Financial Markets

[Malaphax]

Nice short article from financial times about the current Gamestop short squeeze being orchestrated by /r/wallstreetbets

It hit $158.18 briefly this morning, it opened at $96.73 which itself was way up from the previous close on friday of $65.01. 

I'm not sure what will eventually happen to the people who get into this, a retail investor doesn't really have any regulations to follow and this is basically the internet version of listening to mad money cramer and getting all your friends to buy the stock.  It's also starting to spread a bit, with 2.1 million subs I'm starting to see some minor crossover on the more conservative financial subreddits. 

There's a possibility that we could start seeing the SEC or the markets themselves take more action (they've halted trading a few times already) but I don't know what their solution might be.  Also beware, this strategy really only works on securities that have relatively low volume, low prices and large short interest.  If anything the various hedge funds are going to get wise to this and make sure they monitor reddit more closely. 
I'm also curious what this will do to bid/ask spreads, I know robinhood already has poor execution and we might see that further increase. 

https://www.ft.com/content/7aa60aa1-484f-4747-9136-cd0a560dd2d8

[Malaphax]

This is another good article about the gamestop shenangans.  There's some especially good points about reflexivity. 

Quote

The entire GameStop scenario is a case study in reflexivity. [7] Reflexivity is the idea that our perception of circumstances influences reality, which then further impacts our perception of reality, in a self-reinforcing loop. Specifically, in a financial market, prices are a reflection of traders’ expectations. Those prices then influence traders’ expectations, and so on.

Reflexivity may be the best way to understand the 21st Century. Passive investing is an example of reflexivity in action. [10] So is winner-take-all venture investing. Uber raised an absurd war chest, causing more investors to want to pile in, which led to more fundraising and eventually a successful IPO. The fact that Uber has not yet turned a profit, yet today has a $100 billion market cap, cannot be explained with traditional financial thinking, but can be explained by reflexivity.

The internet and instant communication only accelerates these trends. Instances of reflexivity like the strange market movements we’ve seen with GameStop are happening more and more – not only in financial markets, but also in the political and social realm, to incredible effect.

https://paranoidenough.com/2021/01/25/The-Battle-of-Gamestop.html

There's also this article from Matt Levine who goes into more of the financial elements surrounding the GME activity. 

https://www.bloomberg.com/opinion/articles/2021-01-25/the-game-never-stops

[Malaphax]

Quote

Federal Reserve Chair Jerome Powell said on Wednesday that US unemployment is about 10% — or nearly twice the officially recorded rate. That roughly equal to Great Recession levels more than a decade ago.

But Powell also indicated the labor market was in worse shape than previously thought. He said that the US had a long way to go before reaching full employment, a situation when every one looking for a job is able to get one.

The unemployment rate from the Bureau of Labor Statistics, he said, doesn't take into account the millions of people who left the labor force due to the pandemic as well as those misclassified in federal data. Powell said adjusting the data to reflect those trends would likely push the jobless rate much higher.

"Correcting this misclassification and counting those who have left the labor force since last February as unemployed would boost the unemployment rate to close to 10 percent in January," Powell said.

https://www.businessinsider.com/us-unemployment-rate-double-official-rate-fed-worst-great-recession-2021-2

To give some clarification he's suggesting that the U5 unemployment figure of 4.8% is completely inaccurate and is not capturing discouraged workers. 
Here's the current unemployment numbers: https://www.bls.gov/news.release/empsit.t15.htm

I've always been incredibly skeptical of the Bureau of Labor Statistics numbers - but it's a bit surreal to hear the chairman of the fed basically call them bullshit. 

[Malaphax]

Doubling up on J Pow news.  He is now stating the Fed doesn't care about the BLS stated unemployment figures but is instead focusing on the employment rate compared to the population - seeking high participation. 

https://www.reuters.com/article/us-usa-fed-powell-econ/powells-econ-101-jobs-not-inflation-and-forget-about-the-money-supply-idUSKBN2AN2EM

Quote

The unemployment rate itself may even have become passe. It measures the number of people working divided by the number of people working or looking for work. What it does not count, though, are the people out of the labor market - retirees, for example, but also, and of more concern, women who abandoned careers to care for family during the pandemic.

When the Fed considers its goal of maximum employment these days, Powell said, “we don’t just mean the unemployment rate, we mean the employment rate,” measured against the population as a whole and aspiring to “high levels of participation.”

[kuhla]

So the new metric is going to be "participation rate of eligible workers"? If that is true, what is "bad"/"normal"/"good"?

[Jedi2155]

The unemployment rate as historically measured is a good a metric for measuring true un-employment (people looking for work who cannot find it).

With this definition change, you add in a lot of social factors which makes the number much less useful for tactical decision making but more useful at the country level where you want your population to be productive citizens, versus leaving the workforce entirely.

[Malaphax]

2 hours ago, kuhla said:

So the new metric is going to be "participation rate of eligible workers"? If that is true, what is "bad"/"normal"/"good"?

I don't think this is going to change the weekly/monthly unemployment figures being released by the BLS.  I still think those numbers will dominate mainstream business news. 
I think the change is that the Fed is giving less focus to the BLS unemployment number and more towards the participation rate of eligible workers.  I wouldn't call it bad or good, just different. 

As a note, the Fed is very data driven and because it's made up of separate Federal Reserve offices, sometimes different offices will focus on different metrics.  As much as Powell gets the limelight as chairman, it's not a monolithic organization. 

I think the participation rate has it's drawbacks, demographics being a big one.  The labor participation rate is just another useful data point, but like all data it needs some interpretation.  Seeing a reduction in labor participation isn't as useful as identifying 'why' that reduction is taking place. 

[Malaphax]

I stumbled across this rather neat article regarding stock and bond correlation.  
https://mailchi.mp/verdadcap/an-update-on-the-stock-bond-correlation
Traditional thinking is that stocks and bonds should be negatively correlated, when equities go down, fixed income goes up and vice versa.  My issue is that we've seen at least a few instances of this not being correct.  2022 was a great example where both equities and fixed income both declined.  These charts give a bit more color on what stock-bond correlation actually looks like.  

The rolling 3 year stock/bond correlation shows a change from a strong negative correlation into a strong positive correlation currently.  
This includes the rolling one year as well, which adds a bit more noise to the chart.  

Here's an even better chart showing inflation vs stock/bond correlation:

Low inflation = low correlation.  High inflation = high correlation.  
Now that's rather interesting.  Just a note: we haven't seen inflation above 5% since 1990 during a recession caused by the savings and loan crisis, so the right hand side of that graph is overrepresenting data from 30+ years ago.  

Random Commentary:
The financial industry always looks for uncorrelated assets or ways to mitigate downside risk, this has traditionally been done through fixed income investments.  I have been less than thrilled with fixed income investments, especially as a negatively correlated asset; I think they still serve a purpose I just wouldn't count on them to help reduce downside risk.  This article might just be confirmation bias (throw in some recency bias too for good measure), but it's interesting to see people far smarter bring this up.