Pyramid Scheme

Pyramid Scheme

In the three weeks following the Thanksgiving holiday in US, investors were subjected to a rough ride.

Some might call it frustrating. Others maddening. And still others don’t bother themselves to fret over the vagaries of near-term oscillations in stocks, either because they’re Warren Buffett (i.e., too rich to care about 10% here or there, but also too wise to care about ephemeral swings in a mercurial asset) or because they, like the majority of Americans, don’t own any stocks to speak of. Stocks are an asset that’s overwhelmingly concentrated in the hands of a tiny fraction of society.

A reader recently suggested that latter point (about the concentration of equities) has become an “interminable” discussion. In all likelihood, almost all readers are, to a greater or lesser extent, weary of it. Let me explain why we need to keep having it.

If you’re an investor, that probably means you’re a semblance of financially stable, the growing presence of young, debt-saddled speculators notwithstanding. You probably entertain the equities concentration discussion on the unwitting belief that doing so absolves you of the “sins” associated with being capital in an economic system where nearly everyone is labor.

You too are labor, you just don’t realize it, but let’s pretend you’re capital. Reading another article lamenting unequal equity concentration is like saying a Hail Mary or going to Confession. Once you do it, you’re free to go right back to enjoying your position at the top of the societal pyramid, free from guilt.

Your tithes paid, you can indulge in the usual daily condescension, unconsciously stereotyping every African American twentysomething who pulls up next to you at a traffic light playing music you can’t relate to (“God, please just turn green!”), debating how much is too much to give the Hispanic woman who details your SUV at the full-service carwash (“I mean, all I’ve got is a twenty. Obviously I can’t give her a twenty.”), writing off the fortysomething wearing a Trump hat in Walmart as irredeemable despite not knowing the first thing about him (“There’s the problem, right there.) and berating call center employees while simultaneously giving them backhanded compliments (“You said your name is Kimberly, right? Ok, well thanks for working on a Saturday night, Kimberly, and I know this isn’t your fault personally, but somebody has to explain to me why my cable was pixelated for seven minutes this afternoon. You do know Michigan was playing, right?).

What that kind of behavior misses is the fact that, increasingly, nearly all of us are destined for economic irrelevance. Even if we die before the upper-middle class becomes just as irrelevant as the poor, our children will almost certainly live in a world where the societal pyramid crumbles and gives way to a bifurcation in which a few thousand people have everything, and the rest of humanity has absolutely nothing, relatively speaking. (And yes, I’m aware of the paradox inherent in using “relatively” with “absolutely” in the same sentence in reference to the same thing. That’s one of the many joys of reading my longer articles. Paradoxes, oxymorons, double entendres and self-deprecation hide in plain sight.)

No one wants to admit the upper-middle class and, over time, even the “merely rich,” are destined for irrelevance. There has to be a societal pyramid. In a totally bifurcated society, the term “upward mobility” has virtually no meaning. You can aspire, but your aspirations will be confined to higher levels of relative poverty. Yesteryear’s upper-middle class status symbols will lose meaning as indicators of wealth, while real status symbols will be unattainable or, at the least, completely impractical, even for the “merely rich.” The discerning among you will immediately note that in many respects, we already live in such a society.

The equity concentration discussion is a microcosm of these dynamics. Writing it off as “interminable” is just a psychologically convenient way to avoid the larger discussion about mass irrelevance in the face of exponential wealth creation. Better to skirt that uncomfortable reality by suggesting that debates about various manifestations of the exponential process that creates it are overused, hyperbolic talking points.

Imagine someone with a $1.5 million portfolio, comprised of retirement savings and, say, a half-million in actively-traded securities. That person likely counts himself (or herself) as a rich trader. In some respects, that’s accurate, but in the context of this discussion, it’s wholly laughable. Of what real consequence is that person’s portfolio? The top line sum is itself a pittance, never mind the actively-traded crumbs.

I know dozens of such people. And while some are humble and outwardly describe themselves as “minnows,” (as opposed to whales) they fail to connect the only dots that really matter. Without exception, they’re oblivious to the fact that due to the skewed distribution of financial assets, gains don’t accrue in linear fashion, but rather exponentially. They scoff at the notion that they don’t understand such a simple concept, but understanding the math and internalizing the ramifications are two entirely different things.

Even if you make a leveraged bet with the entirety of a $1.5 million portfolio and it plays out to perfection, your gains would represent but a tiny fraction of the minute-by-minute swings in the on-paper fortunes of the world’s richest people. The concentration is so skewed that even the bravest and the luckiest of traders could never hope to vault into the ranks of the elite. For all intents and purposes, such a leap is a mathematical impossibility.

Crucially (and this can’t be emphasized enough) that becomes more true with each passing day. Every day that the distribution remains skewed is another opportunity for it to become even more skewed in the event the assets in question increase in value. With each such turn, the prospects of altering the dynamics become more and more remote. How many meme stock-esque lottery tickets does someone with $50,000 to bet have to buy, and subsequently hit, to become Elon Musk? What will that number be five years from now? And so on.

There’s perhaps no more poignant example of this than the juxtaposition between David Einhorn and Musk. The two men have, of course, engaged in a petty, public war of words for years. When the drama started, David was Goliath. Fast forward a few years and their roles have completely reversed. In fact, the juxtaposition between the two men is so stark as to render comparisons nonsensical. One has $3 billion on a good day and likes to play poker. The other could lose $3 billion in his couch cushions and enjoys building spaceships.

There are innumerable ways to illustrate inequalities in the distribution of financial assets, and particularly stocks. One can spend days slicing and dicing the numbers in order to point out all manner of disparities along demographic lines (see this article from The New York Times, for example). I’ve subjected readers to countless such charts over the years.

Here, I’ll make the point using just one chart. The figure (below) is extremely simple. Anyone can understand it, despite the concept it illustrates being hard to fathom.

The middle class in America owns essentially no stocks, relatively speaking. The top 1%’s share is up to 54%, a record high. Note that the “middle” class goes all the way up to the 89th%ile.

My point in all of the above is that within 20 years (and perhaps much sooner), visuals depicting the share of financial assets owned by several dozen people versus the share owned by everyone else (from the David Einhorns of the world all the way down what used to be a pyramid) will look the same, or, in all likelihood, much more skewed than a chart showing the disparity between the 1% and the middle class in America today.

Unfortunately, this dynamic will continue because it has to. It’s assured. It’s mathematically ordained. Legislation can’t stop it, nor can the most draconian wealth tax. The only way to short-circuit it is to dramatically alter the distribution of assets, or else create new ones, like cryptocurrencies, but the concentration discussion is (at least) as relevant to some cryptocurrencies as it is to traditional assets.

How should we conceptualize of ourselves given the above? Well, that’s a question I can’t answer. Everyone who’s ever made any real money knows “it’s never enough,” so to speak, but now even the most fortunate among us are left to ponder the surreal prospect that “it’s” not just “not enough,” it’s actually nothing. And it won’t ever be anything, because for every $100,000 you make, a god makes $5 billion. And that very disparity means the imbalance will be even larger on the next turn. And so on, and so forth until eventually, you, me and David Einhorn have more in common with the poor than we do with the rich. At least when it comes to where we show up on charts showing the distribution of wealth.

Of course, that doesn’t make you and I poor and it doesn’t make Einhorn middle class. But in a perfect world (i.e., if there’s a silver lining), our shared irrelevance will compel us to realize that social hierarchies and class structures were always artificial anyway. It wouldn’t be the worst thing in the world if the pyramid collapses.


31 thoughts on “Pyramid Scheme

  1. Nothing can stop Musk. Unless of course Powell tweets “Interest rates are too low imo”. Or people turn on Tesla for low quality and fake FSD.
    Extrapolating an exponential trend is a poor way to predict the future. It will break and reverse, even if it looks unstoppable.

  2. As usual, your observations are spot on.

    Like you, I sometimes wish for big things – world peace, for example. However, the hope that “our shared irrelevance will compel us…” will never occur.
    As long as each individual can believe themselves to be better (off?) than others, they’ll be unwilling to level out the benefits of our society. How many of my upper middle class neighbors will only vote for the candidate who will lower their taxes. How many poor and lower middle class voters vote for the same candidates, for reasons that I cannot fathom.

    People want to identify with the winners- not the losers. Few will ever recognize their irrelevance in the big picture, and fewer still will mind it. Instead, they will add the new gods to their list of Personalities, Teams, and Things to worship, and be happy in their church.

  3. This being the Saturday before Christmas fare ( enjoying this Post…H ) . Have to add that what could upend this Status Quo is the Unknown .. The Glacial Pace of change we have talked about is always present and possibly could go into a sprint mode (relative pace) . History has supplied it’s share of surprises . IAs for me …I know fame is fleeting and the next best thing to playing and winning is playing and losing ( as goes the song ‘ Lucky one ‘ by Allison Krauss ).

  4. Well, this is depressing . . .

    Have there been previous historical periods with high wealth bifurcation followed by decreasing bifurcation? How did that happen?

    (Serious, non-rhetorical question.)

    1. What Joey said, though trade unions worked too and were somewhat less violent – indeed, much of the violence was directed at them (see labor movements, XIX and early XX centuries)

  5. Wealth without production (e.g. workers, robots) is not wealth. Imagine if all Amazon warehouse workers quit or all Tesla production workers walked off the job or people quit using Amazon services or buying Apple products. Imagine if politicians quit taking “bribes” from the truly rich. The nobility in Russia had all of the wealth in 1916; all that was needed to change that were some narcissistic Bolsheviks and a fed up population. Will egalitarian change or significant revolution occur in the US? Probably not.

  6. Great post, sir. A few quick observations. Even as I edge towards eight figures, I know I am still irrelevant and what’s worse, I am vulnerable. I had my first really big vulnerability check in the April crash. It wasn’t pretty but I soon knew I was still going to stay comfortably solvent. Now I’m up nicely for the year, in spite of gifting more than half my income, so OK for now. I don’t know about other readers but first reading Harley Bassman’s postings on Convexity a few months back and then seeing his 2022 portfolio suggestions, I now realize that in spite teaching investments for some years and having written a text on the subject, in the land of the real players not only am I irrelevant but I am a rank amateur as well. To do what Bassman suggests one must be very rich to keep those hedged structures in a reasonably proportional context. If I were to try to hedge the coming crash I could easily be throwing away the other half of my income. The sad part about the “real” uber rich is they mostly don’t manage all that money. They all have stables of “people” for that. As you pointed out two guys with 3 billion aren’t necessarily the same. It’s really laughable watching the Donald trying to hang with these guys by fudging his data. He may be even more vulnerable than me. I own my assets, he doesn’t own much of anything except his name and that’s sinking fast. He’s never been exponential like Bezos or Buffett. One other thing that chart you posted shows the top 1% with 54% of the stock and the 50-90%thtle with just over 10%. The bottom 50% has mostly nothing so the missing piece is the 90+ to the 99th%tle. They apparently have the other 35%. I’ve noticed this wedge is virtually always omitted from these wealth imbalance charts. That group, it would seem, contains the “merely rich.” It’s a nice group to be in, but the vast majority of that group will never see exponential growth and would probably be wise not to over-lever, Then there’s the vulnerability factor. I’ll not soon forget the first time I lost 50k in a day. A real wedgie moment. Realizing how easy it was to come back — gone in a week — I followed Dr. Strangelove’s advice, stop worrying and learn to love the bomb. Now those moments just go by. The big problem for us irrelevants is to figure out what to put the new money in without being too stupid, especially at 77.

  7. Jack Ma knows differently. Everything is different when it’s different.
    World peace, I don’t see it till the gods die. Anyone going hungry on this planet is a shame and a failing of all politics and economy. I understand and agree with everything that you have written. That being said, most problems in America are actually luxury problems. Poverty in the US is not anything like it was in the 60s when America was great. Could a time come when the Titans understand what actually is in their best interest?
    The minnows won’t learn because they are in the real sweet spot. Whales aren’t that hard to find if they open a hunting season. Ask Jack Ma.

  8. Obsessing about one’s relative wealth, accompanied by billionaire envy, is not the road to happiness, which is essentially a state of mind. That said, a few laws of the universe come to mind, including exponential growth, consolidation and cyclicality (contradictory dialectic) – which suggests nothing is permanent. Even the top end of a pyramid, isn’t immune to gravity.

    1. Is it billionaire envy or billionaire disgust?

      Elon has decided that now is the time we should all live on Mars. He made that decision, not you, not me, and not anyone else.

      That’s what kings do.

      1. Agreed, I find the lack of democratic input worrying not just for Musk’s projects but also Gates’, Bezos’, the Koch brothers’ and even one/two billionaires who are funding lawyers to defend accused who would otherwise be forced/browbeaten into pleading guilty…

        The problem is that I agree with 4 or 3 out of 5 of these guys’ visions and society seems uninterested in anything but 1, the worst one by a lightyear of the lot.

        So what are we supposed to do when our democratic institutions are incapable of achieving anything of worth and purely maintain the status quo? I don’t like having Musk or Bezos as unelected shakers and movers but, if the alternative is never progressing…

  9. Most of the wealth of the mega-wealthy is in unrealized capital (i.e., stock) gains. There are “simple” policy fixes to address that — tax stock portfolios annually based on mark-to-market, change the treatment of stock options, etc. — and while none of that seems possible in the current political environment, rapidly accelerating wealth inequality will not be ignored forever. That’s one of things people have in mind when they roll out Stein’s Law: things that can’t go one forever, won’t. (Just ask the 18th-century French aristocracy.)

  10. Well, an article bemoaning how the upper-middle class will never catch up to the 1% speaks to your readership I’m sure.

    For the general population:
    Since the price of health care, education and housing has vastly outpaced wage growth during the last few decades and the wealthy have the ability to avoid paying their fair share in taxes — raising taxes on the ultra-wealthy, spending more money on helping the bottom 80% with the above-mentioned categories, and devoting more resources to tax enforcement makes sense to me.

  11. I met a business school friend for coffee last weekend. He retired from a few decades of tech investment banking to manage his stock portfolio, a portion of which he day trades. His son just graduated from college and wants to work in high-tech sales (the modern equivalent of plastics). But while that might lead to being tomorrow’s Mark Benioff, it would require turning down a job offer from Goldman Sachs. Quite the dilemma.

    I (clearly) don’t spend a lot of time hanging out with former classmates or investors, but leaving our coffee date I was struck by how money or more specifically aspirations of becoming even more wealthy appear to dictate every major family life decision (of which his son’s career dilemma is but one example). I was shocked that someone so wealthy (relative to me) should be so much a prisoner of their reflexive and unconscious desire for more.

    “If you worship money and things — if they are where you tap real meaning in life — then you will never have enough … Worship your own body and beauty and sexual allure and you will always feel ugly, and when time and age start showing, you will die a million deaths before they finally plant you … Worship power — you will feel weak and afraid, and you will need ever more power over others to keep the fear at bay. Worship your intellect, being seen as smart — you will end up feeling stupid, a fraud, always on the verge of being found out.” [DFW, “This is Water”]

    This also is a reflection of the increasing of concentration of wealth that leaves the “wealthy” feeling poor.

  12. I’m consistently amazed by the ‘but you too have a chance be a god’ fallacy along with the knee jerk defensive position of the ‘sort of rich’ that the expanding plutocracy is proof meritocracy is alive and well.. The conceptual framework you are deconstructing is too painful for most to face, thus the prevalence of escapist and dismissive behavior. Kudos for having the passion and stamina to question the well established capital cult speak.

  13. H_Man, but hasn’t this problem existed from the beginning of mankind? And doesn’t it always end the same way — the pyramid collapses at some point and the new pyramid builders show up. It could be something to do with our DNA.

  14. This is the honest truth–I would much rather be me than be Elon Musk. I can walk around freely without being recognized or needing bodyguards. And I think he’s a dumbshit. Seriously–the present crop of financial gods–Musk, Bezos, Zuckerburg–these guys are intellectual and moral lightweights, no historical perspective, no vision. “I’m going to Mars”–the musing of morally bankrupt morons.

  15. You can indulge in the usual daily condescension, unconsciously stereotyping every African American twentysomething who pulls up next to you at a traffic light playing music you can’t relate to (“God, please just turn green!”), debating how much is too much to give the Hispanic woman who details your SUV at the full-service carwash (“I mean, all I’ve got is a twenty. Obviously I can’t give her a twenty.”), writing off the fortysomething wearing a Trump hat in Walmart as irredeemable despite not knowing the first thing about him (“There’s the problem, right there.) and berating call center employees while simultaneously giving them backhanded compliments (“You said your name is Kimberly, right? Ok, well thanks for working on a Saturday night, Kimberly, and I know this isn’t your fault personally, but somebody has to explain to me why my cable was pixelated for seven minutes this afternoon. You do know Michigan was playing, right?).

    I was a bit hurt there. You really think we’re all assholes?

    More generally, though, I don’t see the bifurcation you describe as necessarily bad. Most humans throughout history are, regardless of wealth, irrelevant. I think we estimate the total number of humans having ever lived as 100B or so. How many does world history remembers? A thousands, a couple of thousands? Frankly, your odds of being remembered improved significantly if you kill a lot of people rather than get rich (who knows the name of that richest ever king of the Mali empire without googling? Genghis Khan need not be googled on the other hand…)

    If everyone’s needs are being satisfied (and if we could educate people on the fact that lifestyles don’t really change between having, say, $15M and, say, $25M or between having, say $500M and having $1B), maybe it’d be okay to have a few Elon Musk-s?

    We know what the future ought to look like (technology wise) – if you’ve read cyberpunk/near future sci fi. Metaverse, AR/VR, AGIs or ALIs, neurolinks, reversing senescence, fusion reactors, reversing climate change (either carbon scrapping or geo-engineering) maybe cybernetics, Mars terraformation and establishing stations in the main Belt… We know what the future looks like. We just have the slight technical problem(s) of getting it done. Especially sooner rather than later. Someone like Musk does seem important in pushing this agenda forward

    1. I can’t speak for anyone else, but I don’t think we need even one king.

      Since it’s our own economic system as we created it, we can make it whatever we want it to be.

      We don’t need mega billionaires, at all. Not even one.

      I don’t want Musk telling me that now is the time that I should go and live on Mars. He can go and f*** himself.

  16. Today, we are but ants, and Elon is a god.

    In 5 years time, due to exponential growth of his wealth but not ours, we will be bacteria. And maybe not even bacteria. Perhaps we will simply be molecules.

    There’s a reason we created the antitrust laws in the first place. Otherwise today, all of us, including Elon, would be working for Cornelius Vanderbilt.

    We have created a pyramid scheme, and it is high time to tear it down. We need to apply the existing antitrust laws and break up the Elon Monopoly.

    While we are at it, we should also break up the Bezos Monopoly.

    200 years ago or so we got rid of the last king. We don’t need any new kings. Let’s get our democracy back on track. Let’s restore the middle class to where it belongs.

    It’s our economic system. We created it. We can make it whatever we want it to be.

  17. We can escape many things, but not human nature. For that we need to acknowledge it and look it squarely in the face, something humans as a whole have never done. Is it even possible? Can you envision the entirety of the world’s adult population meditating for 2 hours a day. Who would man the ramparts.

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