Artist Joshua Metz

My son mentioned the phrase “hype train” in a text recently. What he is referring to is a swell of social media posts regarding a certain financial asset, e.g. bitcoin, dogecoin, Game Stop stock, etc. Honestly, I always discounted the social media impact on the price of equities. However, as I sit back and watch what has gone on with Game Stop, the proof is incontrovertible that through sheer social media collaboration the price of a stock could far outpace its intrinsic value based on its balance sheet, price-to-earnings multiple and cash flows. With enough social media interest the price of a stock can be affected. Then, with an outsized price move, the traditional media reports on it, until there is broad awareness among the population at large. Then, knowing they have influenced traditional institutions and the broader population, the people who are influencers on social media are emboldened to hype other financial assets as well. Today they seem to be hyping up Silver. Any financial asset that seems to be heavily shorted by institutions is a target right now.

Looking back I can see that the meteoric rise in Tesla stock and Bitcoin was influenced by the hype train. If you are someone who believes in fundamental analysis and are inclined to short a stock or commodity because the price has outpaced its intrinsic value, then watch out for the hype train. It can be a disaster for your brokerage account.

According to the Bureau of Labor Statistics (BLS) median weekly earnings of the nation’s 111.5 million full-time wage and salary workers were $984 in the fourth quarter of 2020 (not seasonally adjusted). This was 5.1 percent higher than a year earlier, compared with a gain of 1.2 percent in the Consumer Price Index for All Urban Consumers (CPI-U) over the same period. (Reference: https://www.bls.gov/news.release/wkyeng.nr0.htm )

On the surface this is great news. Wages were up much more than inflation by a large margin.

In reality the median wage was higher because many in the lower half of the median point lost their jobs and are currently unemployed. Thus, the midpoint of these 111.5 million full-time wage and salary workers slid towards those earning higher wages and are still working.

On the topic of CPI-U, I have not analyzed all the data but in many areas of the country home prices have gone up 10%. So if it costs a young couple $20,000 more to buy a $200,000 house, what does it matter if the price of eggs, milk and bread only went up 1.2%.

The problem with running federal budget deficits and adding to the US government debt is that the amount of the budget that is needed to pay the interest on the debt can crowd out money needed for essential programs. This is similar to a household with a lot of consumer debt.

As of the end of Fiscal Year 2020, the US Government debt was around $27 trillion dollars, however, some debt is owed to other federal agencies and this debt does not impact the interest on the debt.

The below table shows past and projected public debt and the percentage of the budget needed to pay it. (Source: https://www.thebalance.com/interest-on-the-national-debt-4119024 )

In the fiscal year 2022 interest expenses are 8.0% of the federal budget. This doesn’t sound too bad, but if interest rates were to rise as they are projected to do, then the percentage of the budget needed to make interest payments will slowly rise. Another risk is a stagnant economy in which more fiscal deficits are needed to provide stimulus to the economy and provide a safety net for the economically disadvantaged. Of course, the ultimate risk would be if the United States would have to increase spending to fight a war.

The unemployment picture is not getting any better. My opinion is that small businesses continue to close, and large businesses continue to restructure. Overall, many employers appear to be very cautious on hiring.

According to Marketwatch, “Initial jobless claims totaled 965,000 for the week ended Jan. 9, marking the highest level since August. Consensus economists were looking for a print of 789,000, after the prior week’s revised 784,000 new claims.” This is a huge miss, and to make matters worse the number of continuing claims for unemployment stands at 5.271 million people. (These numbers are seasonally adjusted. According to the Department of Labor report, the unadjusted number totaled 1,151,015). By comparison, the number of people applying for unemployment insurance a year ago was 207,000. In other words almost a year after the beginning of the pandemic, there are almost five times as many people filing for initial unemployment claims as in the previous year.

According to the Bureau of Labor Statistics (BLS) only 28.4 percent of those who were unemployed in December 2020 were on a temporary layoff. This compares to 77.9 percent reporting to having been laid off temporarily in April of 2020. Those reporting to be have been laid off temporarily are those who were given a date to return to work within 6 months.

It appears that due to the permanent closings of businesses or the restructuring of a business’s workforce, the layoffs that are occurring now are of a more permanent basis. The BLS reports that in December 2020 the largest share of the unemployed (38.9%) were job losers not on temporary layoff.

What would happen if some of the largest companies in the U.S. ceased to exist?  Well depends…

At the end of 2020 the top 10 companies by capitalization in the US were:

1. Apple ($2.2 T)
2. Microsoft ($1.6 T)
3. Amazon ($1.6 T)
4. Alphabet ($1.18 T)
5. Facebook ($776 B)
6. Tencent ($683 B)
7. Tesla ($668 B)
8. Alibaba Group ($628 B)
9. Taiwan Semiconductor ($565 B)
10. Berkshire Hathaway ($544 B)

At first glance, I can see that the top nine companies were all primarily tech companies.

What would happen if Apple disappeared.  Don’t get me wrong, I love my iMac, iPad and iPhone, but I was a Windows computer user and Android user until just a few years ago.  Apple is essentially a luxury brand.  To say the US could not exist without Apple is like saying our transportation system would crumble if Mercedes Benz went out of Business.

Alphabet is the parent company of Google.  Without Google we would take a serious step back in time and it would in my opinion cause issues.

Facebook does provide a great deal of benefit to small businesses that advertise there, but if it were to disappear overnight I don’t think there would be a catastrophic impact.  There are alternatives.  We might even be more productive.  After Facebook first became popular, I had a student tell me with concern in her voice that she was addicted to social media.

Tesla is one of the hottest companies on the planet at the present time.  However, it is primarily a carmaker among a plethora of other choices.   One of the choices is hybrid cars and trucks which are more convenient than electric cars which need to be plugged into the electric grid.  Hybrid cars were all the rage about 12 years ago, but now they are largely disdained.

The bottom line is that so many things we deem essential, make life more comfortable or convenient but are not truly necessities.