The Economy

Softbank explains some of the melt up in stocks, but it is not all of what is going on.

I don't think people realize just how much liquidity -- money that has essentially been created out of thin air and thrown into our capital markets like casino chips -- is sloshing around. When the real rate of interest is negative -- you get paid to borrow; you get penalized for saving and investing -- it creates perverse incentives. There are a lot of pension funds that want to be prudent, for example, but the risk-free, safe opportunities they have always relied on to meet their obligations don't exist thanks to central banks' recklessness. Which gives them two choices -- 1) fail to pay the pensions they promised or 2) take greater and greater risks in order to try to get the returns they are being robbed of as central banks try to inflate away the debt mess they have created.

In the aggregate, you are talking about trillions of dollars like that -- savers -- that have gotten screwed and robbed since the financial crisis when this madness was kicked into high gear. And those people have pretty much all capitulated and jumped in -- bidding the valuations of various companies (many great companies, some dogshit) to insane levels. That is most of what has been going on. It's also the story of every speculative bubble in history. You get too much debt, margin and leverage. ... on the back of the cost of money being mispriced (i.e. -- price fixing money so it is WAY too cheap).

 

FWIW, thinking about what Softbank is into as a $4 billion bet "driving" the market is not the right way to visualize it, in my opinion. Options are very leveraged derivatives -- they are common enough so that a lot of investors who play with them have no clue just what they are dealing with. If everything those stories said is true, that $4 billion has created around $50 billion worth of exposure for Softbank.

But even that is the wrong way to think about it. Look at any of the stocks that have gotten bid up to ridiculous valuations over the last 2 months -- Amazon, Tesla, Apple, Netflix, Facebook -- and then look at the call option volume during that time. Things were going ballistic. And that is the problem -- Softbank and the $4 billion in premium it paid on their calls may have been contributing heavily (and trust me, this is not solely a Softbank thing), but it took the money they sucked in with them to create runaway speculation.

They created a feedback loop of sorts, where they sucked more market participants into those options (yes, including some Robinhood-type investors) with their strategy. As the call buying got more and more frenzied, the dealers who need to own the underlying stocks (this is how options work) were forced to bid up the stock prices to meet the demand for the call options. As the stock prices went higher and higher, that created more call buying (why not, money is cheaper than free). ... and it turned into a runaway train. It's why the vix (measure of market volatility) has been really elevated at a time that the stock indexes are hitting all time highs -- the only time that has ever happened was right when the dot-com bubble burst, FWIW.

Again, though, none of that happens if the cost of money isn't being recklessly price fixed to make it cheaper than free (just as the derivatives that led to the financial crisis wouldn't have been possible without the Federal Reserve creating the conditions).

15 years ago, I would have been astounded by what is happening. Shit, 8 years ago I would have been saying, "This isn't sustainable, it is going to come to an end soon." The problem is that there has been nothing stopping the Federal Reserve from doing more and more radical interventions, and 99 percent of the population has no clue what they do, how they do it and how destructive it is in the long term. They completely control our debt markets -- and their only reason for being is to keep the aggregate interest payments owed on the trillions of dollars of debt that they are responsible for in the first place from rising, because when that happens there are going to be massive defaults and it is going to tank the broader economy. The problem is that each of their interventions requires them to answer out-of-control debt by finding ways to enable more debt. Which means when it actually does come to an end and they are rendered powerless (the way every command economy / central planning organization ever has; think the Soviet politburo), the payback we all suffer is going to be even worse.

In terms of what happens now, there is going to be a giant game of chicken -- if Softbank isn't already out and Thursday and Friday weren't the extent of the unwind. If they are still in, on one side you have Softbank and /or whoever else owns billion of dollars of calls on tech stocks. On the other side you have the dealers who are sitting on a lot of stock at what they know are unsustainable valuations. Softbank's incentive is to dump their position and lock in a profit. The dealers' incentive is to unload the actual stocks before they go down. How everyone plays their hands is key -- it has the potential to create the same kind of feedback loop that drove up prices, but in reverse. If you are trying to speculate on how it plays out, though, the whole thing is complicated by what the various central banks might do if they see the need to intervene as they do and save the world (the arsonist riding in on the fire truck).

 

BTW. ... Think of the absurdity of what Softbank was up to. $4 billion worth of call options controlling $50 billion worth of stock. Fine.

But the bullshit with which Softbank sold investors in the early 2010s, was about a revolutionary "Vision Fund," which I shit you not, laid out a 300-year investment plan.

When the valuations of the dogdoodoo companies it took stakes in was rising for a while, it was purely because of cheap money driving private equity valuations into a bubble for the ages.

That started to blow up. ... and they abandoned their 300 year "vision" like they were throwing away potato peels. They have been selling off assets they were underwater on, and buying short-dated call options. ... which can best be characterized as a "minutes to months plan."

Masa Son is a charlatan for the ages.

 

Stanley Druckenmiller, come on down.

Stanley Druckenmiller: The stock market is in an 'absolute raging mania'

He's been beating a variation of this drum for years, so feel free to disregard him. But I think it's always worth listening to him and the billions of dollars he has earned in the markets he's talking about.