Inside The Bubble

Inside The Bubble

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.”


16 thoughts on “Inside The Bubble

  1. It’s also worth pointing out that a large percentage of a small number is still a small number. If the number of people with incomes under $75K went from 2% to 3% or even 10% to 15%, even with that 53% increase in trading, most people are using the stimulus for something else, like eating.

  2. I have commented in similar fashion on some of your posts. I think its a good idea to lower the threshold, but not by that much- and as part of a compromise package if necessary. State and local aid, and more generous unemployment insurance is prime territory, along with rent aid/eviction moritorium, student loan moritorium, and vaccine aid to localities. The checks are a good idea- and I would lower the income threshold a bit but not much and phase it out, rather than just stop it at the limit. It has been presently structured with such a phase out. Whenever there is a government aid package, bailout or what have you, the boo birds come out and talk about fraud and other leakages in such a program. It is always going to happen. Short of interviewing every receipient, you are not going to get to perfect- and not even then. That is not the point. Perfection is the enemy of effective and rapid help for many. And that is most important.

  3. Everything old is new again. When I was much younger the argument against any kind of welfare was that the poor people would just take the money and spend it on wine or cigarettes or some other such evil. By the same argument I suppose we should increase the taxes of billionaires because if they have too much money they’ll just but a super-yacht. Too many Americans, by their nature, are just bossy and judgmental and love to try to run other people’s lives. Doing the right thing may not always turn out the way you intended for everyone, but that doesn’t mean it wasn’t the right thing.

  4. Moralizing.
    The young who do have a month or two tucked away no longer have motivation to leave money in savings accounts. Trading accounts to debit card is a couple of keystrokes. Would they prefer under the mattress.
    Excuse them for being modern. As far as they are concerned markets crash and come right back. It is fixed.
    Penalizing savers at every turn is having consequences.

  5. Said clearly and with enough information that anyone who is using their brain to evaluate the situation will clearly see this as the tired old saw (poor people can’t be trusted with money) that’s been around for a long time as many readers have pointed out. It’s pathetic how the well to do in their own gated access bubble will constantly proclaim that ‘poor people are too stupid to be given anything of worth’. It’s shameful and conveniently ignores lots of stories of waste by the wealthy and large corporations whose sins are calculated in the trillions. Waste is everywhere, but always less at the bottom of the financial ladder where food, shelter and health are in limited supply. Why is buying a $2 lottery ticket a financial sin for those making $35,000, while ordering a $25 wagyu burger at a restaurant that charges $12 for a beer is fine as long as you’re driving a Tesla and have a Porsche in the garage. Children are starving everywhere and the money needed to fix that is stuck in the safes of the wealthy.

    The mainstream media is made up of wealthy people who have decided they can speak for the lower classes. Those people at the bottom need more chance to speak for themselves. Is it any wonder that many are so lost, frustrated and ignored that tearing something down is about they only way they can speak and be heard. How many poor had to die from opioid addiction before it was even a mainstream concern. The rich can take a time out at a Malibu clinic while the poor have to work it out homeless and living on the street.

    Consider this; is Jeff Bezos a builder of capitalism or a destroyer of it? On first blush, this might seem a ridiculous question given that he’s created Amazon. But consider that economic systems work when they keep the distribution of wealth more evenly balanced. If they don’t, they eventually get replaced. When one guy destroys many companies that paid decent wages and transfers that wealth primarily to himself rather than sharing it with those doing the real work, I’d propose that he’s a destroyer because he’s perpetuating the unequal distribution of wealth.

    1. “How many poor had to die from opioid addiction before it was even a mainstream concern.”

      Sadly, the trigger was ….. racial.

      Heroin? Crack? “That’s a ghetto problem tjat should be dealt with by more aggressive law enforcement. Step up the war on drugs.”

      Then, along came methamphetamines in rural, white areas. That started to discomfort our friends on the right, but not enough to do much outside of muttering that “something should be done.” Thankfully for the GOP, local “cookers” were augmented by supply from Mexico so they could be blamed for it.

      Opiods were the step too far. All of a sudden countless WHITE lives in Republican parts of the US were getting decimated. As were Medicaid budgets in those states. White lives did matter and some increased spending on treatment rather than incarceration was begrudgingly accepted by so-called conservatives.

      It has become increasingly clear over the last 10 years of just what “conservatives” want to conserve.

  6. When you give money, imho, you shouldn’t tell the recipient what to do with it- seems like everyone can make that decision for themselves regardless of their background or situation.
    Also, this pandemic is far from over and Congress should be focusing on providing adequate vaccines not on a fleeting one time cash transfer that isn’t going to matter much financially to the financial condition of the US- in the long run.
    From an investment standpoint, I am getting nervous that the market is expecting the virus to be contained much sooner than it will be.
    I agree with Joe Biden- going to be a “very dark winter”.- typical that Congress takes forever to do something that is relatively easy and ignores the difficult problems.

  7. If people are so worried about those unaffected by the pandemic or making “too much” money getting stimulus checks, tax it back in 2022. In essence it becomes an interest free loan to those who need to repay it, a concept the federal government has been happy to use for various corporations.

  8. Saying that the rate increased by some percentage is meaningless without knowing what the starting rate was. If the starting rate was 1% and it increased 50% to 1.5% then their point is mute. If the rate had been 40% and increased 50% to 60% then that would be interesting, but who in the world believes that there exists a large contingent of people earning less than $75,000 that are trading in the stock market. Not a likely state of affairs.

    On the other hand, a married couple in Florida or Texas with combined earnings of $150,000 are very likely to not need the stimulus money and will dump it into the stock market whereas a similar couple in California could very well need the stimulus money. So many factors in play and the arguments are being made using insufficient information.

  9. Apps like Stocktwits is where these people hang around for ‘insight’ or ‘trends’, normally a constant meme and insult battle between bulls and bears. The amount of people that do not understand the concept of number of shares/market cap and compare stock prices to each other is mind blowing (I though the Tesla stock split would help but not enough), let alone any other financial metrics. Social media; reddit, twitter, youtube and the ‘influencers’ are here to stay I just wonder how the SEC will control these non-regulated promoters, its easier than ever to engineer pump and dump schemes.

    1. Market cap is really crucial. I mean whatever else you want to call crypto… it’s all in all about $1T total value. That’s about 2x Visa. That’s pretty big, but it’s still smaller than Amazon. The derivatives market is roughly $12T in gross assets. Then again bubble is a stranger and stranger term by the day. It seems that in order for a financial bubble to exist there has to be non-accommodation by reserve banks and there has to be a focus on utilizing the economy to generate utility rather than just returns. I’m sure we can make arguments as to why we should do that… but it gets harder and harder to see when we would do that. Maybe when millions are starving and homeless… but then… maybe not…

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