Malt Liquidity 57

Rates and You

There exists a model of a stock in which the share price is reflective of the amount of future cash flow the stock is expected to bring you as you hold it. While the shorter term gyrations reflect the immediate supply and demand for the stock, over time, we generally have no better reason as to why shares should trade up or down in the long run.

However, as I’ve written before, ZIRP changed the calculus. We don’t want dollars right now because there’s nothing to do with them other than consume or put them back in our investments, both of which are being done to extreme levels (pokemon cards or Tesla stock anyone?). The value of our investments is no longer measured in how many future dollars they bring us, but rather how much immediate entertainment value (Gamestop, AMC) and clout (NFTs) they bring us.

Institutionally, this equation remains pretty much the same, though fund managers are incentivized to never stick their neck out in the way a celebrity buying a Bored Ape would. Any non-allocated dollar is a failure of the manager to deploy their capital. They don’t want dollars because it’s a sign they haven’t done their job. So instead of buying GME, they went out and bought stocks in the ARKK basket. If short term dollars are worthless, you might as well bet on the moonshot long term dollars that an unprofitable growth company promises you in 2040.

I don’t buy the current narrative that “rates are going up so people are selling growth”. It’s too linear. Certainly there is some of this, but rate rises are so telegraphed at this point that the question remains that if you’ve already allocated to growth stocks and bet on 2040, so to speak, does a half percentage point rate increase matter all that much? Something seems fundamentally flawed with our fundamental model if we assume that there’s a mad dash for dollars just because in 2 years the FFR will be 2%.

What if we trade (both on a retail and professional level) because a pervasive sense of boredom has gripped a large chunk of us throughout the day while we sit at our computers? Stocks, crypto, and other speculative mediums provide some level of constant simulation - they move up and down and we make or lose money. It’s like a highly complex hand of blackjack constantly running in the background. It’s fun while you’re winning, and not so fun when you’re not.

Clearly, when things are going down, things are less fun. Perhaps stock prices are just reflecting the fact that there are better things to do with your money than speculate on numbers, and that’s why markets seem to be deflating in all the high growth areas at once. News may call it a “rotation”, but I don’t know if a few Scary Jerry’s can create such a stampede for the exits.

As I’ve written about before, ARKK is my favorite gauge for retail sentiment given that its holdings overlap heavily with “Robinhood stocks”, stocks primarily held by retail traders because they move around a lot and go up really fast. With ARKK finally death-spiraling downwards as none of its holdings can catch a bid, one wonders if retail has just

a) decided crypto is more fun

b) run out of powder to buy dips with

or c) decided to spend money on something with more tangible value to them.

As rates rise and markets get more choppy, more and more people should pick one of a, b, or c, and I’m skeptical that high growth will see any sort of pump through the telegraphed hikes simply due to lack of interest in the shares in the short term. When people get bored, people move on to new things, I guess.