Last Year’s Language

Happy New Year!

Last year’s words belong to last year’s language and next year’s words await another voice.

TS Eliot said that. If you need a break from the daily tempest, read my favorite of his, The Love Song of J Alfred Prufrock.

So often what is said of the machinery of the stock market reminds me of a line from it.  In a minute there is time for decisions and revisions which a minute will reverse.

Against that poetic backdrop, let’s review the math of the stock market and look ahead at what it may this time bring.

Stocks were up. Simple math.  Like the $7.4 trillion now on the Federal Reserve’s balance sheet, representing the spread between what we had before and what we next needed. The market valued that intervention more than real production.

Ponder that. Read some TS Eliot.  If you’ve wondered what Modern Monetary Theory is, this is it.  If economic activity decreases, the government manufactures offsetting money to get the collective back to level.

So last year’s language says we can survive a long-term economic idling. But next year’s words subsequently speak of the ebbing value of money and work and time.  Repeated, it will lead to societal collapse because we cannot pay out money without getting something – stocked shelves, harvested crops, cut hair, worked biceps – in return.

Thomas Jefferson said in a 1790 letter to William Carmichael, “The right to use a thing comprehends a right to the means necessary to its use, and without which it would be useless.”

Next year’s words come from a past voice. If governments insist they can shutter the economy, people lose the most foundational right of all: Independent survival through freedom and initiative.  It transcends government and squats at the base of Maslow’s Hierarchy beside food, clothing and shelter, which shouldn’t depend on another’s edict.

The Hegelian Dialectic – the tension of competing ideas – has become stretched cultural rawhide. Yet the stock market merrily courted 50 million online brokerage accounts and a sort of Bacchanal befitting an F Scott Fitzgerald novel.  Party time!

Let’s go, however, to the math.  The graph here compares a number of the core ModernIR quantitative measures of market behavior central to our intellectual property, Market Structure Analytics for stocks comprising the S&P 500.

By the end of 2020, Active Investment – classic stock-picking, the money motivated by long-term financial performance – was down almost 32% year-over-year as a share of trading volume and totaled less than 10% of the total, a historical low.

What prices the market is what transacts in it.  Not who owns the stocks.  It’s the same as a neighborhood. What prices it isn’t who lives there but what’s paid for what sells.

Even Passive Investment was down about 14% year-over-year.  The big surge driving the stock market to all-time highs as the whole globe dove under gargantuan piles of face masks was Fast Trading and Risk Mgmt.  The former is speculation. The latter is using derivatives in place of stocks.  These behaviors are dominated by firms like Citadel Securities, which buys a bulk of all retail trades from those online accounts, and Wolverine Trading, a low-latency firm focused on automating trade-hedges.

It’s not Warren Buffett and Boston-area portfolio managers.  That was yesterday’s language.

It’s worth noting that volatility was up 44%. Short volume at 43% of all trading volume was almost unchanged from the end of 2019.

What did you think drove stocks in 2020? If you watched CNBC like we all do in investor-relations and investing, it was the work-from-home trade, the future of electric vehicles, the horse race in Covid-19 vaccines.

People and machines speculated on those, yes. But you can’t call 2020 an investment market.  It was one of the great speculative soirees in human history. A romp through Dutch tulips (I’ll let you hunt that one down).

So, what’s it mean for 2021?   I’m reminded of another snippet of Thomas Jefferson’s, who observed via letter,  rather than Facebook post, to William Barry, later Andrew Jackson’s Postmaster General, that, paraphrasing, an extensive, corrupt, and indifferent regime would be met by reformation or revolution, the one or the other.

The stock market’s behaviors are extensive and indifferent and have corrupted its purpose.  What follows if people care is reform or revolt.  Both are opportunities, not obstacles.

The revolutionary opportunity for companies and investors is to see the market just as we presented it here. And there’s reform coming to rules and data.  More on that as 2021 unfolds.

Last year’s market language bred 2021 with generational speculative risk.  That doesn’t mean we’ll be measuring our lives out with coffee spoons (see TS Eliot). We have sure heaped a load on ourselves, though, as a new decade begins.

We’re not worried. We’re watchful. Now, if you’ll excuse me, I’ve got some things to read.