- Can The Bank Take Your House Even If You Pay Your Mortgage? - January 30, 2023
- Reader Case: How do I Squeeze More Income From my Portfolio? - January 16, 2023
- Our 2022 Portfolio - January 3, 2023
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.
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.
Hi there. Thanks for stopping by. We use affiliate links to keep this site free, so if you believe in what we're trying to do here, consider supporting us by clicking! Thx ;)
Build a Portfolio Like Ours: Check out our FREE Investment Workshop!
Travel the World: Get covid-19 coverage for only $42 USD/month with SafetyWing Nomad Insurance
Earn 15% Cash-back: Earn an extra 15% back for a limited time with a Tangerine World Mastercard! Click here to sign up!