Moontower #92

Friends,

$10 million is the new million.

Tech stocks, BTC, whatever you want to call TSLA. Real estate booms in many pockets of the US, second homes gobbled up with all cash offers. I have never seen so many people I personally know make so much money in their investment accounts. I’m not hallucinating. Bloomberg noticed too: The Rich Are Minting Money In The Pandemic Like Never Before (Link).

Meanwhile unemployment has skyrocketed, brick and mortar is wrecked, and ICU bed capacity is strained across the country.

Witnessing the polarity in outcomes has been awkward at best. Consider JP Morgan’s Jamie Dimon comment on the bank’s 2020 performance:

“JPMorgan Chase reported strong results in the fourth quarter of 2020, concluding a challenging year where we generated record revenue”

In Friday’s Money Stuff column, Matt Levine comments:

It is hard to know what to do with “a challenging year where we generated record revenue.” You can take it as sort of a boast: This year was hard, but we did better than ever, because we are very good at our jobs. You can take it as a sigh of relief: Boy are we glad 2020 is over, also wow look how rich we are. You can take it as an acknowledgment that, in the midst of a pandemic, it’s a little gauche for a big bank to make record profits: We recognize how hard this year was for everyone, and we will collect our enormous winnings in a solemn and dignified fashion.

You can substitute “tech and finance workers” for JP Morgan and you won’t lose the script. 2020 was a financial party. The dissonance is more than awkward. It’s unsettling.

Morgan Housel describes the dichotomy in a new post Two Worlds: So Much Prosperity, So Much Skepticism. (Link)

First the plot…

• Last year was the best year for income in American history. By far. It’s not even close. A lot of the surge came from stimulus payments and unemployment benefits. But private wages and salaries are back at a new high. So are average hourly earnings. And weekly earnings. 
• These are not small numbers: Americans made $1 trillion more from March to November of 2020 than they did from March to November of 2019.
• Millions of Americans used it to pay off debt. There is no precedent for [credit card] balances falling more than 10% in one year. But it just happened.
• Add it all up, and total monthly debt payments as a share of income are now the lowest they’ve been on record, going back more than 40 years.
• The result is that the amount of cash households have in the bank has absolutely exploded. I don’t even know if that word does justice. American households have $1 trillion more in checking accounts today than they did a year ago. For perspective, they held $800 billion in checking accounts a year ago. So it’s more than doubled.
• In many ways the American consumer is in the best financial shape in modern history, with minimal debt burdens and eager to spend their record savings.

then the twist…

• The distribution of that prosperity has never been more extreme…There are nine million fewer jobs today than a year ago, a decline of around 6%. But for those earning more than $28 per hour, the job market has fully recovered, like the recession never happened. For those earning less than $16 per hour, one-quarter of the jobs are still gone, which is on par with the 1930s.
• Wealthy people didn’t go on vacations in 2020. So their spending fell, and their savings went up. And the employees who would have served them on that vacation lost their jobs, only kept above water by enhanced unemployment benefits.
• There are so many other skews…[for example] there are two distinct groups: can you help your kids learn from home, or not?

The post was great context for what I’ve already been wondering…

What is this going to do to us?

One of my growing beliefs was the impact of the 2008 financial crisis might be underrated. Consider:

• The BTC origin story was a response to mistrust of centralized banking.
• The lack of political consensus to support income via fiscal policy and relying heavily on monetary stimulus was a deeply regressive policy in hindsight.
• The entrenching of “too big to fail” as “systematically important banks”, and the wider favoritism of big business over small.
• Occupy Wall Street, the rise of populism, and at least a feasible line to the election of Trump as an outsider candidate.

In other words, lots of people in this country were and are pissed. Try explaining to any normal person why the “vampire squid” needed to be made whole on the CDS it bought from AIG. While there was lots of blame to go around, many Americans were just rubberneckers who got bogged down in a traffic jam. By the time the accident cleared, the fast lane was restricted to those with investments and assets. Everyone else, stay to the right please.

If the reaction to 2008 exacerbated inequality, 2020 might have entrenched it. People who were merely rich may find themselves generationally rich. Upper middle class people may find themselves wondering “why work?”. Why fill cavities for $150 an hour when I can just just push a green button on Coinbase? I hope I’m exaggerating.

Some will argue that the inequality shouldn’t matter if everyone is better off in absolute terms. I’m not sure.

Neither is Housel:

Technology has opened a window into how other people live.

To understand why so many people are so angry you have to realize that half the country gained insight into the other half at the very moment those halves were as different economically as they’ve ever been.

Think about this:

• People gauge their well-being relative to those around them.
• Historically, the people around you were relatively similar to you. They lived in the same city, went to the same schools, worked at the same factories, and earned similar wages.
• The internet and social media increased the number of people “around you” exponentially.
• It happened at the same time the economic distance between people ballooned.

Inequality has existed forever. Huge inequality, too. But people weren’t nearly as exposed to other peoples’ lives as they are in the digital era.

When the book How The Other Half Lives came out in the late 1800s – a book depicting squalor and poverty of tenement living – the New York Times wrote: “One-half the world never knows how the other half lives.”

Benedict Evans nailed this years ago when he said, “The more the Internet exposes people to new points of view, the angrier people get that different views exist.”

And what have we done for the last 10 months? Covid has created vastly different points of view, and it’s given people lots of time to sit on the internet.

The extreme degree of accumulating wealth is like a loan secured by harmony. Have we piled too much debt on our social fabric without providing more collateral? These days, solidarity feels under threat. Such imbalances are not helping. Will they correct by accident or intentionally? We will have to settle for hindsight to find out.

The Money Angle

The below links are all related.

• Lessons from the tech bubble (thread)
  @corry_wang

  Last year, I spent my winter holiday reading hundreds of pages of equity research from the 1999/2000 era, to try to understand what it was like investing during the bubble…

  This thread is a humble reminder that the collapse of the tech bubble in 2000 wasn’t really a surprise. This reminds me of funds using derivatives to bet against the housing bubble leading up to 2008. Many were too early and found themselves squeezed by bank counterparties for more collateral until they had to puke their positions to stronger hands. It would be like filling in the right Powerball numbers for the wrong week.

  Right idea x wrong timing = Wrong

• What happened if you Invested in all the pets.coms (thread)
  @econompic

  If you purchased $1 of all 1997 IPOs on 12/31/97, $1 of all 1998 IPOs on 12/31/98, and $1 of all 1999 IPOs on 12/31/99 at their respective market weights on those days (then did nothing), how much is that $3 worth as of 9/30/2020? *$3 invested in the Russell 3000 is worth ~$14.

  Jake’s thread dives into a complete answer. So try to answer before clicking the link.

  In case you care, my approach to the question:

  I started with some assumptions and estimates. For example, how many IPOs happened in each vintage (I guessed 100), what was a typical IPO market cap (I guessed $1B), and knowing that AMZN was a 1997 vintage I made the super conservative assumption that the other presumed IPOs (100 per vintage) all went to zero. So if AMZN IPO’d at $1B it’s up 1560x which means your portfolio, even with 299/300 companies being zeros, went up 5x or about 8% CAGR since the late 90s. I guessed a better survival base rate would be 10% of the IPOs, which meant realistically there are 30 surviving companies. If they were an order of magnitude less successful than AMZN they would have returned 150x each bringing the total “IPO portfolio” closer to 20x. So I took the over. I’d give myself a C.

  The poll prompted a lot of questions for me. Like what is the correlation between survival, returns, and market cap at IPO? For example, how much more likely is a top quintile market cap IPO to survive? Has the relationship meaningfully changed over time? Do companies’ ability to stay private for longer change the return prospects of IPOs long term?

• Gorilla Game Investing (summary)

  This book is a framework for investing when a disruptive technology has been identified but the competition is wide open. Imagine buying all the companies and then selling the losers as they go down and re-balancing into the winners. This can make sense if the industry has winner-take-all dynamics. To me the strategy looks like you are trying to construct a long option on the company that will own the TAM. That re-balance strategy even looks like negative gamma…buying the rallying stock and selling the losers.

A giant realization everyone should appreciate from all these links…most companies go to zero. Single stocks have positive skews. Indices are just baskets of stocks with a rebalancing strategy. Indices have a negative skew. I try not to miss chances to reinforce your intuition of portfolio theory.

Careful, you might even start to wonder: does “equity risk premium” even exist?

Last Call

• DALL-E (openai.com)

  It’s like GPT-3 for images. This technology prompts you for an image and a text description then generates AI-powered images. I’ve been messing with new Moontower logos, it would be useful to have access to that tool.

• Jerry Seinfeld on Tim Ferris (thread)

  I shared my takeaways.

• Meme’ing Fred Armisen’s “jail” skit (thread)

  Timely discovery after I first noticed that Parks and Rec skit last week.

From my actual life