What links the FAANG to RobinHood and Tesla?

This article explains how RobinHood is able to offer retail investors commission-free stock trading. This article goes a bit further in suggesting that RobinHood is not really in the business of stealing from the rich to give to the poor, at least if you think of “the poor” as RobinHoods notional customers.

Almost the nearest thing that economics has to the Second Law of Thermodynamics is There ain’t no such thing as a free lunch or TANSTAAFL for short. In the case of RobinHood, as in the case of Facebook, the product is the “user.” The real customer is Citadel Securities, which gets to see the retail order flow and is free to write AI algorithms to monetize it or to “front run” it as we used to say in the good old days. Of course, Citadel and the others who pay RH for order flow do not literally examine orders and place orders ahead of them. They simply use the real time data on where those leading the herd of retail investors are veering to next to make sure that they are on the right side of the trade.

Telsa, recently jilted at the altar by the committee of the S&P500 inclusion committee is another case where the customer is seen and unseen. In Tesla’s case, a large part of its revenue is from companies like Fiat Chrysler Automotive, which does not make BEVs itself, but needs to include some in its notional product mix to satisfy EU regulators. By counting some Tesla cars as if they were made by Fiat, the latter gets off paying fines to the EU. In Tesla’s case, this is problematic, as these lucrative customers are about to go away, as every automotive manufacturer in Europe is churning out its own BEV range. This is all speculative, as the committee does not give its reasons. Tesla can now raise insanely cheap capital, so it has a big competitive advantage over legacy auto makers and might yet get in the index without opaque tax arbitrage payments from other automakers. We’ll see.

Morning call

Equities have calmed down after the euphoric bounce yesterday. Bonds are dead. Commodities are mixed but fairly flat. Bitcoin ($BRR futures) is drifting down. I don’t see bitcoin as having any intrinsic value, but this makes its price a perfect measure of global sentiment. With no fundamentals to worry about, no yield to link its price to the movement of future interest rates, no trade balances or central bank issuance to worry about, it really has the characteristics of a perfect indicator. With any luck it’ll be a leading indicator, although the “craze” aspect of it would not have helped in its early days. Hopefully, now, there is no novelty in bitcoin: it’s just a tradable commodity (albeit digital) that just reflects investor’s appetite for risk. You can see it here, when I get around to finding an embeddable chart for it.

Worth a look

• Wolf on how J Powell responds to critics who say he’s exacerbating inequality. BTW, it’s perfectly possible for the Fed’s actions to increase the chance of deflation and inflation, at the same time. The future of the economy has a distribution of outcomes, and more matters than just the mean (or the median!).

• Druckenmiller says:

It’s an “absolute raging mania.” Hedge fund manager Stanley Druckenmiller appeared on CNBC yesterday, warning of the mania in the markets caused by the Federal Reserve and saying it will end badly. “Everybody loves a party … but, inevitably, after a big party there’s a hangover,” Druckenmiller said. “Right now, we’re in an absolute raging mania. We’ve got commentators encouraging companies to do stock splits. Companies then go up 50%, 30%, 40% on stock splits. That brings no value, but the stocks go up.”

Druckenmiller also said, as reported by Bloomberg and printed in the FT:

Inflation could hit 5% to 10% in the next four to five years, Druckenmiller said Wednesday in a CNBC interview, adding that the Federal Reserve has created conditions that have sent valuations soaring. Deflation is also a risk, he said.

What do we do about this? I wish I knew. It sounds as though Druck doesn’t either.

US Current Account

This looks awkward for Trump, given his trade wars rhetoric.

Wrap

Written early, but so far the market looks becalmed. Equities practically flat, other markets fairly quiet. Not entirely consistent with the Druck quote above, but this thing is not over yet.

Written as the US closed: quite severe drops in ES and GBP. The latter because of the Brexit omnishambles, presumably. Nearly all commodities down (wheat an exception, maybe). EM currencies down. DXY up (of course). Looks like a classic risk off day, except 10 year treasuries are not responding. We truly are turning Japanese.

Selgin on corridor and floor systems is very good.