Fine, But Who Will Make The Pizza?

Now, I’ll write the article I meant to write at noon on Friday.

Sometimes, when the mood strikes, I’ll deliver a fleeting glimpse into my own life, either past or present. While the names are often (but not always) changed, the stories are true.

Although most readers who’ve come along for the ride over the past, say, two years, likely aren’t familiar with the early “classics,” one of the reasons people flocked to my initial pseudonymous musings was the chance I’d toss in a slice-of-life vignette. I found occasion to work one in Friday, while discussing the explosion in stock and options trading often attributed to retail investors.

Read more: Gamblers

Initially, I wanted to make a point about the composition of the economy, not about gamblers. I’ll do that here.

At the onset of the pandemic, when I still read Howard Marks, he made a good point about the extent to which a simulated economy isn’t viable in perpetuity. Marks penned at least a half-dozen memos during the first several months of COVID. They ultimately devolved into what I considered to be pitiable attempts at philosophical profundity, but before they got there (i.e., while they were still worth reading), he said the following about the federal effort to effectively make everyone whole at least until the world had a better grasp of what, exactly, humanity was dealing with on the public health front:

I imagine [Treasury] can print enough checks to replace every American worker’s lost wages and every business’s lost revenues. In other words, it can “simulate” the effect of the economy on incomes. But we actually need the output of workers and businesses. If all businesses shut down, we won’t have the things we need. These days, for example, people are counting on grocery deliveries and take-out food. But does anyone wonder where food comes from and how it reaches us? The Treasury can make up for people’s lost wages, but people need the things wages buy. So replacing lost wages and revenues will not be enough for long: the economy has to produce goods and services.

Fast forward nine months and the conversation really hasn’t changed all that much. Western nations tried to re-open, but it didn’t work all that well. A vicious second wave of COVID came calling (just as epidemiologists said it probably would) and new measures were put in place to contain it.

Now, there are questions about vaccine-resistant variants and their potential impact on re-openings, with a focus on the services sector where employment is still struggling to regain pre-pandemic levels. In the US, the leisure and hospitality sector shed another 61,000 positions last month, and at -536,000, December’s losses were larger than previously reported. The scales on the visual (below) have been adjusted to “trim” the anomalous losses and gains in and around the first lockdowns last year.

Meanwhile, Congress is at work passing another virus relief bill, which will include a third round of direct checks.

In essence, we’re still “simulating” the economy. But now things are getting really weird because even if you’re like me — i.e., loath to countenance the patently ridiculous notion that poor and lower-middle class families are squandering their stimulus checks on GameStop shares — it’s clear a number of pandemic-related dynamics are contributing to stock trading.

The media’s obsession with stimulus checks, Reddit, and Robinhood is understandable (it makes for flashy headlines), but there’s quite a bit more to it than that. Most obviously, the Fed’s backstop for markets has helped propel risk assets higher. The higher they go, the stronger the “FOMO” (“fear of missing out”) dynamic. In the same vein, the hunt for yield adds “TINA” (“there is no alternative”) to the mix. Stimulus checks, stay-at-home work arrangements, and the realization among communities of retail investors that through collective action, they can shape their own financial destiny, have all contributed to what it’s fair to call a “frenzy.”

Tales of riches in the likes of GameStop are the modern day version of “There’s gold in them thar hills.” The financial media is happy to perpetuate the narrative, thus catalyzing a figurative gold rush in meme stocks and a literal silver rush, with the latter now under preliminary investigation by regulators.

The looped narrative is some version of that old “this can’t end well” cliché, but here’s a question: What if it could? End “well,” that is.

What if a large subset of Americans could somehow feasibly become semi-successful stock traders? They can’t, but let’s just pretend.

When we go through this thought experiment, we initially run into all manner of silliness, including plenty of twentysomethings with Bugattis and Vacherons, but ultimately, we’re brought back to Marks — with a “ks” not an “x,” although the latter is probably where we’re headed if lawmakers don’t do something to short-circuit spiraling inequality.

Commenting on this Friday, Rabobank’s Michael Every noted that “you only see how stable a system really is by logically pushing it to its limits, which we are doing on multiple fronts.” How does the American system work? As Every put it, “Ours ‘works’ if a certain percentage of the population (0.1%, 1%, or maybe 10%, etc.) enjoys the ‘stonk’ benefits, with QE up to a certain threshold of de facto plutocratic seignorage.” He then asked an amusing question as follows:

How will it work if 50% of people decide to day-trade central-bank liquidity for a free ride to prosperity? What if it goes viral and everyone does? How does that kind of economy really function?!

Well, it doesn’t. Or not when you take the thought experiment to the extreme. Marks wrote last year that “people are counting on grocery deliveries and take-out food” and implored his readers to ask “where food comes from and how it reaches us.” Every is funnier than Marks and, dare I say it, a superior writer, so he put it a little more colloquially. Anyone who’s an effective writer knows that colloquial is often synonymous with poignant. Here’s Every:

Obviously someone needs to cook and deliver pizzas to those day traders! So how do we decide who gets to earn minimum wage plus tips, and who gets to retire young by clicking a mouse and buying the steaming rubbish? Could someone in the Eccles Building explain the underlying ethos of such a society?

America’s struggle with the pandemic has always been a tragicomedy. The death toll in the US will almost surely reach three quarters of a million people by the time the pandemic is well and truly “over.” And remember, almost nobody thinks COVID will ever be eradicated entirely. Tens of millions of people have lost their livelihoods, some of them forever. The psychological consequences of that could well exacerbate many of the dynamics discussed by economist Anne Case and Nobel Prize winner Angus Deaton in “Deaths of Despair.” And then there’s the isolation.

At the same time, 2020 delivered an unfathomable financial windfall to the world’s richest people, and 2021 is already delivering surreal outcomes in markets, including, but certainly not limited to, the GameStop saga and the Dogecoin absurdity. Just yesterday, 31-year-old Whitney Wolfe Herd became a Bumble billionaire and she probably won’t be the last. The stock rose again on Friday.

While the Reddit “revolution” was couched in populist terms, that was mostly because it wasn’t a true “movement.” It was just collective action looking for an identity. Ultimately, the “populist” branding was dropped in favor of hero worship around a man calling himself “Roaring Kitty.” While it’s true that a few hedge funds felt the wrath of Reddit, a few more made massive sums on the rally in meme stocks, and that’s to say nothing of gains for private equity. “This isn’t the revolution we thought it was, General Kitty.”

Democratic control of government or not, and the best efforts of a “woke” Janet Yellen notwithstanding, the most likely outcome by the end of 2021 is just that the rich who got much richer in 2020 will have become much richer still. Eventually, this will dead end in some kind of Pikettyian™ end game.

If you’re wondering how Bitcoin might play into all this, it could actually exacerbate all sides of the problem. If it finally is embraced by the establishment, it will be co-opted by the system, likely with the effect of making the rich richer.

And the rich will be totally fine with it if some HODLers make a few bucks along the way. Just like Mudrick Capital and Silver Lake were fine with a few Redditors making a few million as long as it meant they made $300 million (reportedly).

Eventually, central banks may get sick of it — Bitcoin, that is. If they crack down, that will just irritate the masses, who, whether they own any or not, will see government intervention as an attempt to preserve a system that doesn’t look out for the interests of regular people.

Earlier this week, while discussing Tesla’s decision to put it on the balance sheet and calls for Apple to open an exchange, I mentioned that the more buy-in Bitcoin gets from blue chip corporations, the more difficult it would be for central banks to ban it. Rabobank’s Every made a similar point in the same Friday note cited above.

“I repeat my view that states prepared to print money, crush the price discovery of the yield curve, and fund huge national security, defense, and policing arms are unlikely to just roll over to a libertarian cryptocurrency when they can instead make it illegal, as the Fed did with gold in the 1930’s crisis,” he remarked, before offering one caveat, which ties everything said above together. “However, if too many firms put too much crypto on their balance sheets, then acting against Bitcoin might mean blowing up ‘stonks’: And is that allowed?”

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