This is a big shift from what I usually write about, and for those reading I hope that its okay. As the last post mentioned, I really want to get away from the idea of only writing things that scale or try to position myself as some sort of seasoned professional. Instead I want to simply only write as me. And that means pretty scattered thoughts. It’ll still revolve around product, around strategy, and around technology. But it might have some things about finance, education, or even random experiments I’m partaking in my own life or mind. Things that align with my own specific background and experiences, but not necessarily “professional” or business/technology related.
As always, thank you all for reading.
As the title gives away, the topic I want to talk about today is money. It’s about stocks. Evaluations. What money really means as a symbol and to an individual.
Specifically I want to talk about the stock market in recent years and its meteoric rise. We really can’t go even hours nowadays without seeing some article or reporter talk about the market breaking all time highs. This is almost always followed by gloomy predictions that we can’t maintain these groundbreaking evaluations forever. That they’re not sustainable and break our common sense in terms of evaluation metrics. That the collapse is near, things are out of control, and it’s just a matter of time.
And for the most part, this has been taken as gospel. Even though the market gets higher and higher almost every single day, there’s a lot of people— myself included— who agreed with these articles. “It has to come down. It just doesn’t make sense.” And that might be one of the reasons why more than ever, there’s a whole lot of money and people still sitting on the sidelines.
Even with the current CoronaVirus, it’s still around all time highs. It’s been almost a month since what some have built up to be the next pandemic, and yet outside of the tumble of a few days, we’re dancing but a couple percents from the top. Isn’t that ridiculous? If stocks are just shares of companies, unless the companies have become more valuable— which they especially wouldn’t in a pandemic because of suffering sales— they shouldn’t go up in value. Isn’t that just common sense?
But what if that wasn’t the case?
What if it was this fundamental understanding that was the mistake itself? What if we misunderstood the very basics of even what money is? And that the very way that we’re measuring stocks (their worth/exchange in currency) is much more complex than that statement portrays?
We know money as the simple store and representation of value used for exchange. We pay for a bag of chips with money. Chips have value. Our paper (or digital bits) have value. We trade them.
But money is not a singular entity. Instead, money is then abstracted further into multiple forms of currency. It’s an overarching group, where currencies in this case represent forms of money. It’s “money for money”— if that makes sense. And that means that though all of our currencies are stores of value, they themselves flucuate in relation with each other because they differ in supply and trust.
We already know this in terms of exchange rates. But when we combine that with inflation, especially different rates of inflation, things get a lot more squirrelly.
And the way that this ties back to stocks, or rather any asset at all, is to actually get away with the learned focus on currency— and back on the equation of money (or value, if that makes it less confusing). Because of how we use it in our everyday lives, we see currency as a very unique store of value because it is what we use to exchange most often and most directly. To the layman, their domestic currency is an anchor— a stable point in which we base our fundamental unit of value on. But ask any financial or wealth advisor and they’ll simply mark it just as another number in the “asset” column probably with stocks and real estate. Or ask Zimbabwe during hyperinflation. Currency is not money. Currency is just a store of value that fulfills the function of money.
Which means that stocks are currency. Paintings (which the rich use to store value) are currency. Buildings are currency. Even the things we trade currency for, like milk and eggs, they are also currency. Currency that rapidly depreciates as time goes by, but currency nonetheless. In other words: a dollar is a dollar, until it isn’t. And when it isn’t enough, we need something else to represent a dollar.
And when we get to this point, that’s when it starts making sense. Stocks, paintings, and buildings are fixed to a certain extent. But monetary currency is not. That’s why we have inflation, and in a decade of global quantitative easing— it’s something that exploded in supply.
But does that really answer it? Inflation has always existed, and this relationship has always existed as well. We know that a home could have sold for $100 back in the 1800s but may be $1,000,000 now. Is it really sufficient to pin it as the reason for the spike in the last few years?
I think so. Because the reason is the deadly combination of ZIRP (Zero Interest Rate Policy) and massive QE (Quantative Easing). This one-two punch has basically gutted the traditional trust in a government and its currencies. By giving nothing for saving currency in its currency form, and instead even punishing it by actively engaging in an activity that devalues it— governments worldwide are essentially forcing people to reject currency.
Like milk approaching its expiration date, currency by itself has no escape (a healthy interest rate) from losing its own value.
So the people who know avoid it like the plague. Instead they are looking for ways to keep their value/wealth constant. They might even massively leverage themselves because what used to be a danger that grew larger (a debt payment with increasing costs) is now its very opposite… a debt payment that gets cheaper with time…
If i can borrow $100 to spend $100 worth today, and pay $110 a year from now when $110 is worth last year’s $80, I’d be a fool not to do it. It’s literally free money.
The second wrinkle in this is actually the fact that our world is intrinsically and almost irrevocably connected more than ever. The fact that almost every country is using a ZIRP and QE, means that everyone everywhere is chasing assets because they’re looking to maintain their wealth. It’s essentially a loser’s game of chicken because noone can afford not to.
If everyone is pursuing QE and ZIRP, then the one person who isn’t— the one person who has a stable currency and a positive interest rate no matter how small— will see their assets swallowed by international demand. Because their assets, land, stock, or currency, are the most stable stores of value. Sound familar Toronto real estate and US equities?
And so everything is gold. Because everyone is afraid and has no trust in currencies.
We all lose with this. And unfortunately, its the middle and lower socioeconomic class who lose the most (as always). They are the ones least able to diversify their wealth, as they are the ones who— unable to scrounge up the funds to purchase assets or lacking the knowledge to— have the majority of their wealth in currency.
Combined with policymakers’ hesitance towards wage growth (claiming that it raises inflation even though they actively engage in QE and low interest rates which does it much more directly…), I have a strong supicion that this is the real reason that real wealth and savings amongst median households is lower than ever. How even in an era of record low unemployment we get statistics where 63% of households can’t even muster up $500 for a rainy day.
This system seems messed up. And as someone who loves the free market— I’d call it a failure caused by broken and flawed tools rather than an inherent flaw in capitalism. This is artificial, but if the only way to fix it is a gut-wrenching crash, then I’m not sure we can live to stomach it.
Perhaps this is the natural end point of consumerism. Governments push ZIRP and QE to force spending— because it’s better to spend your $100 to get $100 worth of stuff now than save it and only be able to use it as $75 later. It makes for great GDP numbers, creates demand, and ensures jobs. But it actively creates a widening wealth gap and punishes people who possess the virtues we all spout and pretend to extol: frugality, self-sufficiency, and preparedness.
We’ve gone too far. Governments wanted us to spend, so they made currency poisonous to hold. And yet most of us can’t hold enough poison to get into the things that aren’t.