Winter is coming.
But autumn is mighty fine this year in the Rockies, as my weekend photo from Yampa Street in Steamboat Springs shows.
Winter follows fall and summer. Other things are less predictable, such as economic outcomes and if your Analyst Day will do what you hope (read from last week).
Here, two of my favorite things – monetary policy, market structure – dovetail.
If you want to clear the room at a cocktail party, start talking about either one. In fact, if you’re trapped talking to somebody you’d rather not, wanting a way out, say, “What’s your view of the fiat-currency construct?” or “What do you think of Payment for Order Flow?”
I’ve told you before about the daily noon ET CNBC segment Karen calls the “What Do You Think of THIS Stock?” show. Guests yammer about stocks.
Some weeks ago the host said, “What do you think of Payment for Order Flow?”
Silence. Some throat-clearing.
Nobody understands it! These are market professionals. Decades of experience. They don’t know how it works.
Not our topic. But so I don’t leave you hanging, PFOF is as usual with the stock market an obfuscating way to describe something simple. Retail brokers sell a product called people’s stock trades so those people can trade stocks for free.
This is why you’re brow-beaten to use limit orders at your online brokerage. Don’t you dare put in a market order! Dangerous! Not true. Fast Traders, firms wanting to own nothing by day’s end and driving 53% of market volume, eschew limit orders.
They know how the market works. Brokers want you to use limit orders because those get sold. Most market orders don’t.
Pfizer wants everybody to be vaccinated and retail brokers want every trade to be a limit order, because both get paid. Same thing, no difference.
Now, back to the point. If you tell your corporate story to a thousand investors, why doesn’t your price go up? Similarly, why can’t we just print, like, ten trillion dollars and hand it out on the street corner and make the economy boom?
Simple. Goods and services require two things: people and money. Labor and capital. Hand out money and nobody wants a job. Labor becomes scarce and expensive.
And if you hand out money, you’re devaluing the currency. Money doesn’t go as far as it used to. You need more to make the same stuff.
The irony is that handing out money destroys the economy. You can’t make stuff, deliver it, ship it, pack it, load it, unload it, move it – and finally you can’t even buy it because you can’t afford it.
The best thing we could do for the economy is put everything on sale. Not drive prices up and evacuate products from shelves. But that requires the OPPOSITE action so don’t expect it.
What does market structure have in common with monetary policy?
Too many public companies think you just tell the story to more investors and the stock price goes up. We’re executing on the business plan. The trouble is too few know.
Wrong. That’s a controllable, sure. But it’s not the way the market works. AMC Theaters is a value story. It was a herculean growth stock in early 2021 and along with Gamestop powered the Russell 2000 Value Index to crushing returns.
I was looking at data for a large-cap value stock yesterday. The Exchange Traded Fund with the biggest exposure is a momentum growth ETF. It’s humorous to me reading the company’s capital-allocation strategy – balance-sheet flexibility with a focus on returning capital to shareholders – and looking at the 211 ETFs that own it. It’s even in 2x leveraged bull ETFs (well, the call-options are, anyway).
Your story is a factor. But vastly outpacing it are your CHARACTERISTICS and the kind of money creating supply, and demand. If you trade $1,500 at a time, and AMZN trades $65,000 at a time, which thing will Blackrock own, and which thing will get traded and arbitraged against options and futures?
Your CFO needs to know that, investor-relations people. And we have that data.
That large-cap I mentioned? We overlaid patterns of Active and Passive money. Active money figured out by May 2021 that this value company was a growth stock and chased it. They were closet indexers, the Active money. PASSIVE patterns dwarf them.
And when Passive money stopped in September, the stock dropped like a rock.
It wasn’t story. It was supply and demand.
Same with the economy. Flood it with cash, and it’s hard to get that cat back in the bag once you’ve let it out. You cannot reverse easy monetary policy without harsh consequences, and you can’t shift from momentum to value without deflation.
The good news is when you understand what’s actually going on, you can manage the controllables and measure the non-controllables. Both matter. Ask us, and we’ll show you.