Veblen Goods, Late Stage Capitalism, & ESG (Written in TLDR Style)

SECTION 1: The number & monetary value of Veblen goods increase as more money/assets aggregate to a smaller percentage of the population.

1. A Veblen good is an item / good which demand increases as the price and perceived exclusive & rare nature of the good increases. It is a status symbol. This is the reason why Gucci (& other name brands) destroy unsold hand bags rather than sell them at discount prices. (FUN NOTE: BitCoin & Cryptocurrencies are the ultimate Veblan Good in that the supply is finite by systemic design).
2. “Diversification” can consist of real estate, jewelry, gold, high end designer hand bags, Richard Mille wrist watches, original Dali artwork, limited edition Millennium Falcon lego sets, and rare edition sneakers.
   • See StockX, Sole Supremacy, Cryptocurrency, Legoswap, etc.
   • There is value to be able to “pick up and go” with nothing but a Richard Mille wrist watch, and start a life anew with 5 million dollars after selling that watch in a new country.

SECTION 2: Stock markets & other financial markets are not immune from taking on the characteristics of a Veblen good.

1. Stock market P/E ratios are nothing more than a reflection of supply & demand. (Note: Snowflake IPO, TSLA, etc.)
2. For every unit of a financial asset in existence, some investor somewhere must willingly hold that asset in a portfolio.
   • In financial markets, investors can only switch from one stock or bond to another stock or bond through the medium of cash.
   • If no one wants a particular stock or bond, the price is lowered until a buyer is found. The same as an auction of a piece of rare, or unrare, artwork at auction.
   • The total “supply” of an asset is the total market value in existence. The total market value is the total number of units available, multiplied by the market price.
     1. FOR EXAMPLE: If there are only 10 remaining original Michael Jordan sneakers in existence, and the Ebay price is $1 million per sneaker set… the total market value is $10 million.
     2. If there are 10 billion Michael Jordan sneakers… more than the number of people on the planet, the market price per sneaker would probably not be $1 million per sneaker set.
3. IF ALL investors maintained a 60 stock / 40 bond portfolio (i.e. 60% of “cash” in stocks, and 40% of “cash” in bonds), we can easily use classic valuation metrics like P/E, P/B, P/S, CAPE, Market Cap to GDP, etc.
   • We run into a problem since A LOT of bonds are held by banks, not investors…. and the central bank, the Federal Reserve, owns a LOT of bonds (about 7 trillion as of 9/20/20): https://fred.stlouisfed.org/series/WALCL
     1. When the FED buys bonds, they are replacing bonds held by investors with newly created cash. Investors are trading bonds for cash (cash created by the FED out of thin air).
     2. If EVERYONE (fictionally) maintained a 60/40 portfolio, the 40% bond /cash mix changes.. but not the aggregate total market value. The bonds were just converted to cash, but there isn’t more “market value” there then before.
        • For Example: One can imagine the same scenario if the FED purchased a pair of Jordan sneakers at market value then destroyed them. The remaining 9 pairs in existence are still valued at $10 million in aggregate. They might actually increase in value because it is a Veblen good… “value” increase would come at the expense of another asset class (i.e. sold Legos to purchase Jordans).
        • Private banks perform the same function when they purchase assets.
     3. The entities that create net new financial assets are not banks (they are intermediaries), but real economic borrowers: households, non-financial businesses, state & local governments, the Central government, and other nations & their corporations & citizens. (NOTE: we will consider other nations a “wash” as they own US assets and visa versa, but are not the major players for the purposes of this discussion).
        • When these entities borrow from banks, the banks sell those loan notes (i.e. mortgage, bonds, etc.) to investors and those investors have NEW bonds to hold… and the borrowers have new cash to hold. SEE: https://fellow401k.com/blog/deleveraging-the-us-economy-modern-monetary-theory-in-action/
4. In reality, the aggregate Investor allocation to stocks (average) = Total market value of ALL stocks divided by (market value of all stocks + total liabilities of all real economic borrowers).
   • Here’s a nice graph that shows that: https://fred.stlouisfed.org/graph/?g=qis – As of 09/20/20 it is around 40% in stocks. Keep in mind that large entities skew this number lower than what most real human beings are invested in. Interest rates greatly influence this number.
5. The supply of cash and bonds that investors in an economy must hold perpetually increases with the economy’s growth. The cash and bonds in investor portfolios are literally “created from” the liabilities that real economic borrowers take on to fund investment–the fuel of growth. Remember, my spending is your income and your spending is my income and it all goes up with “credit / debt”: https://fellow401k.com/blog/deleveraging-the-us-economy-modern-monetary-theory-in-action/
   1. IF the aggregate (fictional) 60/40 investor is going to “re-balance” and maintain a constant portfolio allocation, then the supply of equities must grow commensurately with the supply of cash & bonds.
      1. For Example: Tesla must create 5 million new shares to sell (out of thin air). We need more Snowflake IPO’s. We need more inventory!
      2. Here’s a chart showing new inventory creation: https://fred.stlouisfed.org/series/BOGZ1FA103064145Q – As of the time of this writing, new inventory creation is not nearly as high as the “dot com era bubble”.
      3. If new inventory is not created, then to maintain a 60% allocation of “cash” in stocks would require stock prices to increase. More cash would chase after the same number of stocks / units.

CONCLUSION SECTION 2: Stocks are Veblen Goods.

Between March 4 and June 10 of 2020, the FED purchased about 3 trillion in bonds. That 3 trillion must be converted into some asset… usually stocks or new bonds/debt (issued at a lower interest rate). We see this in all time record high mortgage re-financings, corporate bond issuance at low rates, oversubscribed bond issuance of risky companies (i.e. Carnival Cruise Line during COVID at 11%), and increasing stock market prices. We have also seen a sharp increase in the price of vintage sneakers, Lego prices (Star Wars sets are crushing it… but Chinese knock offs are entering the market), and of course those Richard Mille watches along with other Veblan Goods.

Financial markets, Veblan Goods, Cryptocurrency, Real Estate, are primarily “storage containers of wealth”, representing dollars (or some other form of currency… which need not be actual currency, more on this later).

The total return of an equity security depends on two factors: (1) the change in price from purchase to sale, and (2) the dividends paid in the interim. Dividends matter, but price is king.  It drives total return.  

Many investors don’t like the fact that price drives total return.  If price drives total return, it follows that total return is a function of the shifting sentiment, preferences and expectations of other people–those who make up the market and “vote” on what the price will be.  

Investors don’t want their returns to be subject to the arbitrary “vote” of other people, and so they pretend they are actually genuine businessmen who “buy” and “own” companies to hold forever.  They tell themselves that their returns will somehow emerge directly from the cash flows of the underlying businesses, regardless of what the market decides to do with price.

This point of view ignores that it takes decades to recoup an equity investment via dividends, the only cash flows that are ever are actually paid out to buy-and-hold investors.  To claim a return on a stock in any other context, an investor needs to sell it for a profit. Consider that 85% of the “stock market” does not fund any real productivity, they are assets on a marketplace, nothing more than a “storage container of value/wealth” being traded like designer sneakers on the “Sole Supremacy” platform. (If you think otherwise, I refer you to the Snowflake IPO: https://fellow401k.com/blog/snowflakes-arent-magical/). The price that other people are wiling to pay is therefore important–supremely important.  Rather than resist this fact, we should just accept it and work within it, by understanding the behavioral propensities of our fellow market participants, and getting in front of emerging trends in how they choose to allocate their wealth. Maybe this is LEGO sets, watches & handbags, equity markets, real estate, small local businesses, micro lending, or ESG funds.

SECTION 3: Late Stage Capitalism & Defining Risk

“Risk” is different for everyone and is ultimately the fear of not meeting expectations. The expectation of being able to retire, the expectation of having retired and having the ability (i.e. “investments”) to stay retired, the expectation of being born into wealth and maintaining that wealth, the expectation of leaving the world a better place for one’s kids and the next generation, and the expectation of having opportunities to participate fairly in “capitalism”.

Risks:

• Risk for the ultra wealthy is classic social revolution… overthrow the lords and redistribute the land. For the ultra wealthy, being able to flee armed revolution with a $5 million wrist watch is comforting.
• The risk of being able to retire looks differently in late stage capitalism. A feature of late stage capitalism is an ever increasing need to create liabilities (i.e. create money / credit) so we can all “feel richer, are progressing, and will be able to retire”.
  • There will be a transfer of 12-15 trillion in the next 10-15 years… mostly amongst the 1%… this is a source of discontent for the masses. 70% of land is owned by 1% of people. The “storage containers of value / wealth” are owned by too few people.
• The risk for the younger generation is they cannot fairly participate in Capitalism. They will never be able to compete in the Richard Mille marketplace.
  • The majority of bitcoin is owned by a small fraction of people, just like all the other assets. For the ultra wealthy, why even bother with the stock market anymore? Anyone can get into that. The 1% can create Veblen markets, own ALL the bitcoin, land, etc. Diversification can come in the form of Veblen goods.
• The younger generations (and general non-wealthy) do NOT feel a sense of agency, power, ability to control one’s future… and the result is the grasping at a sense of agency and power through political means.
  • Protesting, “Cancel Culture”, “Make America Great Again”… attacking the immigrants taking our jobs, the un-woke fascists maintaining the status quo and preventing social justice.
  • Without financial markets & real estate to provide a sense of progress and agency in people’s lives… the central government is running out of “bullets”.
    • The FED can only create convert bonds to cash (i.e. “quantitive easing“), this causes the Veblen Goods bubble (i.e. expanding P/E ratios in the stock market, sneaker market inflation, Case Shiller Real Estate Index , etc. ) through multiple expansion.
• A shift in the storage containers of wealth might help. Let’s use the word VALUE instead of wealth. The real risk for everyone is not leaving a world suitable for anyone to live in.

CONCLUSION SECTION 3: IF stocks/financial assets are Veblen Goods, ESG (Socially Responsible Investing) is a worthwhile Veblan Good.

Why invest in tobacco products where the CEO’s greatest talent is finding legal ways to get poison into the hands of children and 18 year olds? Why invest in oil & gas when people just don’t want to continue polluting our planet? Need yield? Buy telecom companies, REITS, etc… there are plenty of options for yield. Instead of pouring into Veblen goods (that are only Veblen goods), invest in a way that has an impact and provides a sense of power & agency… whether that be an ESG fund or your local neighborhood (i.e. “self directed”). That idea in of itself, is investable whatever your moral positions are.

The truth can be replaced with lies, but mythology (and the American Dream of working hard, retiring, and leaving a better world for the next generation) requires a narrative… an alternative mythology. “Voting with dollars” via choosing to shop at the local “Mom & Pop” store isn’t a reality anymore. Sure we can try, but Walmart, Amazon, and the Tech Giants have won capitalism. In late stage capitalism, “voting with dollars” occurs in assets “bubbles”. The FED is pumping bullets into the bubble the only way they can, from the top down… maybe Congress will join in and help… but until then… we’re all just buying Veblen goods. Might as well have some grounding in real life rather than merely playing the game. Right?