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The Wall Street Shit Machine Kicks Into Overdrive

March 12, 2021 January 20th, 2022

“Wall Street will sell shit as long as shit can be sold.” –Charlie Munger

Never before has there been a better environment to sell shit than exists right now. Personally, I have never seen investor euphoria anything like what we are witnessing today. There are newbie traders out there who seriously believe that 10% per day is a reasonable expected rate of return.

Of course, this is only remotely possible by using a terrific amount of leverage. The most popular type of leverage has come in the form of options.

As GameStop demonstrated once again las week, these trades which are essentially wildly optimistic forecasts become self-fulfilling.

But margin debt, of course, has also played a role. I wonder how much of that margin debt, however, is leverage upon leverage now that cash out refis have become a thing again.

Certainly, not everyone wants to sell their primary residence to speculate in the markets.

And then there is the fact that much of the money being handed out by the government is being put to work in the markets and then leveraged either through margin debt or the use of options.

In all, the circumstances have conspires to create a “perfect storm” for risk taking.

And so, in addition to all the shit options contracts and margin loans being sold to investors at present, we literally get a FOMO ETF care of the Wall Street shit machine.

At the center of this machine, however, sits another four-letter word, the SPAC. Last year was a record year for SPAC fundraising and already it looks like we will surpass that total in just the first quarter of this year.

What makes SPACs uniquely shitty products is that they are especially efficient at robbing the poor and giving to the rich.

Because the compensation scheme for sponsors is so lucrative, they have a massive incentive to “hype” like there’s no tomorrow (which is probably not far from the truth for many of the completed deals).

Sponsors like Chamath also can pledge securities in order to borrow funds to leverage up their own portfolios. Not only does this provide greater upside for sponsors, it also protects against the downside.

Clearly, the risk-to-reward equation for insiders is vastly different than that for outsiders, most of whom have no idea of the sort of risks they are taking…

…risks that the vast majority of hedge funds are simply unwilling to accept.

To many, the only risk in the market is the risk of letting FUD overtake FOMO.

Of course, the only way to explain this dangerous naïveté is to understand these folks have never experienced a real bear market before.

Neither have they considered the fact that their own participation in driving the boom makes a bust inevitable.

It’s a story that has played out time and time again throughout history.

Surging investor demand inspires Wall Street to dramatically increase supply until it overwhelms that demand and disaster strikes.

For years, even decades afterwards, the echoes of the boom and bust continue to ring.

And there are a growing number of signs that suggest supply is starting to outpace investor demand, just as it did the last time new issues were anywhere near as popular as they are today.

The recent action in the stock market is a clear warning that Wall Street has perhaps reached the limit of the amount of shit that can be sold.

It’s all dependent upon investor risk appetites continuing to grow in exponential fashion indefinitely (which is, of course, impossible).

From the chart above, it appears that risk appetites may already be reversing from record highs. Surely, the growing epidemic of financial fraud will do nothing to deter such a shift.

And, in the case of this fraud, the ripple effects could be more significant than those of the frauds that have so far preceded it.

The one thing we can be sure of is that Wall Street will not stop producing more and more shit until it can no longer be sold. Just as certain is the fact that the only thing that will bring about the end of this shit sale is a crash big enough to destroy the raging animal spirits driving the demand for it. At some point, however, the sheer speed and amount of shit being produced will overwhelm the system. And we’re getting closer to that point every day.

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