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This has been a weird year to say the least. Back in January, if anyone mentioned Wuhan, most people would have said “Where’s that?” I miss thse days. It was a simpler time.
Now we’ve been hit with a global pandemic, a sputtering economy, closed borders, and rampant unemployment. By any commonly accepted metric, whether it’s GDP, unemployment, or whatever, the economy is still nowhere close to normal. And yet stock markets are actually higher than where we started the year.
How can this be possible? How can Wall Street be looking so rosy and optimistic when Main Street is still mired in misery?
It’s a question that’s puzzled me for many months now, but after a lot of pondering and poring over business news articles, I have a theory. A theory I’d like to share with all of you right now.
This Recession Hit Small Businesses The Hardest
If we go back through the 20th century and examine each recession that hit the US, we can see that no two recessions are exactly the same. The effects can be similar, in that they all result in widespread job losses and a severe contraction of the economy, but which parts of the economy got hit were different each time.
Let’s examine the last 4 recessions the US went thorough.
Right at the start of the millenium the dot com bubble burst, causing widespread chaos in the tech sector. Silicon valley turned from a booming millionaire factory into a ghost town overnight and billions of market value evaporated on the tech-heavy NASDAQ. Tech workers (like ourselves) got screwed over big time as capitalists stopped lending money to any company with the word “tech” in it.
Then in 2001, 9/11 happened. When the World Trade Centers came crashing down, so did confidence in the US as a peaceful, stable country to do business in, and the Dow Jones suffered its (then) worst one-day point loss in it’s history. Air travel and tourism ground to a halt as the Americans began their War on Terror by invading first Afghanistan, then Iraq. It would take more than 2 years for the world to get used to this new normal of endless war in the Middle East and the economy to start expanding again.
Then in 2008, the Great Financial Crisis happened. Created by greedy unscrupulous lenders pumping up the US housing market with sub-prime mortgages to people with no jobs, it all came to a head on September 15, 2008 when Lehman Brothers filed for bankruptcy, kicking off a series of financial shocks that affected some of the biggest names on Wall Street. Credit froze up and foreclosure signs starting popping up all over the country.
And finally, 2020. A global pandemic called COVID-19 arrived and you know the rest.
In each recession, it was a different sector that got screwed the hardest. Tech in 1999, travel in 2001, banks and financials in 2008. 2020 has been unique because it was caused by a global pandemic rather than an asset bubble bursting, and the first thing governments all over the world did was shut down non-essential businesses. Specifically, non-essential businesses that require face-to-face contact with their customers. So this had a huge impact on small businesses like restaurants, gyms, movie theatres, and sports arenas.
But these aren’t the kinds of businesses that make up a huge part of the S&P 500. Large multinational corporations were largely unscathed. Banks didn’t fall over, manufacturers and shipping companies actually did better, and tech is red hot as everyone is forced to sit around in their underwear and Zoom each other.
This, I think, is a big reason why the stock market indices which contain big, large-cap multinational corporations is doing so much better than your neighborhood book store. They were never forced to shut down.
Governments Bailed The Wrong People Out
If there’s one thing humans are good at, it’s recency bias. Because we have relatively short memories, we assume that when we encounter a problem, we should just try the last thing we did to fix it. That might work if we’re trying to fix a pothole, but recessions are never the same each time.
Remember, the last recession we had before this one was the Great Financial Crisis. That recession was characterized by the seizing up of credit markets, and the thing that ended up pulling us out of that recession was then-Federal Reserve Chairman Ben Bernake dropping interest rates down to 0, and then printing money like crazy in a maneuver he named Quantitative Easing. That had two effects: unfreezing the credit markets by getting money to start moving again, and stimulating the stock market. By dropping bond yields to near zero, money had nowhere to go but into equities. Why invest in government bonds paying next to nothing when the dividend yield on the S&P 500 was 2%?
So that’s what central banks did then. And it worked!
So what was the first thing the US government did when they saw stocks starting to tank? They dropped interest rates to zero and started printing money. It worked last time, it should work this time, right?
Only this time, the underlying problem isn’t seized up credit markets, is it? It’s a freaking virus!
I don’t know if you’ve noticed, but the coronavirus doesn’t care about interest rates. And it certainly doesn’t care about Quantitative Easing.
What kills the virus are masks, antiviral cocktails, and a vaccine. Instead of printing money, the US government could have been buying face masks, distributing them to every single person in the country, and forcing them wear it or face heavy fines like Asia did. Instead, the US government decided that instead of saving its people, they would save the stock market.
Corporations Chose Shareholders Over Employees
We’re no strangers to making controversial statements on this blog. Home Boners are idiots, boomers are the worst, you know the drill. But I’m going to go out on a limb here and declare this to be a completely uncontroversial statement that everyone in the comments will unanimously agree with. And that statement is:
Rich people look out for themselves first.
Oh sure, the fat cats and the CEO’s might toss a bone at their favourite charity or a Democratic party fundraiser to make themselves feel good, but when the chips are down, rich people make sure priority number one is their own wallets.
So it should surprise precisely none of you that the Washington Post ran an article revealing that big corporations took money from the government in the form of emergency, taxpayer-backed loans and used it to give money to their own CEO’s by issuing dividends and share buybacks.
Some publicly traded companies that received taxpayer-backed small business loans to pay their employees during the early weeks of the pandemic paid out millions to Wall Street investors in dividends and share buybacks, publicly available financial disclosures reviewed by The Washington Post show.
Yup.
This is despite the explicit ban that if a company received a low-interest forgivable loan from the federal government, they could only use it to pay employees and not use it to enrich their owners. So what did these companies do? They used the PPP loans to pay their employees, and then used other funds that were earmarked for paying those employees salaries and instead redirected it to themselves. Meaning that those companies had the money to pay their employees but applied for the emergency loans anyway.
Like it or not, during this insane, once-in-a-lifetime pandemic, your taxpayer dollars went not towards the people who are hurting the most, but towards enriching the people who didn’t need help in the first place.
Be a Shareholder, Not a Worker
And that’s why my portfolio’s still positive this year. You might be wondering why I’m dumping on a system that I’m clearly benefiting from, but the truth is the modern capitalistic system is unfairly balanced towards shareholders and not workers.
That much has been obvious for most of my adult life, which is why I consciously saved up as much money as I could during my time as a worker in order to become a shareholder. FIRECracker first realized this when her company forced her into working crazy hours and popping anxiety pills, seeing her company make record profits and then turning around and laying off her co-worker. Not fun. Life is much better now that’s she’s a shareholder instead of an employee.
The system is not fair. But what I’ve realized is unless I go into politics (which I adamantly DON’T want to do), I can’t change the system. The only thing I can do is be on the right side of the system. And in addition, teach as many people as I can to be on the right side of the system with me.
So let’s do it. Stop being a worker, start being a shareholder. Rich people take care of each other, so by aligning yourself with rich people, you will always be OK.
Peace out.
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And in the US, at least, all this wouldn’t be quite so terrible if there was even a hint of collective responsibility. But thanks to the Boomers’ Cold Warrior mentality any hint of ‘socialism’ is terrifying, and our meager unemployment benefits systems are byzantine bureaucratic nightmares by design. Good thing for the fat cats that the disadvantaged get churned by the political system into frothy anger at their fellow downtrodden or else it’d be guillotine time.
Yessssss!!! Adam i love this! (and agree!!)
So well said Adam!
Our government and the federal reserve intervene so much in our economy these days, I don’t even think we can say we have capitalism any more. It’s more like Cartel-ism or Cronyism. It’s definitely not anything like free market capitalism, though.
Thanks for writing this piece. As Bernie Sanders repeatedly says: it’s corporate socialism for the rich; rugged capitalism for everyone else.
Okay, I have a question. If all of us divest from the systems – work for only the required amount of time needed to build a fat portfolio, do we eventually run out of people who are willing to work? Or is the underlying assumption is that there will never be enough people who are willing to make the sacrifices and “see the light” i.e. GTFO out of the rat race? I am genuinely curious.
Also, with how much corruption is in this America. None of this surprises me. What surprises me is that people have not revolted yet. But perhaps not enough of us realize just exactly how dependent the systems ARE on us. I.E. If workers go on strike, down goes the system. However, not many of us have the capital to make such moves.
Thanks for the article.
i dont think there can be enuf people to ‘GTFO out of the rat race’…america, as a collective whole, has made it harder to survive and thrive in the last 2 decades (give or take) and so there are many ppl that just work to survive and dont have the luxury to notice / learn / take part in another ideal…
additionally, america doesnt have a collective system that understands / supports strikes like a france, for example. so imho i never consider american workers, as a whole, striking. Could they? absolutely! Should they? im a revolutionary – so hell yes!! Will they? well no – freedumb and all that…the ‘right to work’ is impressed on society and quickly accepted.
Nice comment. Those were my exact thoughts as well. However I work for a living and I’m getting ready to wrap it up and become a full-time shareholder. I noticed that most of my co-workers and 99% of people here in America are brainwashed into believing that it’s honorable to work 40 or 50 years they just don’t know any other way because they’ve never investigated it. Remember when your parents told you to save money when you were 20 and you didn’t do it? It’s kind of like that. There will always be a vast overwhelming majority of people who will follow the Lemmings right off of the cliff.
Yes! Love this comment, totally agree! I’m only 22 and working very hard on FIRE. I try to help others I know, but they never stick to the plan and stay stuck in the rat race.. it’s frustrating. I think most people in the U.S. are obsessed with consuming. They can’t stop buying a new car every couple years, taking out a mortgage, buying new home décor, clothes, etc. It just never ends and they never build up their assets.. it’s a shame and most people don’t realize they’re in major financial trouble until they’re 40+ sometimes not until in their 60s/70s when they’re living from one Social Security check to the next.
This is actually a great question that’s often addressed in the UBI and anti-work communities (both of which I’ve been drawn to lately.
The answer, more or less, is that most jobs are what the late David Graeber called “bulls*** jobs”; jobs that provide no personal or societal benefit other than the paychecks themselves, and are ultimately busywork that keep us from having the free time to pursue more meaningful endeavors (regardless of whether or not they earn a paycheck).
If people can be freed from the current system of being forced to work in tedious, mind-numbing, irrelevant jobs in order to survive (which can be achieved through a combination of UBI, Universal Healthcare, and personal pursuit of FIRE), the system would likely improve for most people (except, of course, those who profit the most from working people working longer hours for low pay). People would spend less time working pointless jobs and instead focus on more meaningful endeavors. This holds especially true as automation kicks in more and more to provide us with the goods and services we normally pay people for.
Sincerely,
ARB—Angry Retail Banker
There’s actually an economic theory for your question, it’s called The Paradox of Thrift. Basically says personal savings are a drag on the economy and leads to decreased demand. What’s good for the individual is not good for the general population etc. Some argue this is what occurred in Japan during their lost years.
Here in British Columbia people who got laid off received CERB – financial aid during COVID. Most workers (and my entire friend circle except for myself) actually received more monthly income from the financial aid than their working income. This resulted in many people having a with a small surplus of money. I was thinking that the stock market went up because people finally had time to learn how to invest and had extra cash to do so. I’d be curious to see how much user time increased on day trading apps like Robinhood over the course of the pandemic.
It was that way here in the US too. I made double with the original 600 dollar addition to the standard unemployment than what I made working. The standard unemployment(at least in Indiana) pays about half. Then trump did an executive order, so I just got paid an additional 300 for 6 weeks from when the first ran out until early September. I mainly paid down debt with both, took care of stuff that needed taken care of, and padded the emergency fund. But I’ve also been moving toward income in my portfolio so I have the cash flow when I need it. The thing I see a lot of people doing is blowing the extra, or some even invested, but without the financial knowledge of how to do that well, they’ve lost what they didn’t already blow.
Great stuff! Perhaps one of the most interesting articles in recent times. I have been wondering about this too. Your assumptions and theory make sense to me. May be more workers will learn to be shareholders.
Nope! I know you’d like to hear something more positive than that and I do apologize. But nope!
So many issues with the stock market. I remember when companies were doing stock buybacks. I’m no expert but I think the stock buybacks are going to be another reason the stock market will crash big very soon. The buybacks inflated the stock prices. They put the money in their pockets instead of improving their companies.
Buy low sell high. I guess people fell for it. Stock market has turned into one big ponzi scheme.
What’s the difference between a dividend and a buyback? Not much. It’s funds that go to shareholders however a buyback eliminates any taxes the shareholder has to pay in the present and pushes it out to sometime in the future. On that basis, buybacks specifically are not a ponzi.
I live on the west coast and I have a friend who lives in the East Coast Area. I asked him the same thing because I assumed everybody was unemployed. His comment to me was that all the states are different in their lockdown status. He felt that a lot of the states were fully employed and going great and in full swing. That might account for part of it as well. Just my two cents.
“So let’s do it. Stop being a worker, start being a shareholder. Rich people take care of each other, so by aligning yourself with rich people, you will always be OK.”
Quite a bold statement but I personally like it (and not only because I am also a shareholder) but because it is the sad truth that our world is riding in. Now the questions are are you guys trying to be a shareholder of companies that aren’t evil but that are instead trying to make our world a better place? And answering this might actually be an opportunity for its own dedicated post maybe? 😀
Great question. The ending of this post was very unsettling to me because it implies that—instead of acting like true, educated, action-driven millennials, y’all have given up and are choosing to not to “go into politics,” ie. to not give a damn and let the poor remain poor and the system rigged…although it’s really not difficult to participate in politics — you already do this with the money and time you invest in certain companies right? Hope y’all are still voting for CHANGE and not to keep the shitty status quo…
If the poor are not smart enough to dig their way out of being broke, it’s unfortunate but that’s just the way it is. It’s like FIRE. Try to convince someone not interested in their financial future to try FIRE. Good luck! The impetus has to come from within. If there is no desire for change from those individuals, it doesn’t matter what tools, education, or opportunities you place at their feet. It will be a failure no matter what.
@Dave: no shit, but your comment stems from a privileged point of view: do you really think people would choose not to be rich or not to be smart, to have the education and most importably to have TIME and energy to try to figure this all out? To even think about anything beyond what they and their kids are gonna eat for their next meal? The type of comments I’m seeing here are a bit disturbing in that they feed into a classist (not super far from a racist…) narrative, and that’s not OK.
I was poor. Now I’m wealthy. All due to impetus. I find your cheap attempt to try to shame me due to privilege to be offensive and insulting. And then you want to throw the race card at me too. That too is gratuitous and cheap on your part. If comments like this disturb you, you must come from too much privilege and a sheltered life yourself. How about you thicken your skin and see the world for what it is. I’ve tried to help many and what I noticed is that only very few want to improve their lot. The rest want it handed to them. Once you give them the basics, it’s up to them to work out the rest. It’s not up to me to be their crutch for the rest of their life. Racist. LMAO! You don’t even know what that really is. We’re all one race. You’re such a fool. Just another keyboard social justice warrior.
Hi Snazzy, I agree with you and the person who votes and volunteers. Hao, I also agree that we should wear masks and the vaccine comes when it comes.
I like FIRE because people are independent, but the selfishness slays me with their “I got mine, screw you” mentality. I know not everyone says it—the leaders encourage philanthropy—but it’s either between the lines or wide open.
At my hospital, one woman wrote on the white board, “The purpose of freedom is to create it for others”― Nelson Mandela
Money doesn’t make you better than anyone else. It gives you more choices. And then you can choose to lift people up during this global crisis. Or you can take away their jobs.
Looking up Mandela’s quote directed me to two others:
“Education is the most powerful weapon which you can use to change the world.” Thanks, Wanderer and Firecracker, for educating people and changing lives. I hope most of us will try to help others along the way and afterward.
Mandela also wrote, “Overcoming poverty is not a task of charity, it is an act of justice. Like Slavery and Apartheid, poverty is not natural. It is man-made and it can be overcome and eradicated by the actions of human beings. Sometimes it falls on a generation to be great. YOU can be that great generation. Let your greatness blossom.”
I miss true leaders like Mandela. Time for all of us to step into the breach.
Those inspirational quotes just ended poverty, that was amazing.
Of course not. Investing in ESG ETFs before it becomes mainstream is actually asking for a whole whack of trouble. If it truly is important and not a fad, ESG investing will become mainstream and that will solve the issue.
Yeap, that’s why everyone needs to move from the worker class to the owner class. The system is set up for owners to benefit. Workers need to buy stocks or open their own business. Working for other people is a bad long term plan. Passive income is way better than earned income.
Thank you Bryce for another thought-provoking post. Like you, I do not want to get into politics to improve the system. But I do my part by voting, volunteering, and donating to efficient, austere charitable organizations. I wish we all wear masks in the US as the coronavirus is likely to stay for a while. Vaccines won’t come till next May, possibly. The stock market cannot be high for long. The American presidential election is on Nov 3rd. Overall, this year is one of the most uncertain and challenging year. Please stay strong everyone.
“modern capitalistic system”. Capitalists don’t take handouts from government. It is a modern mercantalist system, not capitalist society.
Everyone has the tendency to look out for themselves first, not just the rich. Poor people do the same, it’s just that their selfishness doesn’t affect us so we don’t notice or call it out. Making the rich out to be villains while not seeing that you and I all do the same thing in our own lives in smaller scales is both hypocritical and shortsighted. If people truly want change in what society values, start with our own seemingly insignificant choices. If we just want to protect our status and wealth as the primary objective, we’re no different from the fat rich cats we love to hate, when it really comes down to it. Just not rich enough to be widely hated.
Fantastic article. I couldn’t’ agree more with you. Capitalism is definitely a double edged sword that cuts both ways if you aren’t careful. One side brings prosperity; the other side pain and suffering. It’s a zero sum game we’re playing. The consumer culture that North Americans engage in brings undue pain when a recession hits.
How do we break this cycle as ordinary citizens? You stated it correctly, we become shareholders and consume stocks; not houses and cars. It’s constant preparation that pays dividends both financially and in quality of life.
Those who haven’t made saving a priority and even those who have saved, but are just in an impacted industry, are being painfully reminded of the necessity for more than one stream of income.
Thanks for tackling this topic.
On top of the current stock market, the housing market is so hot and mortgage interest rate is so low, which makes us feel like we can take out a larger loan to buy a more expensive house (despite the employment status). This is scary. We need to keep JL’s message in mind in such market environment, “If you really want FI, seek the least house to meet your needs rather than the most house you can technically afford.” I’m learning so much from you guys, and look forward to learning more!
It’s the sad reality of a system that focuses on monetary growth and performance. That’s not to say there isn’t a very, very happy reality within the system too — look at decades of reduction in poverty and improvement in living conditions — it’s just that there IS a downside, too.
Even when a virus takes over, the system is designed to drive capital to where it’ll earn the best return–not necessarily where it can be used most humanely. Cold, sad reality–right now.
Yes, as a worker who is about to turn to pure shareholder I couldn’t agree more.
To the people who are concerned that we will not find workers I can definitely point you to Martin Fords Rise of the robots and the famous cgp Grey video “Humans need not apply”.
Quick summary : The economy is advancing without needing more workers. Jobless recoveries have been the norm in the past decades.
The peak labour moment occurred in 2000s or even before.
Average wage is barely moving compared to rises in productivity.
As a soon to be ex software developer it is quite clear that labour is on fast track to automation.
Perhaps with a slight taste of outsourcing first.
RPA, low code, program synthesis and the recent Gpt3 natural language processing tools are just the beginning.
Even coding which was supposed to be safe is starting to see automation threats.
Can only say that as a shareholder I can’t wait to automate humans so that I increase profits.
As a human I can only demand basic income. Hope Canada will lead the way…
South Korea is already on track expecting labour automation by 2024.
Hi,
The stock market is the place in which one can consider adding the listed companies in the investment portfolio. One can sit back and focus on the things of his/her interest whilst the generated dividends covers his/her expense.
Such approach gives one the peace of mind regardless of whether one quits the full-time employment after achieving FI. Such status gives one the option and eliminates the worries of retrenchment for one still in the full-time employment. The income from the full-time employment can be channeled into the investment portfolio which is better equipped to generate more dividend for one.
WTK