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July 26, 2020 | The Bad Idea

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

So a quarter million people received double CERB payments, amounting to $442 million. They applied twice, once through the CRA and again through Service Canada. We also know over $11 billion in virus payments of $2,000 a month are going to children living at home who worked part-time in the last year.

Ottawa will send at least $60 billion to people receiving these Covid benefits, which have been extended by two months. Small businesses complain a lot of workers don’t want to return to the job because of the relatively lucrative payments. BMO economists say the CERB is a “key risk” to economic recovery. Manitoba premier Brian Pallister, my old buddy from Parliament, says, “I think it’s common sense and long overdue that we remove these impediments to people going back and taking another shift.” And the longer the virus pogey goes on, the more dependent people become upon it and the louder are calls for a permanent replacement – a universal basic income (UBI).

But beyond the fact the government’s paying people not to work, beyond the mismanagement of public funds through overpayments, beyond giving children two grand a month all summer and the grinding reality the country doesn’t have this money on hand, is another reality: billions is gassing stock market gambling.

The evidence seems overwhelming in both Canada and the US. Online brokers like Schwab, Ameritrade, Etrade and especially the Millennial fav, Robinhood, have been swamped with new accounts. About six million of them in the last few months. Robinhood alone has opened three million. In Canada over a half-million new accounts have been added to Questrade, Wealthsimple, BMO Investorline and RBC Direct. This is the most action since weed stocks first went on sale, and harkens back to the day-trading frenzy of the dot-com era twenty years ago.

It looks like this is having an effect on markets, since most of the newbie ‘investors’ are flipping individual stocks instead of choosing more diversified ETFs holding a broad index or a specific sector. Look at Tesla, for example. Robinhooders have been making up to 10,000 trades per hour in that company’s stock, helping propel the profitless outfit to whimsical levels and making its founder, Elon Musk, the richest human. But he’s still weird.

The kids have also created what’s been called the ‘bankruptcy bubble’ on Bay Street. Companies like Hertz or JC Penny that collapsed into a steaming pile of debt and whose stock values cratered along with them have been wildly traded in a speculative frenzy. “It’s a head-scratcher because people are getting involved in volatile penny stocks but the underlying fundamentals of these companies are horrific,” one Bay Streeter is reported stating. “These are companies that are for all intents and purposes bankrupt; they have too much debt and the stocks are going up 50 to 100 per cent a day. You’re not investing, you’re gambling.”

There’s another problem. Algos.

Up to 90% of all activity on markets is done by computers in a blaze of HFT (high-frequency trading). Algorithms are programmed to sniff out things like mispriced stocks, arbitrage opps and spurts in trading volume. So when thousands of moisters start slamming a stock they just read about on Twitter, the algos can pile on, propelling that issue even higher. And then there is the complete madness of crowds in a world when information is wide but comprehension shallow. That’s how Zoom Technologies jumped 240% – because it was mistaken for Zoom Video – and Chinese real estate pipsqueak Fangdd became a $4 billion stock play when the kids mistook it for an amalgam of the FAANG darlings (Facebook, Apple, Amazon, Netflix & Google).

Some day traders have made a pile of money, especially those buccaneers who embraced risk when the virus crashed stocks in late March. But many have bought turkeys or foolishly taken positions in ghost companies plus seriously inflated endeavours like that of Mr. Musk.

By grasping individual equities it’s a safe bet most of these new accounts lack any kind of diversification or have a balance between growth assets and safer fixed income stuff. So if markets retrace in a second Covid wave or tank for a while because America’s screwed up and the November elections go off the rails, there will be tears. As this pathetic blog has shown in stark stats, there’s infinitely more risk in buying into one or two companies (especially those feeding off fads) than in owning an ETF which holds the 500 biggest companies in America.

But, wait. Whose money is actually at risk here?

In North America governments have now pumped trillions of virus dollars into the hands of citizens. A lot of them desperately needed help since Covid stole their incomes amid quarantines, lockdowns and the collapse of whole industries. But others have chosen to gamble their pogey cheques as well as the cash saved from deferred mortgage payments, with stocks being the game of choice.

Besides seeing money magically appear in their bank accounts through direct deposit from Ottawa, a lot of people are bored. No work routine. No pro sports in stadia or on TV. No concerts or festivals. No bars or clubs. But anybody can open an online brokerage account with a few clicks, and start being a Master of the Universe of a Wall Street wolf.

Is this a step up from lusting for a condo and taking on 20x leverage to get one?

Yup. It is. But there’s no way you can call it investing.

Without doubt, billions will eventually be lost. But many of the losers will care not. Just a game. And the money was free. At least to them.

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July 26th, 2020

Posted In: The Greater Fool

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