The house always wins
We’re just weeks into the Biden administration and so far, things look as I predicted:
The markets are still strong and frothy
The vaccine rollout is still bumpy but progressing
Residential real estate continues to set records in many parts of the country
And there was one more thing that I anticipated—the ongoing gamification of the markets—but that manifested in a way that no one really saw coming.
I’m referring, of course, to the GameStop short-squeeze. What results in terms of Securities & Exchange Commission exploration, investigation and regulation is anyone’s guess.
Governmental action
President Biden is taking quick and important steps in a number of areas—including immigration, health care and human rights—that are important to social well-being.
What the administration hasn't tinkered with is also important. As quoted in the Wall Street Journal article, “Powell Won’t Pop this Bubble (Yet)”:
“Fed officials used to view bubbles as beyond their purview, but the 2008 financial crisis changed that, providing them with a painful lesson that, if it cared about the economy, it should worry about financial market excesses. For now, though, it professes no interest in leaning against the market. Pressed to comment on the stock market in his press conference following the Fed’s two-day policy meeting, Fed Chairman Jerome Powell said on Wednesday that across the asset market, banking and other financial areas the central bank looks at ‘vulnerabilities overall are moderate.’”
Further, the article states:
“In the semiannual report it has been publishing since 2018 as part of its effort to address financial stability concerns, the Fed has been highlighting the spread between the S&P 500’s earnings yield (the inverse of the index’s forward price-earnings ratio) and 10-year Treasury yields adjusted for economists’ inflation expectations. Current data show that spread is around 5.6 percentage points, which if anything suggests stocks are relatively cheap. At the height of the dot-com bubble, that spread was around zero.”
Biden is also staying steady on U.S. trade policy with China, maintaining the Trump administration’s tougher stance. In my opinion, this is also significant to ensure a more equitable playing field.
SOURCE: Wall Street Journal
Residential real estate
Another issue floating around is a rollback of Trump-era changes to state and local tax (SALT) deductions for real estate. While beneficial, a question to ask is, could this also reinforce rising prices, just as low interest rates have? It’s possible: All taxation issues impact markets.
Valuations are high and likely to get higher, inventory remains strained, the trend to move out of major cities continues, as does the commercialization of homes. Here’s a look, from CoreLogic, at how this plays out along price-based tiers.
SOURCE: CoreLogic
As Radian reported, in 2020, 37 U.S. states had record closings, 31 reported the shortest average days on market and 47 reported the highest average sales prices. And until more people move back into the cities (which will come with large-scale inoculation and overall herd immunity) and until more homes are built, the market will stay strong (or strained, depending on whether you’re a seller or buyer).
In past posts, I’ve mentioned the correlations I’ve noticed between the major indices and residential real estate. Interestingly, now I see those correlations closer than ever: the typical 90-day lag has shortened significantly and the question is, is this good? As you may recall in several of my past posts, I discussed market latency and its impact on correlated behavior.
I don’t see Covid-related behavioral patterns unwinding anytime soon in any of the markets—residential real estate or otherwise. I’m also concerned about longer-term impacts of stimulus funds on market valuations and volatility, as well the continued suppressed interest rates. Still, to disrupt those now would turn the economic recovery upside down.
In 2021, then, I see the bubbles potentially expanding…although, in my opinion, it may be absurd to say that and here’s why. A “bubble” could “pop” tomorrow—or years from now. As I’ve said before, when they do, it’s less often a dramatic market event and more of a slow and steady unwinding or even just a subtle drifting—a time of little movement in either direction, more of a settling. And when that happens is anyone’s guess and a guess is all it is—if anyone claims to know, run for the hills (away from them).
Global markets
Globally, we’re seeing some economic recovery, but also lasting pandemic-related challenges, not the least of which is the emergence of Covid-19 variants that bring about renewed uncertainties.
Still, we’ve learned so much over the last year—wear masks, stay socially distant, wash your hands, get tested, stay home if ill and, when absolutely necessary, shut down borders, as has been the case with Canada—that it seems we should be able to weather these changes without the unprecedented overall economic fallout that we experienced last spring.
Equity markets
In the wake of GameStop, many argue that “gamification” has always been at the heart of the markets and they’re not wrong. I’ve used that term a lot, too, but now I see that it’s the “social-mediaizing” of markets and commodities that has led to this new challenge to Wall Street. I call them “Instatraders.”
If we take it at face value, the GameStop situation started because a guy who liked the company and thought its stock was undervalued bought shares—that’s how things work. Then, he made a YouTube video about it and shared his thoughts on social media platforms like Reddit —not much different than telling friends and family at a cocktail party about your investments, right?
But then, through the magic of social media, everything is interlinked and amplified and in a relatively short time, virality attacks. It’s hard to discern whether this was an intentional display of bullying in the markets or, as many people say, just an opportunity to support a company that they grew up with and loved and that as it turns out, they say, happened to be undervalued.
A desire to support a company or industry that you care about is what inspires a lot of investors to get started in the game. Seeing an opportunity to decimate a group that has seemed to have all the advantages is also tempting.
That these temptations morph into an all-out feeding frenzy of epic proportions is the unavoidable result of our digital interconnectedness colliding with human behaviors. Good people do bad things and bad people do good things.
So the question becomes, is this something sinister or just the natural evolution of how trading works in this age of digital everything? I’m inclined to think it was both.
Last week, pre-GameStop, I mentioned that investing is a zero-sum game: When one gains, another loses. This time, in the ultimate “robin-hooding” via Robinhood, the gain seemed to go to the little guy.
And, as noted in the Wall Street Journal article, “Gambling? In the Stock Market? I’m Shocked,” this isn’t the first time something like this has happened. It’s simply amplified by the ease and speed of the internet.
What will come from this?
There are regulations and standards that exist to prevent outright manipulation of the markets, in theory to protect individuals as well as investment firms, and chances are that this situation will be investigated (as I write this, it was announced that Janet Yellen will be looking into it). And my hunch is that an over-compensation will be put in place, only to be reduced or retracted down the line.
Today, everything is instantaneous and exponential. Absolutely, some people made tons of money. Absolutely, others lost tons. One wins when another loses. Zero-sum game.
I don’t think there’s long-term value to the type of groundswell momentum trading that GameStop epitomizes. A lot of people -- not just hedge fund managers but regular people -- could lose a lot of money, especially if they get a taste of quick and early success.
Democratization of trading is a good thing in the sense of equitable access, but people who jump in through frenzies like GameStop don’t necessarily understand the risks of market timing and other fundamentals. When viewed from the resulting get-rich-quick approach, I always compare the markets to casinos -- and I’ve seen a lot of people lose a lot of money through both.
In this heady environment, beware of tales of “instatraders” and their instafame and instamillions: In the end, the house always wins.
This week, I recommend listening to this excellent On Point episode, hosted by Meghna Chakrabarti on NPR. Her guests, Americans for Financial Reform senior policy analyst Alexis Goldstein and Jacob Frenkel, former SEC enforcement attorney and federal prosecutor, provide an outstanding look at the GameStop challenge to Wall Street.
My team loved it and I think you will, too.
