THE DOUBLE GLAZED MARKET

 

It’s hard to believe it’s been a year since the first accounts of a new virus began to emerge from China. At the time of those initial reports I wrote an essay that became one of the first chapters of my book “Hello Out There” (shameless plug warning - available here on Amazon: https://www.amazon.co.uk/Hello-Out-There.../dp/B08DJ8FWS1).

In it I warned that the outbreak of the then nascent Corona virus could prove fatal to Donald Trump’s hopes for re-election as it exposed the underlying weakness of the economic “boom” he was touting. The chapter, in isolation, is posted to Granfalloons from back in February of 2020 and can be read here: https://sheamonu-granfalloons.blogspot.com/.../corona-no...

I had predicted in the article that this new virus might prove to be Donald Trump’s Achilles’ heel – and I think I got that one right. I also think that I pointed out something that has also proven true – the virus did not “destroy” the economic model that Trump had touted as being so successful – instead it exposed that model as flawed. Trump had built a house of cards, predicated upon the idea that pumping money into the economy via unsustainable tax cuts, massive debt increases and targeted tariff relief could create the illusion of wealth. When viewed that way I said this would be the net result:

"Treating the economy like this is dangerous, and cannot be sustained for long. Trump doesn’t care. As far as he is concerned it only has to be maintained until November, long enough for him to tell everyone how great things are. That’s why the latest Chinese export has him so worried. The Corona virus just might disrupt his timetable."

The pandemic did exactly that – and don’t take my word for it – here it is from the horse’s mouth (or rearward parts) itself. Check out the three-minute mark of the rambling wreck that was his airport farewell: https://www.bloomberg.com/.../trump-gives-farewell...

There would be those, and I am among them, who view Trump’s handling of the pandemic as his greatest missed opportunity. It was the resurgence of the virus that was the most crippling of the pandemic’s political effects. A minimal amount of preventive action, a nod towards the use of masks, a smidgen of advocacy for enhanced social distancing, a glimmer of support for a more aggressive lock downs in red states, a few changes in the organization of his rallies, earlier support for higher levels of individual assistance – anything – might have tempered the overall economic impact of the disease. Take those steps in April, May or June – and the actions would have been embraced by his opponents who would therefore have to share in the blame if they should have proven insufficient. Instead, as we all know, the President resisted every attempt to take such actions until after the election, when, in what seems to have been an ill-advised attempt to salvage the Georgia Senate runoffs, he went against his own negotiating team to advocate for more than tripling the economic package on offer as part of the so-called “stimulus bill”.

Which leaves us with one of the biggest of the many questions that arise concerning the Trump presidency.

Why?

Why would someone who reveled in being vocal on just about every other topic defer so much to passive voices in his own party when it came to aggressively targeting the virus? Why not grasp the opportunity to appear the intrepid leader when he had every notable scientist and doctor in America ready to back him up? Why not co-opt some of the praise that rained down on others ranging from Andrew Cuomo (Democrat) to Mike DeWine (Republican). It’s not like it was a mystery that this type of action, in addition to the obvious health benefits, offered significant political benefits, especially for Republicans. Here is what one bit of research, conducted by U.S.A. Today, revealed:

"The most striking finding from our research relates to the actions of Republican governors. When COVID-19 was recognized as a threat in March, some Republican governors like Mike DeWine in Ohio and Larry Hogan in Maryland acted aggressively and were among the first to discuss the importance of staying at home and reducing mobility. Somewhat surprisingly, Republican governors’ recommendations often led to the largest behavioral responses among people, particularly those who resided in counties that leaned Democratic or were evenly split between the two parties."

So why did Trump ignore this fact – which certainly must have been known amongst his advisors, both political and otherwise?

The answer most likely lies in another bit of that farewell speech – and the extent of its folly is revealed in the events of this past week. Note that when enumerating his administration’s “achievements” amongst the first listed by Trump is the status of the stock market. “The stock market is now substantially higher than it was at its higher point prior to the pandemic” he intones, leading one to first of all wonder how the hell something can be “higher than its higher point” and, if you look past the confines of, you know, the English language - to further wonder what the hell difference that makes to the economy as a whole?

Here’s the answer – it doesn’t really make any difference. The stock market is not much of (i) a predictor of how the economy will do in the future, (ii) an indicator of how the economy is doing right now, (iii) a reflection of how the economy did in the past or (iv) a guide for how people should feel about any of those things. What does the stock market reflect? It reflects the state of the stock market at any given point in time.

That’s all.

In terms of telling economic analysis the performance of the market is of historic significance only. Can you tell how strong the economy is by looking at how the market is doing? Sometimes yes, sometimes no. The market did really well during the Bush administration (while being somewhat volatile). Meanwhile, as we know, the economic substrata was crumbling under the weight of sub-prime mortgage packages, corporate governance nightmares and the potential bankruptcy of the U.S. auto industry. The market did quite poorly during certain stretches of the Obama years when, as we now know, the economy was actually significantly improving. The market tells you what the market is doing – that is no reason to believe it is telling you much of anything about the economy as a whole.

The things is – I can say this until the cows come home, (and I would urge you to google “why is the stock market going up when the economy is so bad?” to find 4000 articles that tell you the same thing) – and it won’t make a damn bit of difference. Most people hear “the market is up”, or “the market hit a record high” – and automatically assume they have just been given insight into the current state of the economy, rather than having just been told nothing more than the current state of the market. More to the point – when a 40 something looks at his 401K and sees its value is much higher than last year – he feels good – even if intellectually he knows that he isn’t going to be touching that until he’s 65 – two and a half decades from now, by which time everything may have changed fifty times over. The market offers the vast majority of people a comforting illusion of economic knowledge when really it is the thinnest edge of what just might be a wedge that will split you neatly in two.

But there is no one who knows the value of an illusion more than Donald J. Trump. His career is built on illusion. He knew that if he were to take any of the pandemic actions outlined above – even if they worked to the benefit of other Republicans – it was likely that the market would take a significant hit. The market was already volatile enough – Trump simply did not wish to risk the possibility of a sustained summertime drop in the Dow Jones average. That was, in my view, a political mistake. More importantly, and this is irrespective of “my view” – keeping the market inflated during the pandemic was undoubtedly not reflective of the true state of the economy both when it was occurring – or now.

In order to see this concept at work in an economic “test tube” one need only look at the events of this past week. Here I’m going to give you the Reader’s Digest view of the shenanigans underway in relation to GameStop, a company that until recently traded rather benignly on the New York Stock Exchange.

 Even if you don’t realise it you have likely traipsed past a GameStop store while patrolling your local mall or central business district. The firm specializes in selling videogames – and in its heyday you might have seen a queue forming outside its doors on the day the latest version of Madden or Grand Theft Auto was released. Then, times changed, as times are wont to do. Video game sales began to migrate on-line and the queues vanished, as did a large portion of the customer base. GameStop stores began to lose money even before Covid shut down many of the malls where they were located.

About this time you are probably saying something along the lines of “I know this story – GameStop is BlockBuster for videogames!” You very likely wouldn’t be far wrong – but let’s not abandon GameStop to the fate of your classic video chains just yet. After all – there are still a few GoldenDiscs around – maybe something will come along that is the video equivalent of the vinyl resurgence, or hardware like Playstation V (then VI, VII, VIII…CXL…) will boost sales – or the company will come up with an on-line fix… I know – all of these are straws at which to grasp – but the company can at least try to rebound. Of course, while it flounders its stock will suffer – right?

So you would think.

Instead, in the last week, GameStop shares were trading at a record high – going for nearly $500 per share at one point (before crashing, at time of writing, to a still inflated price of $193). How the hell did a company that everyone knows is struggling mightily end up trading at a level that is so inflated that it makes the Goodyear blimp look like one of those gas bubbles that rises from the bottom of a glass of beer? This is one of those cases where the “short version” – is the long version.

The “abbreviated version” goes like this – thinking the future of GameStop was ummm – not bright – a number of hedge funds made bets that they would be able to borrow against the current value of the stock and then purchase and return the required number of shares when the value had gone down. They would then keep the difference between the current value and the later, lesser, value as profit. This is known as “selling short”. Selling short is considered incredibly risky by most investors because you can get caught owing huge amounts of money if the time comes to meet your “call” on the shares and the price hasn’t dropped. If they are being honest those same investors will tell you that going short is the kind of fun thrill that drew them to the market in the first place – although they will also tell you it becomes more fun when they are experiencing that thrill via the conduit of other people’s money (OPM). Those hedge fund operators who sold GameStop short – yep, they were thrill riding with OPM.

Unfortunately for these fund managers they were being watched by another group of investors, made up largely of day traders who communicated on-line via Reddit and the like, many of whom traded on a platform called “Robinhood”. Communicating with each other they figured out that if they kept the share price up high enough they could create a run on GameStop, undercut the hedge funds and make a lot of money. They succeeded. Quite a few of them made millions. Meanwhile – the funds lost billions. One fund, Melvin Capital, lost $2 billion in the last couple of weeks alone. Listen – GameStop as a company lost $500 million in 2019 – it would seem to be almost impossible to lose four times that investing in that same company just one year later – but congratulations Melvin – you made it look easy.

There are, of course, quite a few day trader investors who tried to climb on board the GameStop train a bit late who are also going to lose a lot of money. They jumped into this mess because of something called “FOMO” – which stands for “fear of missing out”. Even though they know, deep down, that they are probably going to pay for this – they took the plunge anyway because they just can’t stand the fact that there might be something interesting, profitable, entertaining or exciting on the other side. FOMO explains why that idiot babysitter goes down in the cellar even though they have been told the house is haunted. It also probably explains why a good few of those morons who were marching on Washington thought “Hey, I think I’m going to take a stroll into the Capitol building – what’s a little teargas?”

Here’s the thing – if one or two people had done what those day traders did it is likely that they would have been treated as criminals for improper “market manipulation”. When a few thousand day traders do it – well, at a certain point it just becomes “the market”. That may not seem right, or fair – but the market, while often brutal and relentlessly unpredictable – is nonetheless “fair” in the sense that if you play it you get what you should expect – an often brutal and unpredictable result. I responded to one comment on Facebook concerning the whole matter this way:

"It is likely that nothing illegal happened here - but that is far different from saying nothing really, really dumb went on. There is enough egg on faces to make the world's biggest omelet, and enough left over to be making lots of French toast over the next few days. Above all - this disaster (and, trust me, for each day-trader millionaire being made there are going to be a hundred pensioners crippled) shows how anyone - ANYONE - who mistakes the ups and downs, gains and losses of the stock market for the health or lack thereof in the general economy is an idiot of the highest caliber. The market is reflective of one thing and one thing only - the market. On that day, at that hour, in that instant. Not the success or failure of an economic policy, not the competence of a party or leader, not the "trends" whether macro or micro. The market is a horse race and anyone one who makes more of it than that is the part of the horse that can be found behind the jockey."

I stand by that assessment. I think the market does what it is supposed to do – no more, no less. The fate of many a GameStop investor will be disastrous – and it probably would not be a bad idea to figure out how this sort of thing can be avoided in the future. Still, there is another, perhaps more important, lesson to be learned from this.

Here is a little quiz:

Do you think GameStop is a company that undoubtedly has a bright future?

Do you think placing a large amount of your money on GameStop shares would be a safe, sound investment?

Do you believe the future of retail-based video game sellers is solid?

Do you think GameStop deserved to be the hottest stock on Wall Street this week?

Do you think the answer to any of these questions is “yes”?

If you answered “no” to all these questions – you’re wrong on the last two. GameStop did deserve to be the hottest stock on Wall Street this week – because business merit need not have anything to do with whether or not a stock becomes active, goes up or down in value, catches investors’ fancies or garners headlines. The only thing that a stock needs to do to deserve a high volume of trades is – have people wish to trade in it. For whatever reason GameStop met that test. It got what it deserved – and so did the people who made or lost money in it. The market as a whole follows that same principle. I will not insult the people who work on Wall Street by telling them that the market they trade in is rigged, wrong, unfair, deceptive or invalid. Just do not insult the rest of us by trying to tell us that same market has anything much to do with measuring or assessing the general state of the economy. It might impact that economy from time to time, but so will the presence or absence of a frost in Florida. Do you watch cloud formations and then tell everyone what they mean for the economy? Read tea leaves?  Crystal ball?

Think of it this way. If you are looking to buy a house and drive past one that has a “For Sale” sign and a great-looking set of brand-new double-glazed windows – do you automatically assume that it is a great house? Of course not. Those may just make things look cosmetically better. The foundation could be rotting, the roof leaking, termites eating away the walls, there could be an easement for a new highway running right behind the back yard. Maybe the double glaze will make you look closer, maybe it will make you want to check if that foundation is good, the walls strong, the back garden quiet and tranquil. But you wouldn’t base your entire decision on just what the windows look like.

The market is like the windows on that house. A strong or weak market might make you want to take a closer look at the underlying economy – but you wouldn’t base a decision on just that one factor because it might be completely misleading. That’s why, when Donald Trump was telling everyone how wonderful the economy was “because the stock market is doing so well” – he was trying to sell you the house based only on the double glazing, while hoping you wouldn’t look at the foundation.