Discover more from Margins by Ranjan Roy and Can Duruk
Is WFH affecting the S&P?
Most of you have been seeing the headlines: S&P at an all-time high! Apple is now a two-trillion dollar company!
There's been ample discussion about the relation, or disconnect, between the stock market and the "real" economy. How can we possibly see a surge in prices while tens of millions of Americans are unemployed and a great deal of the stimulus packages are ending?
My co-host Can tackled this topic of "haves and have nots" last week (in a post that led to someone referring to us as "miserablists"…a moniker I will proudly own). I wanted to dig a bit more into the "how" I think we arrived at this confusing state of economic dissonance, and am going to try to explain why I think remote working (WFH) is playing a part in this.
The first thing everyone should make sure to be familiar with is the idea of a K-shaped recovery. Back in late March/early April, there was a good deal of discussion around what a possible recovery could look like. We had letters like L, V, W, Z, and even some talked about a Nike Swoosh recovery.
The first time I encountered the idea of a K-shaped recovery was back in June from Peter Atwater, a Professor at William & Mary. The idea is that rather than one collective recovery that follows some drawable path, there are two very distinct recoveries taking place. One line happily extends up and to the right, while the other concurrently declines.
If you're interested in better understanding the economic data backing this up, along with a great piece on the technological underpinnings of the K, check out:
Wall Street Journal: "COVID-19 is dividing the American worker" (this from Chris Mims should be required reading).
But for the purpose of this article, let’s focus on the top half of the K. A lot of people are watching things around them improve.
If you're among those doing well, most likely your cashflow is also doing very well. I write this with a bit of hesitation as I know it feels out-of-touch and obnoxious and seems to come up in conversations like a dirty little secret, but the data is clear:
The U.S. personal saving rate — the percentage of people’s income remaining each month after taxes and spending — skyrocketed to a record 32.2% in April, up from 12.7% in March, according to the U.S. Bureau of Economic Analysis. At the same time, consumer spending fell 12.6% as the economy slowed down and unemployment rose.
For me at least, there are just fewer things to spend money on. I'm still fairly millenial-y in that almost all disposable income I spend is on "experiences" (I hate that word). Travel, dining out, going out, activities with the kids; all of this spending just came to a complete halt while my income has not changed. Sure, I'll buy some stuff online, but otherwise, there is just more income left over to save and invest.
It’s not just the well-to-do. If you had managed to pull off some combination of stimulus checks, PPP loans or unemployment assistance, your bank account would’ve been very happy. When 40% of Americans can't afford a $400 emergency expense, those stimulus checks would’ve transformed bank accounts.
And that was the exact plan: to unload cash upon the people!
Say what you will about our government being dysfunctional, but Jerome, Mitch, and Nancy were certainly exceptional at firing the cash cannon.
This isn’t going to be an argument about people trading their stimulus checks on Robinhood. But, that nationwide cash infusion would’ve certainly propped up businesses and industries, contributing to the overall state of the economy.
You have a lot of people sitting on a lot more cash than they’re used to.
Like all great economic manias, there is always an underlying truth to the narrative driving things.
"10 years in 90 days". "Five years in five weeks." There have been a lot of different ways people have phrased it (McKinsey calls it "the quickening") but the simple idea is that longer-term digital trends have all rapidly accelerated due to COVID. This means that the Big Techs, the Shopifys, the DataDogs, the Pelotons, and their ilk will all tremendously benefit.
It makes sense. It’s a good story and one we are definitely in the midst of. But should Shopify be trading at 60x price-to-sales? Should Apple be worth $2 trillion? Should Tesla, I mean good lord, trade at whatever TSLA is trading at right now?
The best piece I read addressing this priced-to-perfection market is from James Montier at GMO:
One of my favorite definitions of risk comes from Elroy Dimson of Cambridge University who noted, “Risk means more things can happen than will happen.” I find this helps reinforce the unknowable nature of the future and highlights that history is just a series of discrete branches on a much larger tree. So, when I look at a very sharp recovery like the one we have all just observed, I can’t help but wonder if the world has forgotten about risk. It appears to be as if the U.S. equity market in particular has priced in a truly Panglossian future where everything is for the best in the best of all possible worlds
But what has been pushing that perfect pricing? Well, we have a large number of people who feel that things are improving, sitting on cash, and now we have a good story.
Okay, now I have zero data on this :) But we started writing these newsletters to raise questions, or more accurately, bloviate theories, so here goes. The third element that has had an impact through the duration of the pandemic: Many people, especially among the investor class, are working from home.
There are two parts to this: First, the impact on professional investors.
Traditional finance is one of those industries where WFH was definitely not part of the culture. Face time at offices mattered. Being on the floor mattered. Networking in person mattered. It's definitely among the more conservative of industries in all these regards.
A few weeks ago, I wrote about how the rapid shift to sitting at home and doom-scrolling is quickly and quietly transforming how many of us perceive the world. This can have dangerous outcomes, the clearest ones being QAnon or COVID disinformation. But, it's worth thinking about how that same shift has affected investors, both professional and amateur.
For professional investors, it's worth understanding that while information flow is the lifeblood of performance, it's also somewhat controlled and restricted in an office setting. Lots of websites are blocked at offices; your information universe is limited to sources and channels deemed worthwhile by some compliance officer and knowledge manager working in tandem. With a Bloomberg Terminal you are clearly not going to be missing any major news but there is also some corporate filter keeping you away from dark corners. There's also the socializing filter of not wanting to have coworkers walk by and see you just scrolling Twitter or Facebook if those sites happen to be allowed. Consuming information in the office was a very specific thing, with norms and systems developed over the decades. That specific information flow drove markets.
I've now been seeing finance friends who had long shied away from finance twitter and the blogosphere diving into the deep end. They’re even sending me ZeroHedge links!!!!! This changes the topics followed and the general mindset. It definitely amplifies feelings of FOMO as algorithmic feeds are built to do. Tesla becomes a much more central company of conversation. People start having a much more emotional viewpoint on Gold.
I won't get into whether this is a good or bad thing, but we should recognize the entire world of professional investing went from a highly-regulated information environment to the messy, infinite, and algorithmically curated one the rest of us without a Bloomberg Terminal have long navigated. I definitely don’t believe that a controlled information environment is better (Footnote 1) , but the speed at which people have been asked to adapt makes me think there is some discernible impact on markets. Of course, more people will be paying more attention to Tesla. Of course, more people will be sucked into the dominant market narratives.
So the entire investor class is sitting at home and experiencing information in new ways. They are watching their own bank accounts grow and watching companies fulfill a market narrative as their stock prices simply cannot slow down. Why wouldn’t you crowd in? Even Masa Son is now invested in NFLX, TSLA, AAPL, AMZN, GOOG, MSFT, and SHOP!
Side note: on compliance, I'm especially intrigued to see how WFH changes investor risk behavior. I can’t imagine there are no breakdowns in controls and risk monitoring when everyone leaves the office, but those things we'll have to wait to learn.
And finally, let’s remember the merry band of Robinhood traders.
The smartest thing I read about QAnon was that it’s like an "alternate reality game". It allows you to log on, start "doing the research", going down internet rabbit holes, and then thinking you are unmasking some truth the general population doesn’t know. All the while interacting and competing with thousands of others playing the same game.
It's kind of like the stock market.
Participating in the market always was kind of like some Massive Multiplayer Online Game. It's competitive. There are set rules. There are hundreds of thousands of participants. It straddles the line between the digital and the physical (servers, floor exchanges). You keep a very clear score.
The stock market is really the perfect thing to "do" while sitting at home. It's exciting. There is constant motion. It's fun to talk about. You get really competitive. It can be played on your phone. You can get rich. And now take millions of people with some cash to burn, and it makes a lot more sense why you would see the retail trading boom.
The Dave Portnoy pivot to stocks, love him or hate him, was a brilliant move. With no sports being played, trading could fill a lot of the same needs and the market was still definitely open. It also seems clear why everyone is suddenly trading options. It's just a lot more fun! Buying stock to hold indefinitely really does not get the juices flowing that buying an option expiring in a day and way out of the money does.
There is plenty of debate on whether we can definitively attribute market moves to retail investors, but all these trends in confluence make me feel they are having an impact beyond their simplet trading volume. It’s why Hertz and Kodak are topics even on CNBC. It’s why Tesla, again, is doing what Tesla is doing (I’m just watching in awe). It’s why the entire market itself feels like it’s moving, in the same way, the lead stocks on Robintrack were. All this stuff works in tandem.
I won’t say Davey Day Trader and the Robinhooders are responsible for driving the market. But I do think they now play an outsized role in entering the headspace of hedge fund managers sitting at home, watching the markets go up and up, and flush with cash. Prior to early March, they survived on a steady diet of predictable newsfeeds, bank research, and newspapers, and now suddenly they’ve been unleashed into a world of Twitter and Zerohedge. They are now very online but given no guidebook.
It's probably clear from my past few pieces, I've been thinking a lot about how the WFH nature of the pandemic is changing the way we collectively think and interact with the world. There are very clear and present dangers, but when we look back, there will also be plenty of mundane, comical, odd, or academic second-and-third order effects we come to realize.
There is certainly a whiff of mania in the financial markets right now, but there is also a feeling of confusion. Like many realms of life right now, it’s worth exploring how remote work has changed the markets. Davey Day Trader doesn’t come out of nowhere, right?
Note 1: I want to make sure to clarify that I do not think the closed information environments of financial markets, especially through that of the Bloomberg Terminal network is a positive thing - even writing a post on this subject back in 2013 titled “Tear down that corporate firewall”. A big part of the news startup, Informerly, I ran for nearly four years was trying to inject more blog and unconventional content into corporate newsfeeds! What worries me right now is simply the speed at which people have been thrown into this new world.
Note 2: I still can’t believe that Point72 was apparently using Robintrack data.