The Breakdown - S&P 5 vs. S&P 500: The Real Story of the Stock Market Recovery

Episode Date: August 20, 2020

Today, NLW debuts a new format: “10 Takes in 10(ish) Minutes.”  In this analysis, he looks at 10 takes surrounding the S&P 500’s return to positive territory on the year, including: Great American comeback Market disconnect and widening inequality  Don’t fight the Fed To the Stoolies go the spoils Stock splits and SPACs It’s Tech vs. everything else Cantillon insiders FTW A new era of global liquidity? You’d have done better with gold You’d have done a lot a lot better with bitcoin 

This is the part of the market recovery narrative that is on the one hand the most obvious and on the other hand, the most ignored by media. This is not a story of S&P 500 success. This is a story of S&P 5 success. That's the deal. That's the take. That's the whole thing. It is the S&P 5. This is a tech-driven rally. And we can have a conversation about whether that's deserved and how much this is showing just how much of our lives are moving online, right? Maybe this isn't a bad signal or rather a non-indicative signal. Maybe this is an indication of just how important these companies are compared to everything else. Maybe this is correct. However, we still can't ignore the fact that the other 495 companies on the S&P 500 are simply not performing. This is not a story

of stock market success. It's a story of technology consolidation. Welcome back to the breakdown with me and lw. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, BitStamp, and nexo.io, and produced and distributed by CoinDes. What's going on, guys? It is Wednesday, August 19th, and today we are discussing just how real is this stock market recovery. Now, this is one of those episodes where the whole episode feels like the brief in some way. In fact, I'm actually debuting a experimental format today. I'm calling it roughly 10 takes in 10 minutes, and if you've listened to this show, you know there's no way

I'll keep it to 10 minutes, but I'm going to try, or at least I'm going to try to be a little bit quicker. So what I'm going to do is I'm going to go through 10 different takes or interpretations of the S&P 500, which closed at a record high yesterday. It had wiped out the losses from the coronavirus shutdowns. And so obviously there is a lot of narrative making and meaning claiming around this event, and I thought it'd be fun to quick hit go through a bunch of different takes on what it actually means. So this is 10 takes in 10 minutes on how real the S&P 500 or stock market recovery is. Let's go. Take number one, this is the Bulls Proven Right.

This is the V-shaped recovery that we were promised narrative. This one is best embodied in a tweet from Vice President Mike Pence who wrote, S&P 500 closed at a record high today, fully wiping out its losses from the coronavirus. This is the great American comeback. So obviously this interpretation says, look, we told you it was going to be a V-shaped recovery, we told you that as painful as this was, it was a short-term pain, and that our markets are the greatest in the world and they're going to come soaring back. This is the great American comeback.

And there are certainly lots and lots of people who have made money going on this narrative, and frankly, a lot of people who have missed out on a lot of money by trying to fight this narrative. So this is narrative number one, this V-shaped recovery we were promised. Take number two is an almost direct reaction to that take from the vice president, and it's really about the idea of just how disconnected markets are from the real economy and why we're seeing widening inequality. This take was summed up by Chai Girl, aka former breakdown guest Tracy Schuquhart,

who wrote, I mean no disrespect. But any politician claiming the stock market, is indicative of Main Street is delusional. When someone pushed her on this and said, Why are you mad? She said, I have repeatedly said this market is bullish. Am I mad that politicians have decided that the stock market is an indicator of their success? Yes, why? It's creating great economic divide and the cities I love are burning. This is an argument that we've talked about a lot on this show that this reverence for the stock market as the only scorecard for the economy, what it does is it distracts politicians from the economic plate of people who can't

afford to participate in the stock market at all. It further cements the role of asset price inflation as a force for driving a wedge in America rather than leading everyone to prosperity. I'm not at all getting into the continued jobless claims numbers or anything like that on this show, but I think it's an important take to pair with this idea of a, quote, great American comeback. Take number three was expressed by so many people in so many different ways that all I need to do is touch on it and you're going to get the idea. It is the triumph of don't fight the Fed. This mantra of don't fight the Fed, its predecessor in the Fed put, this has taken on an entirely new level this year. You've seen it in the Jerome Powell memes. You've seen it on Wall Street Betts. You've seen it

with Davey Daytrader global, spoiler alert, that one's coming right up. Don't fight the Fed, the idea that central banks will do whatever it takes to keep stock prices high has become one of the dominant narratives overall, and to those who believe in it, or to those who are just trying to use it for self-fulfilling prophecy, this day yesterday was the greatest triumph of it. Take number four, I'm calling to the Stoolies go the spoils, and this is the natural extension of Don't Fight the Fed in the internet meme era. Now, while the politicians may have been pushing the idea of a V-shaped recovery,

no group has been more willing to engage in meme warfare to actually make it so than the merry band of traders at Davy Day Trader Global and at Wall Street Betts and at the Robin Hood generation, this group of people made a bet that when everyone from Buffett to see, CNBC turned bearish, that they could force of will their way back to the market working. In doing so, they created a narrative that those same mainstream media outlets were able to parrot, which was the process by which this turned into self-fulfilling prophecy. As soon as you started to see articles about how Dave Portnoy was outperforming big hedge fund managers, you better believe a lot of people got over the career fear of being too bullish and instead got into the career

fear of being too bearish. As a witness of an absolute apex of this idea, just a week ago, TMZ published an article called Day Trading the Stock Market is easier than you think. So I'm not commenting on how this ends, but I will say you can't look at the S&P 500 recovery and not have one take at least that goes right back to DDTG. What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've just waived the 3.5% credit card fee for all crypto purchases. What's more? With crypto.com's MCO Visa card, you can get up to 10% back on things like food and grocery shopping.

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NXO also lets you earn up to 10% annually on your fiat and digital assets. What's more, interest is paid out daily, and you can add or withdraw funds at any time. Get started at nexo.io. Another take on the S&P 500 has to do with stock splits and SPACs. So SPACs or special purpose acquisition companies are something we talked about extensively a couple weeks ago. I did a primer episode.

But basically the idea is this is a different way to go public that gets around the traditional IPO process. And it really fits with the Davey Day Trader group because in some ways it's hugely or exactly entirely narrative based. You have a promoter, for example, Chamath, Palahapitia, who's a person. says, I am going to take a company in X sector public. Here is the public company vehicle that I'm going to use, buy its shares for $10 a pop, and they will turn into the shares of this new company. That's the idea in brief. And SPACs have attributed or accounted for a huge portion of IPOs this

year. So it's a vehicle that's really gotten into the energy in that raw kind of narrative energy of the day trader set. Stock splits are a newer trend, at least in this 2020 iteration, that are getting this group excited as well. Both Apple and Tesla have announced stock splits and the street is saying that this may be the beginning of a trend. The normal FinTwit crowd has been kind of making fun of this because effectively there's a gambit going on that stock splits make the stock more appealing to retail traders, even in the world of fractional investing, because it makes it seem like you can own more. This is an entirely psychological phenomenon, of course. Stock splits don't actually impact value, right? They are the same ownership you come away with. It's just in a

different number of units. But that doesn't necessarily matter. And frankly, anyone who's in Bitcoin, who has had one of their friends or families say, well, I'm not interested in Bitcoin because I can't get a whole one. I'd rather have one of these other coins where I can spend $100 and get $100 million of them. We know that this psychology is real. So people are making fun of it, but it's a real thing. Ben Carson wrote, finance textbooks, stock splits don't impact the value of a company in any way. Tesla investors, we disagree. Ramp Capital, meanwhile, said fake source. Federal Reserve plans to add stock splits as a tool in lieu of rate cuts to battle broad market asset declines.

The point here is that stock splits should not be making the value of those stocks go up. But they just might be because of this force that we're seeing of these retail traders and just how much psychology matters right now. Take number six, it's tech and everything else. A New York Times article today was titled Big Tech's domination of business reaches new heights. And this is something we've talked about a lot, but I'm just going to read a quick passage from that article. The stocks of Apple, Amazon, Alphabet, Microsoft, and Facebook, the five largest publicly traded companies in America rose 37% in the first seven months this year, while all other stocks in the S&P 500 fell a combined 6%. Those five companies now constitute 20% of the stock market's total worth,

a level not seen for a single industry in at least 70 years. Apple stock market value, the highest of the bunch, reached $2 trillion on Wednesday, double what it was just 21-week ago. This is the part of the market recovery narrative that is on the one hand the most obvious and on the other hand the most ignored by media. This is not a story of S&P 500 success. This is a story of S&P 5 success. That's the deal. That's the take. That's the whole thing. It is the S&P 5. This is a tech-driven rally. And we can have a conversation about whether that's deserved and how much this is showing just how much of our lives are moving online. Maybe this isn't a bad signal, or rather a non-indicative signal, maybe this is an indication of just how important

these companies are compared to everything else. Maybe this is correct. However, we still can't ignore the fact that the other 495 companies on the S&P 500 are simply not performing. This is not a story of stock market success. It's a story of technology consolidation. Take number seven, the Cantillon Insiders for the win. So yesterday I tweeted out, what's the new stock market narrative, because I'm pretty sure, according to mainstream media, that all the bears are dead and this is completely real. Preston Pish responded and said this. He wrote, If you're rich and the first to receive freshly printed money, the last thing you want to hold is something with counterparty risk. Therefore, equities with intangible assets that haven't been

impaired fit the bill nicely. So this gets at the idea that equities are a natural beneficiary of printed money of money printer go burr. And the point here is that when money, when liquidity flows into the system, it doesn't make it down to people's kind of clothing and food purchases. It stays in financial assets. It allows people to move money into the markets. And in some ways, that's fine. Part of the Fed's job is to make sure that there's enough liquidity in the market to make things move, to allow people to keep spending, keep loaning, etc. The problem is when that money is theoretically supposed to do other things, like help people with employment, it takes a very, very long time to actually make it down to them, which goes back to Chai Girls part from the

very beginning of this about how this ultimately actually exacerbates wealth inequality. So I guess in retrospect, maybe I would be able to combine these two takes, but I just think that it's a really important point to remind people of the victory for the Cantalon Insiders, as many like Max Kaiser have so aptly put them. There is also a non-cynical take that I want to mention. This is take number eight, which suggests that we're heading into a new era of global liquidity. I think the main voice promoting this that I've seen has been Dan Tapiero.

He tweeted a couple weeks ago, when it rains, it pours. Jim Kramer saying, Animal Spirits like he has never seen them, will be much bigger than tech boom of 99. This is the global macro liquidity boom of the 2020s. Now, Dan is big on gold and Dan is very big on Bitcoin. So what is he talking about? Well, in his estimation, this flood of liquidity into the system, this negative real interest rate world that we live in,

one of the major beneficiaries is equity. He sees just this as the dominant paradigm for the coming decade. He thinks that central banks are going to have their hands forced and we're going to have more and more of that. And in the context, even as gold and Bitcoin increase because of their hedging of currency risk, equities will also benefit as well. In this new era of global liquidity, Dan has frequently tweeted the idea that we need to shift our mental frameworks and not look at somehow as things like Bitcoin and Gold as anti-correlated to equities. What they're anti-correlated to is currencies. And that means that you could see Bitcoin, gold, and equities surging up together. And maybe that's the story of the decade to come.

Take number nine, I think that we do need to come back a little bit to this triumphalism of the stock market returning, because if you had just bet on the stock market on only equities this year, well, even though now you're back in the black, you'd have done a lot better with gold, right? Even with gold struggle over the last few days or week or so, it's still up 20 plus percent on the year, I think 25, 26 percent on the year. What's more, gold is entering into the conversation of, you know, an alternative to treasuries for big institutions that want to hold a safe asset but don't like

the idea of kind of negative real rates. So I think that we need to pause on celebrating too much the people who were just equities bulls to the exclusion of everything else because they wouldn't necessarily have done as well as, for example, the gold bulls. Which brings us to take number 10, of course, which is, if you'd done a little better with gold, you'd have done a lot better with Bitcoin. There is such a convergence of narratives around Bitcoin right now and fundamentals that it is very hard to ignore. If you need some example of this, go check out Raul Paul's conversation last Friday, I think it was, his kind of weekly brief, weekly wrap-up on Real Vision, where he reinforces that Bitcoin is the most important trade in the world right now. Dan Tapiero,

who I just mentioned, said he's known Rao for 20 years and he's never said anything like that. What's more, Rao on Twitter has said that he has more than a quarter of his net worth in Bitcoin right now. So this isn't just a small move. This is a huge, huge move. And it feels like every week, another big investor who came from a traditional background who wasn't necessarily a core Bitcoin bull is finding their way into this space. So that's it for my 10 takes in 10 minutes, not quite 10 minutes, on the stock market to quickly review, take one. This is the V-shaped recovery we were talking about. Take two, this shows how disconnected markets are from the real world. Take three, don't fight the Fed. Take four, to the Stoolies go the spoils. Take five, stock splits and spacks.

Take six, it's tech versus everything else. Take seven, Cantalon Insiders for the win. Take eight, a new era of global liquidity. Take nine, you'd have done a lot better with gold. Ten, you'd have done a lot, a lot better with Bitcoin. Anyways, guys, let me know if you liked this format, and I'll try to do more in the future. But for now, I appreciate you listening. And until tomorrow, be safe and take care of each other. Peace.