Robinhood and the Washington Idiots at Work
Today, especially, the “idiots at work” sign should be flying high over Capitol Hill.
We are referring to the boisterous congressional hearings about who is to blame for the crash of GameStop, the alleged nefarious machinations of the hedge funds and Robinhood and the purportedly innocent victims in mom’s basement who thought call options were the greatest new video game since Grand Theft Auto IV.
But among today’s silly foibles, the incessantly repeated idea that the Reddit Mob was a victim of a “pump and dump” scheme surely takes the cake. If these people were stupid enough to think that the value of a company dying in plain sight (i.e. GME) could go from $400 million to $23 billion in less than six months while its reported finances continued to deteriorate, they deserve to loose every dime of the stimmy money they threw into the Robinhood pot.
Still, the fact that the greedy, dimwitted Reddit Mob got its just desserts isn’t the half of it.
What was really on display Thursday in the recently christened (since January 6th) Holy of Holies of American Democracy is the utter cluelessness on both sides of the political aisle with respect to the financial elephant in the room: Namely, that the Fed has transformed Wall Street into a giant, destructive gambling den, which is now sucking a growing share of the populace into the pursuit of instant get-rich speculations that have no chance of panning out.
Stated differently, the relevant pump and dump scheme is the one being foisted on America by the lunatics at the Fed. You just can’t have stock market capitalizations growing by orders of magnitude faster than national income – especially when you measure from a starting point that was already pushing into the nosebleed section of history.
That has clearly been the case, however, since the pre-crisis peak in Q4 2007. The broadest measure of stock market capitalization available is the Wilshire 5000 Total Market Full Cap index, and its up 250% since October 2007.
By contrast, nominal GDP has gained just 33%. But there is simply no rational or sustainable basis for 13 year growth rates which diverge as follows:
Per Annum Change, Q4 2007 To 2021
- Wilshire 5000: 10.0%;
- Nominal GDP: 2.9%
Needless to say, this is where the gambling disease comes from. If GDP is a proxy for average annual gains from ordinary labor and business enterprise on main street, then the prospect of getting more than 3X those gains from frequenting the Wall Street casino becomes downright compelling; and that’s especially the case in the final blow-off stage of the bubble, when the rise in stock values goes nearly vertical, as they have since the March 2020 interim low depicted in the chart below (purple line).
Of course, the skunk in the woodpile is that sooner or latter market capitalizations can’t outrun the growth of income for a reason that is so profound that it has been completely obfuscated in the heat of the current mania. To wit, stock market capitalizations are ultimately nothing more than the present value of future cash (income) flows, even if from time to time exuberant traders and leveraged speculators – fueled by the central bank printing presses – manage to uncouple them from their main street anchors.
Wilshire 5000 Index Versus Nominal GDP, 2007-2021
Then again, you can understand how greed among the Robinhooders fostered the stupidity embedded in the GameStop and short-squeeze contretemps of a few weeks back.
After all, these newbie graduates from the Sony PlayStation world were participating in their first rodeo, but that excuse doesn’t wash for a minute when it comes to the men, women and theys domiciled in the Eccles Building. These cats keep insisting there is no bubble, but what the hell is this?
The current ratio of stock market capitalization to national income (GDP) is not only at the highest point in history and even above the insanity of the 1999-2000 dotcom bubble, but is 3X or more the level which prevailed before 1990.
That is to say, during the era in which the US economy grew at 3% per annum, real median household incomes rose steadily and honest price discovery had not yet been euthanized
Article from LewRockwell