By the beginning of 2020, if anyone told you that a few months later Hertz, a 102-year-old car rental firm, was going to declare bankruptcy, you would probably laugh them out of the room. Hertz was a ticking time bomb — holding over $14 billion in securitized debt and struggling to compete with the likes of Uber and other ride-hailing services — but the “zombie” car company survived the cheap money era, issuing new debt to pay off existing liabilities at zero interest rates.
This activity allowed Hertz — and other zombie companies — to live far longer than the standards normally tolerated by capitalism. That was until COVID-19 locked the global economy, wiped out all Hertz ‘s revenue and forced the company to declare bankruptcy afterwards.
Yet amid insolvency, economic decreases and the U.S. Bankruptcy Law specifying that all loans must be settled before the stockholders obtain cash, the share price of Hertz has grown to rates higher than before the bankruptcy was declared. How could it be? Why doesn’t stock hit zero?
Introducing the moral hazard of Federal Reserve and US Treasury sponsored unlimited bailouts. In the last month alone, the Fed has raised its balance sheet by $4.5 trillion, and the US Treasury has supported companies with a $2.3 trillion stimulus plan approved by Congress. Remember the 2008 bailouts of TARP banks? Compared with the government’s response to COVID-19, they are child’s play. No stock, mortgage, junk bond or any other security on Wall Street can go to zero.
The enormous volume of money poured into the financial system by authorities tends to fan craziness within the markets. As it turns out, Hertz is only the tip of the iceberg. Even the biggest steaming pile of financial excrement won’t soon be allowed to fail. In reality, it is offering three-digit percentage returns to investors right now.
Take Luckin Coffee ($LK), the coffee chains’ “Enron“. The firm acknowledged that on April 2nd it was a scam, but since then the share price has increased by 400%. How does a corporation reveal itself as a scam, and yet maintain a $1 billion market cap? But only in a juicy market. Completely insane.
The sector has been crushing bulls and smoking short-sellers over the past month. Now that everybody owns the reserves of COVID-19 stories — the Zooms, the Teladocs, the Amazons — a massive short squeeze has been produced in “interest reserves.” Investors have piled in businesses with terrible prospects rather than take money, yet they trade at a serious decline to the wider market. Financial stocks have risen by 19% since May, industrial stocks have risen by 21%, and airline stocks have risen by 65%.
“Who would buy this crap?” You’d wonder. All this money sloshing about has created a new type of speculator: an investor called “Robinhood“. The financial sector and government fund inexperienced investors’ gambling debt by stimulus cheques. Afterwards they purchased a record number of call options and a record number of U.S Index ETFs. They have even crashed the platform of Robinhood — several times.
But the Robinhoods are outperforming the market right now while the “smart money” is losing its shirt on bearish bets. It makes you think: why spend when you can purchase a distressed car rental business and make 100%, or purchase a fake coffee chain and make 400%? And all that in the job of a day. Why even consider investments that have stable fundamentals? Boring government bonds or defensive stocks such as Walmart, Kroger or GSK. Instead, it is time to talk about cheating and bankruptcies. How can it go wrong?
And despite initial virus fears from mid-February to mid-March plunging global stock markets by more than 35 percent, investors have overlooked numerous catalysts for a second COVID-19 wave. The world seems to have gone back to normal, forgetting the whole thing about the virus and the #StayHome movement.
Las Vegas casinos look as busy as before they were closed, French citizens poured back into the beautiful streets of Paris and civil unrest has spread all over the world. How do you actually practise social isolation in a casino? You probably can’t. How are you protesting with a mask on? You probably can’t. You ‘re going to take that off and scream out, and you’re coughing as you yell. But the markets don’t care. This week, they’ve rallied every day.
As the Fed’s printing press continues to run, shooting on all cylinders, and the Trump administration continues to bail out everyone and everything, we will continue to see the most insane, ridiculous stock-market behavior on a daily basis: Robinhood investors reporting 1000 percent returns with their stimulus checks, bankruptcies and triple-digit return frauds, and short-selling blowing up as “dogsh*t wrapped in catsh*t” rallies 10, 50, 100 percent in their face.
What we’re witnessing is the craziest financial scenario ever, something we’ll never experience again, even before the next euphoria caused by bubbles. Of course, these conditions won’t last forever, but investors embracing absurdity will profit while they do and investors clinging to financial logic will feel the burn.