Maximum Bitcoin, Minimum Wage

If you wanted to be dramatic about it, you could call February 8, 2021, the day when investors in S&P 500 index funds learned they’ll be exposed to Bitcoin.

That’s one implication of Tesla’s disclosure that the company’s balance sheet now includes $1.5 billion of the cryptocurrency.

As to whether the move, had it been announced several months back, might have impacted the decision to include Tesla in the index, we’ll never know. Because that’s a hypothetical. But in comments to Bloomberg, David Blitzer, former head of the selection committee for S&P Dow Jones, said the index is supposed to “measure the US equity market, not… second-guess management decisions.”

Noted, but some found the news a bit disconcerting. It’s not so much the decision itself as it is the person making it. Elon Musk is a lot of things, many of them good, but the only thing more erratic than his behavior is Tesla’s stock which is, in some cases, just a derivative of his behavior. Blitzer went on to tell Bloomberg that the index methodology “doesn’t provide for dropping a company based on a management decision except in extreme cases such as an impending bankruptcy.”

Read more: Tesla’s Balance Sheet Not Volatile Enough. Needs Bitcoin, Musk Reckons

The fact that we’re even having the discussion says more about the protagonist than it does about the actual decision. America is used to this. For example, convening two summits with Kim Jong-Un would have been a questionable decision no matter who occupied the Oval Office, but… well, you know what I mean.

It’s the same dynamic here. Any blue chip US company that decides to “diversify” their cash pile with Bitcoin will make the news. But because it’s Elon, the media has a free pass to skip straight to implicit suggestions that perhaps Tesla should be delisted.

Maybe I’m just in a good mood this week, but I found it all quite funny. Like everyone else, I have quite a bit of core long exposure to the S&P, and my well-documented skepticism towards Bitcoin notwithstanding, this doesn’t concern me. This is just another manifestation of Musk’s sometimes quixotic behavior. He’s flipping a middle finger to someone, it’s just not clear who. I don’t own any Tesla shares individually, so if he wants to imperil his own balance sheet in order to send some kind of message to the world, then that’s up to him. The shares rose on Monday and Bitcoin hit a new record.

Meanwhile, the CBO guesstimated that raising the minimum wage to $15 per hour would increase wages by a net $333 billion over a decade. The Office’s report paints this as a kind of Sophie’s choice:

In an average week in 2025, the year when the minimum wage would reach $15 per hour, 17 million workers whose wages would otherwise be below $15 per hour would be directly affected, and many of the 10 million workers whose wages would otherwise be slightly above that wage rate would also be affected. At that time, the effects on workers and their families would include the following: Employment would be reduced by 1.4 million workers, or 0.9 percent, according to CBO’s average estimate; and The number of people in poverty would be reduced by 0.9 million.

So, 900,000 Americans would be lifted out of poverty. But 1.4 million would lose their jobs.

These are, of course, estimates. We know that paying people more will mean they have more money. That much is settled. (I hope that elicited a chuckle.) Among the things we don’t know are the effect on inflation (i.e., the purchasing power of the additional dollars) and the actual impact on employment.

To put it mildly, there’s considerable debate about the notion that a higher minimum wage would prompt massive job cuts. Yes, it’s important to protect margins. But you can make up some of the higher wage costs by charging more for your products. That eats into purchasing power, which is part of the debate. Ultimately, businesses need workers. You can’t just lay everyone off in an effort to prove a point. Who’s going to do all of the menial work? Here’s the CBO:

Employers would pass some of those increased costs on to consumers in the form of higher prices, and those higher prices, in turn, would lead consumers to purchase fewer goods and services. Employers would consequently produce fewer goods and services, and as a result, they would tend to reduce their employment of workers at all wage levels. When the cost of employing low-wage workers goes up, the relative cost of employing higher-wage workers or investing in machines and technology goes down. Some employers would therefore respond to a higher minimum wage by shifting toward those substitutes and reducing their employment of low-wage workers.

Again, much of that (most of it, in fact) is speculation. Robotics and AI aren’t generally advanced enough to churn out a readily employable army of androids capable of making custom drinks at Starbucks or wandering the aisles of Walmart restocking the Cinnamon Toast Crunch. So, no, firms can’t just “replace” everyone with “technology.” Some firms can replace some workers with technology (think self-checkouts at the grocery store), but eventually, management bumps up against the law of diminishing returns. (How irritated do you get when you go into a store and can’t find any associates when you need to ask a question? How many times does that have to happen before you find someplace else to shop? Have you ever been to the Starbucks in Grand Central? Try to imagine robots staffing that location during the morning rush. It wouldn’t work. Neither would reducing the number of employees.)

Anyway, there are procedural issues too. Without delving into the tedious specifics, a debate over the ramifications for the federal budget will determine whether Democrats are able to include the minimum wage provision in their go-it-alone stimulus push. “The president remains firmly committed to raising the minimum wage to $15,” White House Press Secretary Jen Psaki insisted. That said, Biden clearly understands that getting this included in the current stimulus package will be difficult.

As for markets (outside of crypto news, I mean), Monday marked the sixth straight day of gains. That’s the best streak since August.

At this point, the market is clearly comfortable with the re-opening narrative and the idea that, one way or another, stimulus is coming. Janet Yellen’s remarks over the weekend appeared to bolster sentiment materially.

Small-caps are on another truly remarkable run. The six-day gain in the Russell was approaching 10% into the afternoon on Monday.

As for rates, Monday was a somewhat frustrating session. While the week began with flashy headlines (e.g., 10-year breakevens at 2.21% and 30-year yields above 2%) “bond bear fatigue” set in, as BMO’s US rates team put.

Symptoms of “bond bear fatigue” include “oversold 10-year stochastics, slow/no-data session dip-buying,” and what Ian Lyngen and Ben Jeffery amusingly called “an inordinate amount of energy devoted to determining how to be compensated in cryptocurrency.”