Years ago, an episode of Family Guy (the edgy cartoon sitcom) featured a subplot that revolved around a local news segment called “What Really Grinds My Gears.”
The cartoon’s main character, Peter Griffin, anchored the segment, which was just a forum for him to rant about things that perpetually annoyed him.
Like everything else on Family Guy, all aspects of the segment (from the circumstances that brought it to life to the rants themselves) were crude, so I won’t recap it. But Tom Tucker, a fictional anchorman on the cartoon, described it as follows while pitching it to Peter: “We’re looking for an everyman to rant about petty nonsensical irritants to replace our ‘Spotlight on the Middle East’ segment.”
Well, one “irritant” that “really grinds my gears” is the suggestion — tacit or otherwise — that Congress shouldn’t authorize more stimulus checks because the majority of the money is going into the stock market.
Besides being prima facie implausible, it’s cruel vis-à-vis people who aren’t (and couldn’t even fathom) spending an extra $600 on speculating in a retail brokerage account.
In an article dated Saturday, Bloomberg cited AlphaOmega Advisors’ Peter Cecchini, who delivered a boilerplate assessment. Basically, Cecchini stated the obvious, which is that the lower down the income ladder you go, the less likely it is that recipients of stimulus checks will funnel the money into the stock market.
Bloomberg struck a dramatic, almost conspiratorial tone. “That may be, but data suggest anyone who gets the boost is more likely to put it in the market than those who don’t,” the article said, before citing new data from Envestnet Yodlee, which shows that trading among people who received stimulus payments this month was up 30% from December. “Trading among those with annual incomes of less than $75,000 who received payments jumped 53%,” the article declared.
We’ve been down this road before. Last summer, in “Dip-Buying Perfection And The “Bizarre Case Of The Robinhood Rally,” I took a look at similar data from Envestnet Yodlee. Readers can peruse that linked piece at their leisure, but below is a key excerpt from my own quick assessment of the data which, again, sought to quantify the propensity of stimulus recipients to squander the money on speculative bets in brokerage accounts:
Securities trading isn’t even mentioned in the category of those making $35,000 per year or less. This data doesn’t suggest that those who needed the stimulus the most are squandering government aid on stock trading. Maybe other data does. But this data doesn’t.
The only additional thing I would add is that some of the money earmarked for virus relief is guaranteed to be misspent. Indeed, we’ve already seen that with some Paycheck Protection Program loans. I’m not denying that, and indeed I’ve covered it. But the question is whether there is a trend in enhanced benefits to poor families being squandered or otherwise misused.
Lest anyone should misconstrue the point, I’m not suggesting that lower-income brackets are immune to the allure of speculation simply because the have very little disposable income.
In fact, it’s sometimes the case that between subpar education and the desperate search for hope (no matter how long the odds), the poor are susceptible to get-rich-quick schemes. The lottery is the most poignant example. The chances of winning are infinitesimal, but the cost of playing is “affordable.” While not everyone who plays the lottery is poor or undereducated, some are. By definition, those players cannot afford to play (or at least not every week). And while they intuitively know that the chances of winning are small, they don’t know just how small because the haven’t taken (for instance) the basic probability and statistics course that’s a requirement at most four-year colleges. If they had, they’d know that playing the lottery is pointless. (Ironically, playing the lottery should be conceptualized as a luxury activity — something you can do when you have money to burn.)
In the age of Robinhood, and in an era characterized by absurd E-Trade commercials featuring a tagline derived from that old adage about how to get “even” when you’re feeling aggrieved (i.e., “Don’t get mad, get E-Trade”), it’s certainly not far-fetched to suggest that Americans would plow free money into equities.
I’m sure most readers have seen the commercials, but take 60 seconds and watch the one below, which is particularly outlandish.
In my opinion, that is detrimental to the psychological well-being of would-be market participants and shouldn’t be allowed on television or online. Let me just be as explicit as possible about that: In my judgement, relevant regulatory agencies should ban that ad and probably the entire “Don’t get mad, get E-Trade” campaign.
All of that to say this: It’s by no means out of the question that some stimulus money (and maybe a lot of it) will be spent into an already frothy stock market.
However, the financial media should be cautious not to accidentally make the case against direct payments to low-income households.
“Trading among those with annual incomes of less than $75,000 who received payments jumped 53%” in early January, Bloomberg remarked, in the same article mentioned above. “More than 150 million Americans would likely be eligible for a $1,400 direct payment, on top of the $600 payments approved in December,” it went on to say, referencing Joe Biden’s stimulus package. “The sums would be hitting bank accounts at a time of full-blown mania in the market.”
Note how those passages attempt to pass off subjective judgments as objective facts. “Full-blown mania” is an inherently subjective description. There is no universally recognized definition of “full-blown mania.” That’s not a technical term. It’s just an adjective next to a noun. (Sorry, Bloomberg.)
Is there objective evidence of speculative froth in the market? Well, yes. Probably. Although, again, objectivity is difficult to come by in this context.
For example: There was no shortage of “bubble” talk in January of 2018, when the S&P sat at 2,880. Since then, we’ve seen, in order, the implosion of the VIX ETN complex, a painful rout inspired by Fed rate hikes, a full-blown trade war, and a literal plague complete with a global depression. And yet, here we are at S&P 3,768.
So, was 2,860 really a “bubble”? I don’t know. The figure (below) underscores how difficult it is to pin down what counts as “froth” and “mania.”
There are a couple of things worth noting about that visual. First, previous “bubbles” don’t look like “bubbles” compared to Bitcoin. And some Bitcoin adherents will tell you even it’s not a bubble. Second, BofA, like Bloomberg, equates “stimulus checks” with asset bubbles (see the chart header).
But there weren’t any stimulus checks in late 2017 when Bitcoin took off to $20,000. And while Bloomberg recently cited myriad examples of market phenomena that could quite plausibly be characterized as a manifestation of stimulus money being channeled into speculation, analysts and financial journalists perpetuating this story are, in many respects, living inside their own bubble.
The chart below, derived from Census Bureau data, shows the total number of families with children (red line) who were experiencing some kind of food insecurity at the beginning of last month. That figure was up sharply from pre-pandemic levels. (Incidentally, that figure should be close to zero in America, considering the country is the richest nation in the history of human civilization.)
Needless to say, journalists writing articles for financial media outlets (not to mention analysts) aren’t likely to be starving or half-starving, and neither are their children, assuming they have any.
The problem with the media breathlessly documenting evidence of “full-blown manias” and explicitly linking them to stimulus checks, is that it has the potential to sway lawmakers against more aid for households who need it. This is especially true at a time when hand-wringing over the deficit is likely to increase now that Republican budget hawks no longer need to be wary of irritating Donald Trump’s Twitter account (may it rest in peace).
In a testament to how easy it is to get stuck in one’s own bubble, Bloomberg, searching for confirmation bias, interviewed a 23-year-old Boston resident, “who works in the financial services sector.”
“I told my friends, if you’re going to spend your stimulus check on shoes, you might as well just put it in Robinhood instead,” the young lady told Bloomberg. She described the $600 payment she received this month as “just something extra I didn’t need.”
It seemed lost on Bloomberg that a 23-year-old working in financial services in Boston might not be the best person to interview if what you’re trying to do is gauge Americans’ predisposition for funneling virus relief checks into equities. Might I suggest a single mother of three in inner-city Baltimore instead. Or perhaps a wage worker in Detroit.
All of this helps make the argument for more targeted stimulus. But that’s easier said than done.
Consider this: One way to ensure that checks go to people who need them, is to dramatically lower the income threshold to, say, $35,000. However, those kind of common sense “fixes” aren’t as common sensical as they sound on the surface. Until this year’s tax season is over, it’s not possible to know, on a nationwide basis, who’s making how much. It’s likely, for instance, that many leisure and hospitality workers who in 2019 made, say, $45,000, were driven to the brink of poverty in 2020. I know one such worker personally and you probably do too, even if you don’t realize it because you can’t ask them considering their employer is no longer able to open the doors.
While it’s all too easy to step back and make the lazy claim that the bursting of stock market bubbles would only “make things worse” for an economy that, for regular people, still feels like it’s mired in a deep recession, the notion that rampant call-buying and high volumes in penny stocks are good reasons to reconsider stimulus checks is ludicrous.
Sure, this kind of debate makes for compelling reading in finance circles. And it’s quaint that journalists and the Reddit crowd have expanded their vocabulary to include terms like “gamma.” But stepping outside of that bubble, does anyone really believe it makes sense to cite last month’s volume in OTC shares and surging interest (figuratively and literally) in short-dated call options, as a reason to stymie relief checks aimed at ameliorating the financial strain from the worst global health crisis in a century?
Only people living in a bubble could suggest as much. My own audience has expanded of late. That means some people who read this article won’t even know what “gamma,” “call-buying,” or “OTC” even mean. Are we going to deny those people stimulus checks based, in part, on the notion that they’ll use the money to speculate in options and penny stocks? I certainly hope not. But it’s possible that such debates could contribute to a reduction in the size of the payments or in disbursement delays.
And that’s “what really grinds my gears.”