Stonks Only Go Up
My interest in investing was piqued when Anuj Abrol started a newsletter called Witty Wealth. WittyWealth has a very WallStreetBets kind of vibe to it. Anuj excels at breaking down investments in an authentic and down-to-earth way. He injects humor and memes into traditionally boring information. He was way into SPAC’s before anybody else. He very much looks up to Chamath Palihapitiya, who’s investing style he puts somewhere in between Warren Buffet and Dave Portnoy (a.k.a Davey Day Trader a.k.a. Paperhands Portnoy). Portnoy made headlines earlier in 2020, when he invested in Spirit Airlines and Boeing. He also made money betting on the cruise ship industry.
Keep in mind, US airlines have declared bankruptcy 66 times since 2000. Airline mileage programs are worth more than the business the system relies on. For example, the value of United’s MileagePlus program is $21.9 billion. Over in the stock market, the value of the entire airline is only about half that. Airlines stay viable by selling miles to credit card companies, as well as mortgaging their frequent flier programs.
Also, keep in mind, the CDC implemented a ban on cruise ships last year, and has yet to approve any ship to resume service. Meanwhile, the CEOs of Delta, American, United, and Carnival Cruises earned over $150 million from 2017 to 2019. These businesses are worth next to nothing during a pandemic, and may take years to fully recover. Portnoy betting on these stocks during a miserable year is just one example of how everything is awful, yet everything is okay in the financial markets.
My issue with the GME and WSB narrative is the financial media accused small-time retail investors, who bought into the GameStop hype, of being disconnected from reality (GameStop isn’t expected to turn a profit until 2023). The fact is, financial markets have been disconnected from reality for some time.
The first red flag was in May, when Hertz’s stock rose 95% after it filed for bankruptcy. Around the same time, companies like J.C. Penney and GNC saw their shares rise substantially despite being in Chapter 11 bankruptcy.
The second red flag was when Matt Levine started writing about Uber. Uber is only one of a handful of companies valued at more than $50 billion that doesn’t make a profit — but that doesn’t stop people from investing.
Uber reported a loss of more than $4 billion in 2017. They lost $3 billion in 2018. They recorded a $5 billion profit in 2019 because of a one-time gain selling businesses in Asia. But in total, from 2014 to 2018, they lost almost $7 billion. They lost more than $1 billion in 2020 (this would have been worse but Uber let go of ¼ of it’s staff during the pandemic). Bookings for Uber rides, their primary business, declined 53% in the third quarter of last year. Rides were down 75% in the earlier months of the pandemic.
UberEats grew 113% during the pandemic, but is also not profitable. This is because food delivery is inherently unprofitable — even more so than ride-hailing. Which begs the question, if UberEats isn’t profitable now, when can it be? Maple, Sprig, SpoonRocket, and Munchery are all food delivery start-ups that have gone under. Amazon shut down its restaurant delivery business in 2019. The biggest restaurant delivery companies, such as Grubhub and DoorDash, still lose huge sums of money. Huge growth in demand has been achieved by charging customers less for delivery than drivers get paid to deliver stuff from point A to point B.
Anuj floated the idea that Uber’s long-term plan was to become a super-app (a closed system of many apps in one, or at the very least, an expansion of services offered). But after Uber deprioritized several finance-related projects, like credit cards and a digital wallet, this was determined to not be the case.
People bullish on Uber will tell you that their businesses actually make money. It’s just that they spend more money winning over new customers (whether you’re Amazon or Netflix or DraftKings, you’re spending a ton of money acquiring customers — it’s sort of all anyone cares about). Uber also spends millions of dollars on legal fees and lobbying to make sure their employees remain independent contractors (imagine how much money they would be losing if they had to actually pay people a living wage, give them health insurance, and pay payroll taxes).
There are many companies in the food delivery space — UberEats, DoorDash, GrubHub, Delivery.com, even Instacart. They compete for market share by losing money. They make up the difference by raising money from venture capitalists. They all do it, and they burn through billions of dollars every year. All of these businesses promise their investors the same thing. A lot of the time, it’s the same investors (something pointed out by Kara Swisher, Scott Galloway and Matt Levine). They say that competitors will fail or lose their appetite for losses, and then it will be possible to raise prices. The less viable competitors do get acquired by the more viable ones, like Uber acquiring Postmates and DoorDash acquiring Caviar.
In the short term, you can acquire competitors and lose a little less money. But when you do that, you signal that losing money is a viable business model. So others will jump into the space, and you’ll have to buy them too (see: newcomer Lunchbox). Plus, there’s only so much you can consolidate before lawmakers challenge mergers.
“You can lose money every step of the way, and never convince anyone that you’ll ever make money, and investors still exit with more money than they started with…It is a perpetual-motion machine of implausible consequences. Present profitability doesn’t matter, future profitability doesn’t matter, all that matters is harming the profitability of an even more lavishly funded money-losing venture-backed company.” — Matt Levine
The insane thing is that food delivery doesn’t work for anyone involved — restaurants, drivers, not even the delivery companies themselves. They are almost all losing money. It’s almost impossible to really make money as an Uber driver. Most of these apps take large commissions, usually up to 25% but it can get higher, on all transactions, on top of monthly fees. This makes it incredibly difficult for a restaurant to make money unless they’re dealing with large volume. Not to mention, the businesses that these delivery companies are making money off of are limping along during a global crisis.
Most people point to tech as the reason why the stock market has risen so much during a pandemic. But many of the world’s most valuable tech startups have never been profitable, doing exactly what Uber has done — raising billions of dollars from investors while losing money every year. Brands like Zillow, Snapchat, and Spotify are among those that have yet to make a profit. The idea is that these companies will figure out how to make money eventually, much like tech giants before them.
According to Kevin Roose, 76% of the companies that went public in 2017 were unprofitable on a per-share basis in the year leading up to their initial offerings — the largest number since the peak of the dot-com boom in 2000, when 81 percent of newly public companies were unprofitable.
Amazon didn’t make a profit until 2001, and had relatively thin profit margins until recently (a lot of it’s money comes from AWS, which may have to be split off into another company if they don’t want to be accused of being a monopoly). Partially due to the losses of previous years being carried forward, Amazon now earns profits of billions of dollars and still doesn’t have to pay income tax on it — making it the biggest company in the world to not pay taxes.
DoorDash lost $667 million in 2019. They lost $149 million in the first nine months of 2020. And yet, the company’s shares closed at $190 each, 86% above its initial public offering price of $102, after trading began in December (the stock is currently above $200). Lack of profitability, huge competition, and making money because of a pandemic does not seem to scare people away. Uber’s shares were up 80% at the end of 2020.
“The history books are going to look back and make a case study out of this: a hyped market, a business that couldn’t make money in the best possible lockdown environment, not going to make money in the future, yet selling for double its original IPO price.” — David Trainer
The third red flag is corporate America is more indebted than at any point in history. This is the result of low interest rates, which have led to a rise in zombie companies. Zombie companies are companies that are unprofitable, and have to borrow to survive. In fact, they make so little money they are unable to pay the interest on their debt. They are effectively bankrupt, but kept alive as long as banks with low lending standards continue to give them money.
The phenomenon of zombie companies began in Japan after their real estate and stock market bubble burst in the early 1990’s. A lot of people compare the present-day American economy to the Japanese economy after their 1990 crash. This is when Japanese banks eternally renewed loans, and only required companies to make interest payments during the life of loans.
Bloomberg did an analysis of the 3,000 largest U.S. traded stocks, and found that 739 companies haven’t earned enough to meet their interest payments. Somewhere between 16%-25% of all American companies are zombies. They include Macy’s, all four major U.S. airlines, Carnival, Exxon Mobil, and Marriott. Total debt obligations amount to about $2 trillion.
Zombie companies sustain themselves via low interest rates, which have been low since the last financial crisis. The 2008 crisis prompted the Federal Reserve to pump unprecedented amounts of cash into the economy, which is something WSB’ers love to bring up (money printer go brrr). These policies add to the feeling some retail investors have that they can’t lose. Because if the market goes down, the Fed just drives it back up again.
The Fed doubled-down on low rates in response to the pandemic (though interest rates have been declining since the early 1980’s). The lower the interest rates, the more zombie companies. This makes sense because the loans are cheaper to take, so more companies take loans. Low-interest rates should make it easier for companies to pay off their debts, but that has not happened. Additionally, the Fed is lending a lot of companies a lot of money. These programs are designed to keep corporate America afloat until the pandemic is over.
You could argue that zombie companies are sort of a good thing and almost necessary compared with the alternative of even more businesses going bankrupt. But not all companies have access to credit (larger companies were first in line for PPP loans). It’s a problematic system. Basically, underperforming companies get their debt refinanced over and over again, while productive companies struggle to get access to credit. And going out of business is bad, but going out of business and leaving a ton of unpaid debt is worse — especially when these companies take the rest of the economy with them.
“In a healthy economy, bad companies die and good companies replace them and new industries rise while old ones fade. But if the Fed keeps all of the bad companies on life support, neither of those necessary processes can happen.” — Noah Smith
People like Ben Bernanke will say that, even though the Fed is responsible for interest rates, they are really actually not. He will tell you that there are other forces at work like the natural rate of interest, or the real interest rate, or the equilibrium real interest rate. He will tell you that many factors affect the equilibrium rate. He will tell you the state of the economy, not the Fed, ultimately determines interest rates. But these things obviously influence each other. And I would argue that interest rates have been so low for so long that it’s impossible to get an accurate reference point for what our economy should look like. When things aren’t naturally allowed to happen that should happen, there are both intended and unintended consequences.
The Fed doesn’t want to raise interest rates because they are reluctant to cause a recession. But they seem to be prolonging the inevitable. A couple of things will happen when interest rates rise. First, more than $1 trillion in risky, junky corporate debt will probably be downgraded, triggering a possible mass sell-off. Then, companies will lay off workers and reduce investment. Because nobody wants a recession there will be strong pressure to keep corporate borrowing rates low forever.
If the Fed keeps monetary policy too easy for too long, the result will be inflation. But there is a new theory that sees low interest rates as the cause of deflation, rather than inflation. A lot of the hypothetical causes of interest rates being so low for so long actually seem to be effects of low interest rates. But the thing is, central bank ‘printing’ does cause inflation. Immediately — in the stock market.
In order to stimulate the economy, central banks print money by buying their own government bonds (quantitative easing). They sometimes buy corporate debt too. They actually ‘buy’ this money with money they digitally print.
Printing of money, by way of decreasing interest rates, causes inflation immediately in stock prices. The printed money doesn’t go to the average person, it goes to corporations who sell their debt to the central bank. It goes to big investors who sell their government bonds back to the central bank. The stock market indexes should grow with GDP growth, but they don’t. They follow money supply more closely.
When rich people get “extra” money it goes straight into stocks. This is what has been happening since 2008. The reason why there isn’t inflation in the price of consumer goods is because this money doesn’t reach the middle class or the poor.
In other words, government intervention has done more to stimulate financial markets than the real economy, and is not targeted at those who need it most. The burden of supporting the economy has fallen on the Federal Reserve, which has pumped trillions of dollars into the financial system to prop up businesses and markets. This has fueled gains in the stock market and a surge in home and car buying (home values have jumped to their highest level ever). Although low interest rates should make homes more affordable, low rates increase demand for houses, pushing up the price of homes.
One problem with not letting big companies fail (in 2008 or now) is that it does not allow share prices to fall to their market level. As a result, younger generations don’t have the same opportunities older generations were given: a chance to buy stocks and real estate at a reasonable price. It’s also unfair to small businesses who are allowed to fail. Additionally, we are borrowing against future generation’s prosperity in order to protect the wealthy. Stimulus is necessary, but it has to be more targeted.
The pandemic is causing especially large gaps between rich and poor, and between white and minority households, but it is also widening the gap between big and small businesses. The stock market continues to reflect big businesses increasing their market share during Covid — if a small business closes, a larger business fills the void. Not to mention, big businesses were allowed to stay open (Home Depot, Walmart, Amazon), while small businesses, like restaurants, were not.
Forgiving $50,000 in federal student loan debt per borrower would be nice. But there are still tons of people with private loans they can’t pay or unload. A lot of people (especially millennials) think universal basic income is the answer. But without addressing the inflation of costs like housing, healthcare, and education that really contribute to income inequality, UBI is largely inadequate. Without getting away from privatized healthcare and education, the income would simply create an underclass of people who would still have no access to any form of social mobility.
The only way to fix this problem would be to increase taxes on the wealthy, or establish taxes on stock trades and then allocate the money to healthcare or education. Also, wages have to increase. By a lot.
“Citizens pay for this zombification “with the destruction of savings through financial repression and the collapse of real wage growth. Savers pay for zombification, under the mirage that it “keeps” jobs. Zombification does not boost job creation or buy time, it is a perverse incentive that delays the recovery. It is a transfer of wealth from savers and healthy companies to inefficient and obsolete businesses.” — Daniel Lacalle
I think prior to the GME thing, most people thought retail investors didn’t have the ability to move the price of a stock (by some estimates, they only made up 10% of the market prior to 2019). Yet, Redditors who bought GME stock thought that if they all bought the stock at the same time it would go up, which they were somehow neither right nor wrong about.
By buying shares to make them go up, you’re buying them at steadily higher prices. When you start to sell and your selling pushes the shares down, your average sales price will be lower than your average purchase price, which means you will lose money. The idea is, instead of you pushing the price up, to get other people to do it for you. One way to do that is to induce a short squeeze. Redditors were hoping to take advantage of a short squeeze.
A short squeeze happens when a stock jumps higher, forcing traders who had bet the price would fall, to buy in order to stop greater losses. If everyone on Reddit bought the stock, there’d be a short squeeze. The buying pressure forces the price up even more, leading to panic-buying from short sellers trying to cover their trades.
Redditors looked at previous short squeezes that took place with Volkswagen in 2008 and Tesla in 2019 as justification for their tricky play. Tesla is the WSB poster child and the mother of all bubbles. Michael Burry, the hedge fund manager portrayed by Christian Bale in The Big Short, made $270 million investing in GME and thinks Tesla stock will drop 90% this year. So there’s that.
I have a strong suspicion that, whatever retail buys, the system sells. Whatever retail sells, the system buys. The only way buying more works is when you have huge short interest. To his credit, Keith Gill (a.k.a. DeepFuckingValue a.k.a. RoaringKitty) did a great job identifying the extent to which GME was shorted — 140% — an illegal amount I’m told.
A useful measure of identifying stocks at risk of a short squeeze is short interest. Short interest is the total number of shares sold short as a percentage of total shares. A heavy short interest does not mean the price of a stock will rise. Rather, it means that many people believe it will fall. The paradox is that the higher the short interest (an indication of a dim outlook), the higher the chance contrarian investors will buy the stock in order to potentially exploit a squeeze. In 2008, after it’s auto sales crashed to the ground, Volkswagen briefly became the world’s most valuable company due to a short squeeze. Then, it’s stock plummeted.
Like Bruce Springsteen writing a song, Redditors weren’t necessarily thinking all this when buying the stock, but they were feeling it. People were buying a stock worth way more than it’s fundamental value, hoping to get out in time. A lot of these people were buying on margin, a rich WSB tradition.
Younger people don’t invest in stocks the way older people do. They are much more interested in the short-term. They also love betting on options. Part of this is the result of short attention spans, as well as the need for instant gratification being exploited by apps.
The new brigade of Robinhood traders are options traders. The median age of these investors is 31, and about 50% identify as first-time investors. The kind of option favored by these investors is very similar to a sports bet. And institutional investors are like bookmakers. The thing about these trades is how speculative they are. Speculating has much less to do with the profitability of a company, and more to do with what you think other people are going to do.
Robinhood was criticized for stopping trades on meme stocks. But the main takeaway for me is how Robinhood makes money. They sell your orders to market makers. Their customers are the product. The more often you buy and sell stocks, the more money Robinhood makes — even if you lose money every time. Additionally, the majority of Robinhood’s income comes from options trading.
The financial ties between Robinhood and the hedge funds shorting GME are suspicious, to say the least. Melvin Capital was one of GME’s largest short sellers, and received a $2 billion bailout from another hedge fund, Citadel, when the stock went up. Robinhood may have had good reason to restrict trading because of a capital squeeze, but Citadel is one of Robinhood’s biggest customers. Moreover, the 15 top hedge fund managers made $23 billion in 2020. All are men. And when retail investors lost money on these trades no one was there to bail them out.
Redditors think they made hedge funds lose $70 billion. To be clear, not one hedge fund folded because of this, and it was never about punishing hedge funds. The people who are going to make billions of dollars off the GME pump and dump are the investors in Robinhood who have signed up millions of new accounts. The same people investing in Robinhood are the same people who are investing in Reddit and Uber and Facebook.
What happened with GME was not a populist movement (a pushback against the establishment) because corralling an internet forum is like herding cats. The GME thing was basically just a get rich quick scheme that some people benefited from, but most did not. The WSB mentality is less, “where we go one we go all’’ and more, “greed is good,” or, “what is good for the individual is good for the group.” But there are parallels. The primary driver for these movements is the widening gap between the rich and the poor.
Billionaires have increased their wealth from $1.9 trillion to $4 trillion since 2010. The federal minimum wage has not increased at all in that time. Bailouts are mostly an attempt to maintain wealth for the wealthy. I can’t think of one real thing done in Congress since I’ve been alive that doesn’t help rich people stay rich. Everything from the stimulus to the tax structure favors people who already have money. Warren Buffet once said, “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”
There is a disconnect between politicians and young people. The average age of an American Senator is 62 years old. The only millennial Senator is Jon Ossoff. Plus, the wealth of people under the age of 40 as a percentage of total wealth has gone from 19 percent to 9 percent in the last 30 years. Young people have been asked to make a lot of sacrifices for older generations (especially recently), and I think you’re starting to see the effects of that.
The number one killer of young people is suicide, and the youngest generation is now also the loneliest (traditionally it was the oldest generation). Combine this with overprotective helicopter parents, rising costs, stagnant wages, growing inequality, information bubbles, global warming, the fact that this is the first generation in history to not have better life outcomes than the previous generation, and what you have is an epidemic of loneliness, addiction and depression, which is exacerbated by the pandemic and people spending more time online than ever before. If young people were living their lives and going out (and not being shamed for it), they wouldn’t need to be getting self-esteem from investing on an app.
Although the media has made much of the jargon on WSB, I have not seen a reporter mention $ROPE. When someone talks about $ROPE on WSB it indicates the poster should invest in rope and hang themselves when they’ve lost all their money on an investment. Robinhood is seen as partially responsible for at least one man’s suicide.
There’s a clear correlation between how young people invest, and suicide being the number one cause of death among young people. In order to invest in your future you need to see a future worth investing in. I am one of those who believes this new style of investing (high risk, short-term) is a reflection of the impossibility of saving for retirement in a slow and steady way because the system is rigged and the foundational elements of middle-class security are gone.
“You don’t get a pension now; you get a Robinhood app and a WallStreetBets account. Everything is risk and uncertainty; your whole financial life is a gamble; you might as well make it a fun one.” — Matt Levine
The media has been reporting more about the deteriorating mental health of young people. The Vessel, that thing you’ve seen but don’t know the name of, closed in January after a third young person threw themselves off of it. There has been a noticeable increase in student suicides in and around Las Vegas (though Las Vegas has the distinction of being the suicide capital of America, these are usually adult suicides). To paraphrase Scott Galloway: traditionally, in our society, if young people play by the rules, they are supposed to have a better quality of life than the previous generation. This is not happening, and suggests that the playing field is not even.
John Steinbeck is misquoted as saying that socialism never took root in America because the poor see themselves not as an exploited proletariat, but as temporarily embarrassed millionaires. This is the perfect way to describe young people on Robinhood. In order for things to change, young people need to start asking themselves ways they can make a difference that don’t just benefit them as individuals. I would love to see more young people run for office, and there are organizations looking to help with that.
Almost exactly like DraftKings and FanDuel, Robinhood entices new people to invest with free money, and encourages them to trade on impulse. It’s interface is practically designed to make you lose. Moreover, it just becomes another thing on your phone that distracts you from reality. The most common addiction people have is an addiction to information — anything to distract from what’s really going on. Compulsively looking at stock prices has nothing to do with money and everything to do with mental illness, and a lack of tools to help you cope with life.
I don’t know anymore about the stock market than I do about my own body or my car, so I look to experts for guidance. If you’re sick you can go to a doctor. If your car stops working you can go to a mechanic. If I had the know-how, I’d fix these things myself, but I don’t so I have to rely on someone else’s judgment. If you have extra money to put somewhere, most people go to the internet.
Very few people actually do their own due diligence on stocks. They rely on other people — in this case, Redditors — to tell them what to do. More than 10 million new brokerage accounts were opened in 2020. Most retail investors, as well as people who do this for living, can’t tell you which way a stock is going to go. So maybe listening to some random person on the internet doesn’t make you any worse off. In some ways, the collective brain power of everyone on the internet working together might be the only counter-balance to the tools institutional investors have.
Pros getting upset by retail investors entering the market are like poker players who got upset when Texas hold‘em was a fad. Things get more unpredictable when amateurs join in. Something you once had some degree of probabilistic control over starts looking more and more random and arbitrary (or to use the word I keep seeing: volatile).
Why do the financial markets not reflect the state the world is in?
Whether you’re unemployed or not, people have more disposable income. Employee compensation has not fallen much during the pandemic because the millions of people no longer working have been disproportionately in low paying service jobs. Also:
- Putting your money in the bank is more pointless than ever (because of low interest rates).
- The pandemic has people spending more time online.
- Investing has been gamified via apps.
- You don’t have to pay to make a trade.
Stimulus checks + extra unemployment benefits aren’t going to last forever. The rise in profitability of some companies was the result of lockdowns and the pandemic, which were short-term changes. But I think we’re starting to see some permanent changes in the economy. For example, the shift to e-commerce away from face-to-face interactions will continue to accelerate.
And going back to Uber for a second — they obliterated the taxi industry (there has been a cluster of suicides among taxi drivers as a result). What happens when Uber pivots to driverless cars? Jobs never really left for the wealthiest Americans, but unemployment for everyone else remains incredibly high. Unemployment claims have failed to show any sustained decline for months. Millions of Americans remain out of work and are struggling to pay their bills. At some point, a real restructuring of the economy may need to take place in order to avoid advancing what has basically become two entirely separate economies.
Greta Thurnberg talks about, “fairytales of eternal economic growth,” which is a sentiment shared by the financial markets and WSB. According to WSB’ers: “stonks only go up.” They think they can force this to happen through willpower. I think a lot of people who invested in GME got a reality check, but the market as a whole has yet to have one.
The final indication for me that something is wrong with the financial markets is this graph:
I’d like to think that I’m not a bear or a pessimist, but a realist. And what’s going on (and I mean that in every sense you can think of — economic, environmental, even technological) is not sustainable.
Income inequality peaked in 1928. Inequality declined through the 1930s’ and 1940’s. But since the late 1970’s, there has been a sharp rise in income concentration at the top. It was interrupted briefly by the dot-com collapse in the early 2000’s, and again in 2008 with the Great Recession. But top incomes have been on the rise again since 2009. We all know what happened in 1929, the next crash is just a matter of time. You can’t have a stock price that is divorced from fundamental value forever.
“Don’t wait for the Goldmans and Morgan Stanleys to become bearish: it can never happen. For them it is a horribly non-commercial bet. Perhaps it is for anyone. Profitable and risk-reducing for the clients, yes, but commercially impractical for advisors. Their best policy is clear and simple: always be extremely bullish. It is good for business and intellectually undemanding. It is appealing to most investors who much prefer optimism to realistic appraisal, as witnessed so vividly with COVID. And when it all ends, you will as a persistent bull have overwhelming company. This is why you have always had bullish advice in a bubble and always will…
The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble (the type we typically have every several decades and last had in the late 1990s). Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior.
It will very probably end badly, although nothing is certain…The single most dependable feature of the late stages of the great bubbles of history has been really crazy investor behavior, especially on the part of individuals. For the first 10 years of this bull market, which is the longest in history, we lacked such wild speculation. But now we have it. In record amounts.” — Jeremy Grantham
From Crypto Art to Trading Cards, Invest Manias Abound — Erin Griffith
‘GameStop/Gamestonk’ Has Nothing To Do With The Madness Of Crowds — George Calhoun
The Financial Crisis the World Forgot — Jeanna Smialek
Bull Market Beset by Too Many Misconceptions — Barry Ritholtz
Could Index Funds Be ‘Worse Than Marxism’? — Annie Lowrey