As we head into hot vax summer, Americans might actually be in the position to spend their money on cocktails and movies and gym memberships and travel, reversing the imbalance of an economy powered by purchases of durable goods. But the glut in people’s bank accounts, according to one theory, has also led to a rise in financial speculation, which could build recovery on unsustainable ground and lead to an eventual crash.
The Berkshire Hathaway annual meeting served as the chief venue for such scolding, putting a lot of weight on retail investing, amid the rise of Robinhood apps and YOLO trades. Warren Buffett and his business partner Charlie Munger savaged the developers of options trading apps, with Buffett lamenting that they “tak[e] advantage of the gambling instincts of society,” and Munger saying it’s “god-awful that something like that brought investments from civilized men and decent citizens.”
The truth is that there is a lot of overspeculation in the markets. But to blame it on young people day-trading their stimmy checks, or even on the developers who make it easier to execute those trades, is akin to blaming purchases of avocado toast for the lack of millennials buying houses. There’s an aspect of moralizing in Munger and Buffett’s pronouncements, even if it’s not directly targeted at “these kids today,” and it neglects where the overwhelming majority of market speculation has emerged from over the pandemic year: the usual corridors of runaway capital.
The Berkshire boys reserved most of their scorn for two nascent speculative plays: SPACs and cryptocurrencies. We’ve talked about SPACs before, and they are definitely cause for concern. The basic setup is that a group of investors create a shell company, usually with some glittering name of an athlete or celebrity attached, and put it into the public markets. Then, within a couple of years, the SPAC (special purpose acquisition company) “merges” with a privately held firm, as a way to end-run around the traditional initial public offering process. “If you secure a famous name on it you can sell almost anything,” Buffett said at his conference.
It’s easy to see where market speculation is concentrated: in mergers and private equity transactions.
That said, SPAC mania is mostly a story about institutional and longtime investors, who surged the previously sleepy asset class to new heights. The ringleaders include some of the biggest investors on Wall Street, who simultaneously decry the overspeculation in SPACs while investing in or owning them. By targeting private companies with below-investment-grade credit ratings, SPACs have directly contributed to the rise of junk bond markets, not the stuff of retail investors.
Anyway, we’re on the downside of the SPAC craze, as an oversaturated market begins to sag. There were 109 SPAC deals in March, and after the Securities and Exchange Commission took an interest, just ten in April. Retail investor buying of SPACs dropped 90 percent in April, and SPACs that have completed a merger are down 20 percent year-to-date. This is fine for insider SPAC sponsors, who can take away millions even as the company falters because of the way the deals are structured. But practically everyone else has seen the grift and has given up. Hometown Deli, the New Jersey–based cheesesteak restaurant that bizarrely has a stock with a $100 million market cap, is actually a Hong Kong–based investment company looking to do a SPAC, the kind of story you see at the end and not the beginning of a cycle.
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As for crypto, the madness of rising values of joke coins should certainly make people nervous. The rise of non-fungible tokens, or NFTs, as a way to assign value to digital art or collectibles seems like it’s running into bubble territory. It has become a way to pull money in from outside the crypto world in the name of getting artists compensation for their work, which is truly dangerous and serves mainly to boost companies like Ethereum, which play a role in creating NFTs. The fact that an aborted NFT auction featured work of Jean-Michel Basquiat that was set to be destroyed and preserved only in digital form suggests the real-world implications of what amounts to being more a PR vehicle for Bitcoin enthusiasts than anything.
There’s a horse racing platform called Zed Run where you can “buy” digital tokens of virtual horses—some of which command six-figure salaries—and enter them in races for prize money, which kind of brings the whole concept of finance as a casino full circle. But that’s just it: NFTs and crypto are mostly a virtual replication of gambling and collectible entertainment, which both have gone through their boom-and-bust cycles historically. Before this, it was online poker and Marcel Duchamp putting signed toilet seats in galleries. At some level, it’s decadent and maybe speaks to a certain age of inequality and abundance at the top, but it’s not something we have to deeply worry about as a macroeconomic matter.
If you want to worry about something there, how about the absolute explosion in home prices, thanks to a cratering of inventory and a literal lack of lumber to build new homes. Chatter about runaway prices feels like a bubble situation that can actually affect people’s jobs and financial situations, as we saw over a decade ago. CEO compensation that’s soaring even as the companies those leaders preside over struggle is certainly another form of speculation, on individuals who appear to be doing a poor job despite the reward.
The financiers are finger-wagging at exactly the wrong people, when they should be pointing the finger at themselves.
But more to Buffett’s point about market speculation, it’s easy to see where this is concentrated: in mergers and private equity transactions. There is currently a frenzy of M&A activity, and while the SPAC craze did make this worse by increasing prices for private companies, deal making has continued even as SPACs tailed off. The first four months of 2021 saw $1.77 trillion in global transactions, higher than any other year in history. “It’s the busiest I’ve ever known it,” said one industry veteran to the Financial Times. Deals have surged among tech startups too, which in recent years has been a prelude to more mergers as those founders pursue an exit strategy. The Biden administration has provided little resistance to merger activity, which gives budding monopolists the signal that they will have no problems building their empire. In particular, private equity is thundering, with $1.6 trillion in spare capital to play with. Mega-deals of over $10 billion are rising, and major sales, like Apollo Global Management’s purchase of AOL and Yahoo from Verizon, have consummated in recent days.
We know the dangers of this rampant speculation: more layoffs as mergers create “synergies,” more companies forced to take on debt and inevitably hemorrhage workers in the process, more communities hollowed out with the loss of key services like hospitals, as private equity firms value their own profit extraction over viable businesses. This is a far more insidious form of financial speculation than someone YOLO-trading a couple hundred bucks for fun.
Even in the context of stock markets, the fact that five tech companies now account for one-quarter of the entire value of the S&P 500 is a much more precarious situation, not only for Wall Street investors but for the economy and the world, than any run-up in GameStop or AMC Theatres. This isn’t “speculation” in the traditional sense, but investors piling into a small group of stocks above everything else unbalances the market and magnifies the pain should one of them stumble. It certainly rhymes with the world piling into mortgage-backed securities and the resulting fallout. Winner-take-all markets where a few giants eat up practically all profits and extend their dominion, at everyone else’s expense, is simply a much bigger problem to be solved. The guy with 44 percent of his portfolio in Apple, whose name is Warren Buffett, should know this.
In other words, the financiers are finger-wagging at exactly the wrong people, when they should be pointing the finger at themselves. Small-time investors may be able to be a factor in one meme stock or two, but capital—big, bold, limitless capital—is responsible for whatever hazards have befallen financial markets. Regulators can do something about this, and Congress can too; raising capital gains taxes on the rich would likely raise the cost of private equity–style transactions and lead to less financial engineering, for one thing. But they have to understand what problem they actually need to solve.