UGH – Robinhood is Not Your Friend

I didn’t want to do this. Talk about GameStop, Reddit, Stonks, short-squeezes, hedge funds and roaring kitties.

And yet, here we are.

GameStop Strip Mall Location

I didn’t want to do this because part of what I hate about traditional financial journalism is that it focuses on the sensational and statistically improbable, such that the average reader may come away with a twisted sense of what is normal and probable. And therefore the average reader might set a course that is unwise, or cement beliefs that are untrue.

I didn’t want to do this, but then I kept reading the stories that celebrated all the sensational. I fielded questions like – “are short sellers bad? If not, please explain” and comments like “I bought GME, wish me luck.” So I can’t help myself. 

My apologies for piling on. 

Short-selling is not bad. Short-selling is a necessary market function. Institutional market makers, otherwise commonly known as brokers, go short in the ordinary course of their business to maintain orderly market flow. Other institutional investors have the ability to “go short,” by borrowing securities, selling them at today’s market price, and then hoping to buy them back at a lower price in the future. Sometimes this makes money, when the stock declines. Sometimes this loses money, when the stock price rises. There is no deeper moral meaning to this short selling activity. 

Short-selling is part of the plumbing and wiring of financial markets. Short-selling is no more evil than copper wires are evil for lighting up your house. Should you, the non-licensed electrician, touch those copper wires? Hells NO! Step away from those wires. Do not short stocks yourself unless you want to get fried.

Institutional investors do sometimes short stocks. They also use borrowed money, engage in options strategies, and trade for short-term gains and losses. Retail investors should, probably, never do these things. I’m not saying it should be illegal for individuals to do this – we permit harmful vices all the time in a free society among consenting adults – but there should be warning labels and limits and deep discouragements and heavy taxes and all the speedbumps to prevent people from doing themselves much harm.

Robinhood app – I’m not a fan.

Robinhood is a financial services app providing an easy-to-use onramp to retail investors. A seemingly-friendly accessible Main Street approach to Wall Street. It should be a morally neutral platform. Unfortunately, it appears to encourage all the worst investment behaviors that Main Street retail investors should not do. Behaviors like using leverage, options, trading individual stocks, short-termism. Robinhood is a menace because it’s going to cost people money, people who probably can’t afford to lose it. And lose they will.

acorns_app
Acorns, my favorite “democratizing investing” app

Despite the name, the Robinhood app does not favor the ‘everyman’ over the Wall Street sharps. On the contrary, to the extent it encourages leverage, options trading, individual stock trading and short-term trading, it will, over time, inevitably tend to transfer money away from the everyman toward Wall Street. All under the guise of “democratizing investing.” There are some great “democratizing investing” apps.1 Robinhood just is not one of them.

Reddit is cool. A couple of guys (I think they were mostly guys but on Reddit users can remain anonymous so permit me to just simplify genders here) found value in an unloved stock, GameStop. Many months ago. It was so unloved that many hedge funds had large short positions. In January, a mob of Redditors, and others, engaged in a buying frenzy, a storm-the-capitol type pile-on in that stock. It was as unwise, conspiratorially-fueled, and briefly successful as any shocking market move in recent memory.

To be clear, there is nothing new about a part of this. Attacking short-sellers and making them suffer is a time-honored blood sport among professional hedge fund investors. 

What was new was Robinhood investors and Reddit Bros figured out a way to put on their viking caps, fur-trimmed coats and body armor to overwhelm the financial barricades to participate en masse, with the sheer weight of their bodies, (metaphorically, financially, speaking) causing mass hysteria in the stock.

Would-be populists, ranging from Senator Ted Cruz to Congresswoman Alexandria Ocasio-Cortez questioned attempts by regulators to slow down the GameStop frenzy. Their commentary was neither informed nor helpful. 

The slow downs, we now know, were designed not to quelch the mob nor to defend short-sellers, but to protect market makers – including especially Robinhood, from failing. They were the Capital Cops of this story trying to do their jobs. Nobody wins when they go down. Unless you are in favor of anarchy. Which I am not.

We also now know that much of the frenzy involved large institutional investors as well as the Reddit Robinhood and Reddit Bro crowd. The Wall Street Journal has reported on $700 million, $200 million, and $150 million gains by traditional hedge funds joining the pile-on in January. I just mention this because the simple David and Goliath story is always appealing in markets, but frequently wrong.

A few other thoughts. I recently argued that despite the fact that traditional inflation in the economy seems tame, that the run-up in real estate and stock markets generally should be understood as a specific form of inflation. 

Protect yourself from the viking hats

I cannot prove the following, but I believe it: The frenzy in GameStop, like the parallel ephemeral frenzies in stocks like Tesla and AMC, cryptocurrencies like Bitcoin and Dogecoin, and commodities like silver seem to share a mob-like desperate quality. My thesis – again just my belief – is that the easy monetary policy from the Federal Reserve (low interest rates, huge securities portfolio) has created an ocean of extra cash, sloshing around the capital markets. The excess liquidity sloshing around creates waves and then occasional rogue wave tsunamis. The appearance of these rogue waves in the markets are a kind of inflation. 

They are dangerous and possibly destructive, but only if you put yourself in harm’s way. Stay inland, and defend your castle against the viking hats.

A version of this post ran in the San Antonio Express News.

Public Service Announcement: Please use better investing apps than Robinhood.

Like Acorns (my favorite)

or Like M1 Finance

or Like Qapital

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  1. Specifically, I think Acorns is amazing and everyone should open an Acorns app right now

School Finance FrightMare in Houston

choice_between_two_evilsVoters living within the Houston ISD catchment area on November 8th face a “Scylla and Charybdis” vote – and it’s not Clinton vs. Trump – but rather equally terrible public school funding choices.

What’s happening in Houston gives Texans everywhere an insight into a complex problem with no easy solutions, as Glen Read the general manager of budgeting and financial planning for HISD explained to me in a conversation recently.

A “yes” vote on the ballot question in Houston will authorize “the board of trustees of Houston Independent School District to purchase attendance credits from the state with local tax revenues,” which means sending an estimated $162 million from the state’s largest school district to a state education fund, known as the Foundation School Program (FSP). It also means future payments from HISD in increasing amounts in future years, as Houston’s property values increase.

A “no” vote – barring legislative intervention this Spring – triggers something that has never yet happened in Texas, which is to separate commercial properties from HISD’s tax rolls and assign them to other school districts. Like I said, neither of these choices feels good.

houston_isdIt’s also an opportunity – albeit a painful one – for Texans to learn more about a financing system which the Texas Supreme court in their May 2016 ruling named “Daedelean,” “Byzantine,” “Augean,” and an “ossified regime ill-suited for 21st Century Texas,” while simultaneously declining to over-rule previous legislative decisions.

These upcoming payments from HISD have been mislabeled “Robin Hood” and “recapture.” But “Robin Hood” is a terrible nickname for this upcoming process, for two reasons, having to do with the definition of “wealthy” and for the specific meaning of “recapture.”

First, labeling HISD a “wealthy” district is odd. The “wealthy” designation that triggers HISD’s payment comes from a math formula – specifically the ratio of total real estate property values to student population, with a few adjustments to the population number for attendance rates plus specific student designations. The “wealthy” label does not take into sufficient account a measure that seems more important to me, like the fact that 76 percent of HISD kids are designated “economically disadvantaged.” Robin Hood – the mythical man in tights – did not after all make a habit of stealing from the poor.

augean

Second, also unlike our mythical Robin Hood that “recaptured” money does not necessarily get redistributed to poorer school districts. Now, this is the point where Texans everywhere should sit up and pay special attention. Right here. Ready?

HISD’s “recaptured” money goes into the state’s primary education fund – the FSP – but that money is not doled out subsequently to poorer districts. This is the key point. The math ratio of property value to student population determines which districts pay money in to the FSP and which districts take money out of FSP, but none of that determines whether the state, as a whole, allocates sufficient money to the FSP. In fact, as property values rise locally – and you, the taxpayer, pay more – you’re not really funding your local district, or even the poorer districts. You are relieving the state of the obligation to pay more for education. More money into the FSP from higher property values means less the state has to pay. That’s the finance trick you need to know.

And that’s really nice if you’re trying to save money at the state level, but not exactly Robin Hood-style redistribution, nor a great plan for funding great public education.

For these reasons, The Houston Chronicle editorial page has twice urged a “No” vote, and which would trigger either the never-before-enacted property-tax-separation method or daring the state legislature to try something different before July 2017 – when property rolls would shifted. To be clear, a “No” vote is a sort of game of financial chicken between the voters of Houston and the state, with unknown consequences.

We can do what we usually do about this type of thing, which is to shut off our brains in order to take comfortable refuge behind pre-existing ideological prejudices, and take potshots at the other side’s idiocy. But if you are under the impression that you could start a conversation about school finance with “All we need to do is…” then you are mistaken. This subject does not admit of easy solutions.

 

Hacking our way intelligently through the overgrown jungle of public school finance, we have to hold a number of contradictory thoughts in our head simultaneously. For what its worth, my process goes like this:

  1. The socioeconomic background of an individual student appears to affect student outcomes far more than funding-levels-per-student at a school or district. As a result, poor performance at poor schools and higher performance at wealthier schools can persist indefinitely, despite roughly equal funding-levels per student. “Social reproduction” – or a society with little economic mobility – can’t be undone easily by throwing more money at the problem.
  2. And yet, just giving up on the idea of economic mobility – our hope that poorer kids have a chance to get ahead in life through a combination of hard work and a good education seems – I don’t know, what’s the word? Maybe: Un-American?
  3. When we talk about public school finance in Texas, really what we’re talking about is educating poorer kids: 59 percent of kids in Texas public schools overall are classified “economically disadvantaged.” The school districts subject to ballot questions that I’m writing about this week and next week, in the Houston and San Antonio ISDs, educate 76 and 92 percent economically disadvantaged kids, respectively.
  4. To which I conclude that we can’t fix this quickly with more money, or by simply equalizing scarce resources, but at the same time, to not try to improve it some how, some way, some day is to resign ourselves to a bleak future of haves and have-nots with no end in sight.

I have no sodaedalean_mazelutions. I’m just trying to educate myself on one of the most complex finance problems out there.

I can see that the HISD ballot question is a terrible choice to make.

 

A version of this ran in the San Antonio Express-News and Houston Chronicle

 

Please see related post

The San Antonio ISD ballot question (upcoming)

 

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