero-sum (although it doesn't directly transfer 1:1 as wealth). Their valuation may grow in the long-run, which, if sold, and transferred to other economic activities by their owners, would make the wealth a net gain.
3. Market Cap/Valuation is not wealth. When sellers/buyers are large enough, the price of a stock does not directly transform into the same amount of wealth. You can't take AMZN and sell off all of its stock at its current price.
4. Pertaining to the current situation, it isn't really clear if companies that are hiring more and generating more wealth right now is compensating for the country-wide loss of jobs from the pandemic. Not even economists can predict with good accuracy whether this is going to result in a net wealth gain when all is said and done. However, this is evidence of a wealth transfer, because the surplus labor generated by extra AMZN workers goes directly to its largest shareholders, e.g. Bezos.
(Note, that you can have a positive-sum wealth generation and a wealth transfer at the same time)
> Then there was also the whole CARES act this year
5. Printing money does not generate wealth.
Yes, stocks are the only investment that has a decent return right now -- but don't let that obscure the real changes to the economy that are happening. Large companies and e-commerce companies are doing fantastically well this year. (So are their employees, for the most part.)
Those without means are the ones mostly getting unemployment benefits and the other benefits, paid for by taxes, i.e., paid for by the most affluent. Then when they retire, they will get SS benefits, which again is progressive, i.e., a slight transfer of wealth from the richer to poorer.
Also the less fortunate benefit from a whole host of post-tax transfer programs to assist them, also paid for by the more/most fortunate.
Finally, both pre and post tax household income has grown for all quintiles for some time. So if the rich are somehow taking money from the poor and leaving the poor richer, it would be an amazing feat.
Prices of consumer goods may be flat, and nominal income may be increasing, but workers increasingly can’t afford housing.
Also, as someone that refinanced a house this year, I can assure you the wealthy are receiving much larger payments than the working class got from their stimulus checks.
Yes, I am. All econometrics comparisons are in real (i.e., inflation adjusted) dollars.
Here's [1] one example: median inflation adjusted household income from 1985 ($52K) to today ($68K) has grown a lot. Dig up the same info per quintile, and you see the same trends.
This also ignores that households have fewer not more dual income over this time (check Census data to confirm if you don't belive), and that the average worker has gotten younger (thus are earlier in a career, thus lower income on the career ladder - this can be checked with BLS and Census data), and the actual person in the precise same set of circumstances now as then has shown even more growth than this simple median metric shows.
>workers increasingly can’t afford housing
Also false. Here [1] presents inflation adjusted price per square foot of new housing - remarkably consistent over the period listed 1978-2020. What has changed over this time is the median house has increased in size tremendously.
I've ran these numbers back as far as I can find data, and the trend is the same - flat per square foot price when inflation adjusted.
So I agree some places are expensive, but the vast majority of the US is not, and overall workers are not facing increased housing costs for the same housing. What they do now is want more than their predecessors want, and complain the prices are more.
>Also, as someone that refinanced a house this year, I can assure you the wealthy are receiving much larger payments than the working class got from their stimulus checks.
I also refinanced, and I don't how you conclude this from doing one refi, or even how you can conclude such a claim from a single anecdote. Care to explain?
If you;re going to claim some statement testable with real values, please provide a citation to your data. I don't find any of the stuff you're claiming to match these sources (Fed, Census, BLS, CBO) which are pretty well regarded sources of economic data.
[1] https://fred.stlouisfed.org/series/MEHOINUSA672N
[2] https://www.supermoney.com/inflation-adjusted-home-prices/
Now that it's been added to SPY you might not be wrong, it's very possible more than half of investors own shares in TSLA one way or another.
Are there products that make it easy to do this? I imagine it would be theoretically possible but incredibly time-consuming to keep up with SPY by manually trading on RobinHood!
Should these firms survive, their labor costs may be depressed for a few years unless they were already paying their median worker at minimum wage (energy wasn't). Firms use labor in the short run to adjust for income gaps/overages. They tend to adjust capital in the long run, which is why hotels aren't yet all selling their properties.
I was puzzled by the Fed's interest rate 0 until 2023 - until I realized that the LIBOR to SOFR transition had been pushed, in part, to 2023 (https://www.reuters.com/article/usa-fed-libor-idUSL1N2IG12W). Chances that it finishes out in 2023 is slim, but it's something.
Stocks are not a replacement for bonds...and bonds with <1% (https://www.treasury.gov/resource-center/data-chart-center/i...) aren't even a good investment anymore, pushing this stock bubble higher. The people tripling down on long-term trades like Tesla for retirement are idiots banking on the good times going on for decades. Remember 2000s when there was a media push for "Generation Equity" - WIRED frontpage? Yeah, that was the same thinking. There isn't enough money in the world or GDP for a generation to cover a 100Trillion debt market once it matures (which would be 100T+rate the purchased bonds bear).
If you want to do short selling or short-term trading, that's great, but these are these infantile investors that are going to see their investments wiped out in a correction.
Not sure you're making a good case against equities here (unless I misunderstand)... if the world cannot produce GDP to cover $100T of debt, there's only one realistic solution: inflation. In case of inflation, equities make a good investment (as they represent real value, not nominal value such as debit).
I don't see it that way, because it isn't working that way. The reduced interest rate has not resulted in additional lending, but in additional asset acquisition, mostly more debt (deflationary). This is mostly due to nobody borrowing and the uncertainty leading to people using money to pay down debts, (deflationary). Inflation can makes debt more manageable, but that's if you can get ahold of the liquidity. The liquidity doesn't exist and the printing of money via bonds, doesnt make the problem better because the dollars you get from the fed are at the price of more debt. The presence of inflation today doesn't equal reduced debt today.
> Equities will default or mature
The vast majority of the market overvaluation is in companies with massive leverage (investment in a type of financial debt - either bonds and mortgages) or are banks that have nothing but that to carry their share price. The modern equity prices are basically tied to the load of debt they have acquired.
If you don't see things this way, that's fine. That's what it all looks like to me.
[0]: http://www.philosophicaleconomics.com/2013/12/the-single-gre...
Less talked about and also fueling the rise over a longer time horizon has been the great reduction in the number of listed companies. That is more of a driver on the fund/etf composition side than the mom and pop TSLA/AAPL day trader.
Anything desirable that can’t be created easily, as newly printed money will flow directly to it.
I consider a broad market equity index fund to be a risk free asset on a 5+ year timeframe. State and local government defined benefit pension obligations are invested in them, individuals' 401k and IRA accounts are invested in them, and the most influential members of society are invested in them. There is no political will to let the price of stocks fall (or even stagnate), and so either the US government keeps stock prices chugging along, or the USD has lost its buying power, in which case you have a bigger problem than your stock market holdings (if you're American).
The easiest option is to exit the stock market entirely. Just hold cash. Spread it across multiple banks and accounts.
Next easiest option is to change your stock/bond ratio. Make sure the bond ETF you use is diversified.
Next easiest option is to keep a static portfolio but put more than a stock ETF and a bond ETF in it. There's a nice set of "lazy" portfolios here [0].
Next easiest option is to build a static portfolio for a particular level of risk. There's a handy tool here [1] that can spit out the optimal balance given a goal and a set of assets to choose from (I'd choose a selection of ETFs). If you're risk-averse, your goal is probably to minimize variance.
Next easiest option is to switch to a dynamically-weighted portfolio that changes the balance of assets in your portfolio based on market conditions. This can be the same as the previous option but you'd recalculate the portfolio month-to-month.
And finally, there's playing with derivatives. You can "insure" whatever portfolio you like using options and/or futures.
I would strongly advise against anything "crypto". Either the financial system is still functioning and you'll benefit from regulated financial markets, or it isn't, and your cryptocoins will be useless, because they're difficult enough to use today, why would it be any easier when the world is crumbling?
And this all assumes the US financial system is still functional. If that's not the case, I'd focus less on finance and more on doomsday prepping.
I vaccines didn't exist, I would believe this but given they do, I can't image the future is not brighter.
Brokers are also incentivized to sell risky products such as options as those are the ones that generate the highest revenues.
(1978) The Gambling Fever On Stock Exchanges [1]
(1986) Capitalism's Casino [2]
(1989) THE STOCK MARKET FROM THE ROARING '80S TO THE SOBER '90S [3]
(1993) How Clinton's Stimulus Plan Cuts Into Deficit; Stock Market Casino [4]
(1995) Are Stock Markets Costly Casinos? [5]
(1999) The Wall Street Casino [6]
(2002) Nasdaq 'Casino' Had Few Safeguards [7]
(2011) Gambler or Investor? The Truth About Why We Trade [8]
(2014) The Big Casino [9]
(2015) The stock market is a 'dangerous casino' that's disconnected from the real economy [10]
(2020) When Did the Stock Market Become a Casino? [11]
---
[1] https://www.washingtonpost.com/archive/business/1978/09/07/t...
[2] https://www.washingtonpost.com/archive/business/1986/10/08/c...
[3] https://www.washingtonpost.com/archive/business/1989/12/31/t...
[4] https://www.nytimes.com/1993/02/28/opinion/l-how-clinton-s-s...
[5] https://core.ac.uk/download/pdf/80562055.pdf
[6] https://www.nytimes.com/1999/08/23/opinion/the-wall-street-c...
[7] https://www.washingtonpost.com/archive/politics/2002/11/11/n...
[8] https://www.wsj.com/articles/SB10001424052702303499204576388...
[9] http://www.dollarsandsense.org/archives/2014/0514orr.html
[10] https://www.businessinsider.com/the-stock-market-is-a-danger...
Of course, many gamblers also have models and systems and it is not uncommon for professional traders to also be big casino/sports gamblers.
Less talked about is the ever shorter time horizon of what even still pass as investments. The shorter the holding period, the more likely the nature of the trade was more akin to a gamble than an investment.
To your other point, brokers don't "sell" options or other risky products to anyone anymore. The idea of someone calling you up on the phone and suggesting you buy 100 lots of OTM calls on TSLA is quaint at best. What brokers do do is make available products through their trading platforms that private 'investors' may trade after signing off on the appropriate paperwork (for instance, an options or futures agreement). Brokers are not going to check too hard to see if you lied about your knowledge of the prodcuts (and hence the 'suitability') as it is you, not them, who are going to make the trade/investment.
As to the financial aspect, brokers today have raced to the bottom with zero commisions on most products in exchange for selling order flow to other market participants. While it is certainly possible that in some cases the revenue from selling options trades is higher than equities, on the whole it is probably on a par. Robinhood averages $0.00026 per $1 of trade value for equities from Citadel. They average $0.50 per contract on the option side. So 1000 shares of a $50 stock gives $13 vs say 10 contracts giving $5. While 100 contracts might be more revenue, a 100 lot trade is probably a very cheap option with narrow(er) spread and not likely to get Robinhood $0.50/contract.
Its not rocket science.
If you use margin and/or engage in derivatives, you're not an investor, you're a speculator.
An investor is someone who has a long-term interest in the market and takes time to make reasoned decisions as to their actions in the markets.
If you're just jumping in and out of the market in the hope of making a quick buck here and there, you're not an investor, you're a speculator.
Stock trading is speculative by default--no one knows the future.
> Speculators are sophisticated investors or traders who purchase assets for short periods of time and employ strategies in order to profit from changes in its price.
> As the story goes, one day in 1929, Joe Kennedy is getting his shoes shined. The boy began to give stock tips as he polished Kennedy's oxfords. In that moment, it struck Joe that he needed to leave the market. He reasoned, famously, if shoeshine boys have an opinion on stocks, the market is clearly, dangerously popular. Supposedly, he pulled out not long before the stock market crash that led to what we know today as the Great Depression.