Market manias could end in tears — No bipartisan stimulus deal likely — Robinhood CEO hauled to the Hill

From: POLITICO's Morning Money - Tuesday Feb 02,2021 01:06 pm

Feb 02, 2021

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Quick Fix

Why recent manias have Wall Street freaked out — I write here about the giant surges in stocks like GameStop and AMC — and now commodities like silver — and how they are ringing giant alarm bells from Wall Street to Washington.

None of the moves had much to do with underlying economic fundamentals. Instead, the fevered trading of the last week shows all the markings of a market mania that historically ends in big losses for small traders, sharp pull-backs by big investors and regulatory investigations paired with hand-wringing congressional hearings that drag on for years long after the damage is done.

And Wall Street has already been defying gravity for the last year, soaring to record highs and lofty valuations in the face of a brutal global pandemic that still poses considerable economic risks as virus variants spread before vaccines can take hold.

And now it’s social media — which has driven politics in bewildering directions over the last several years — pumping up what look like multiple bubbles that could burst in painful ways.

One Wall Street CEO told me: “There is a huge question about the role of social media here and there are just no regulations around it … Anyone can go on these platforms and tout a stock or a commodity they own and get a big following and then dump it. It’s pump and dump in a totally new, viral format and there are huge risks that need to be looked at right now or we could be in very serious trouble.”

The bigger picture — Individual investors should of course have to right to buy and sell whatever they want without regard to how it might slam hedge funds or big Wall Street firms. The larger question is whether bubbles are forming all over the place that could end in widespread pain.

Mohamed A. El-Erian, president of Queens College Cambridge and chief economic adviser to German investment giant Allianz told me: “We are now living through the greatest disconnect between financial markets and the real economy that we have ever seen … And we now have younger retail investors who have disposable cash, are savvy at social media and have cost-free platforms.”

GOOD TUESDAY MORNING — None of you showed up to shovel the roughly 900 inches of snow in front of my house. But we still love you anyway. Email me on bwhite@politico.com and follow me on Twitter @morningmoneyben. Email Aubree Eliza Weaver on aweaver@politico.com and follow her on Twitter @AubreeEWeaver.

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Driving the Day

FIRST IN MM — Via Aubree: A bipartisan group of CEOs, academics and policymakers have joined forces to launch the Commission for Inclusive Capitalism.

Later today, the group — which includes former Council of Economic Advisors chairs Glenn Hubbard and Laura Tyson, Markle Foundation President Zoë Baird, TIAA CEO and former Federal Reserve vice chair Roger Ferguson, former U.S. Congressman Steve Bartlett (R-Texas) and more than a dozen others — will release 21 policy and business practice recommendations ‘for the inclusion of the American worker in our nation’s sustained recovery and economic growth.’”

The Commission, alongside the Ford Foundation and the Rockefeller Foundation, will host a virtual roundtable Wednesday afternoon to discuss the recommendations with Sens. Mark Warner (D-Va.) and Rob Portman (R-Ohio).

ROBINHOOD CEO HAULED TO THE HILL — Our Zachary Warmbrodt: “The CEO of online stock brokerage Robinhood is expected to testify before a House committee on Feb. 18 as lawmakers dig into the firm's role in the tumultuous trading of GameStop stock and other companies, people familiar with the matter said.

“The hearing before the House Financial Services Committee with Robinhood CEO Vlad Tenev, which has not been formally announced, is primed to be a blockbuster. … Robinhood’s decision on Thursday to stop its customers from buying the stocks sent GameStop's shares plummeting, drawing criticism of the brokerage from Rep. Alexandria Ocasio-Cortez (D-N.Y.), Sen. Ted Cruz (R-Texas) and other lawmakers on both sides of the aisle.”

DEMS GET ANXIOUS ON STIMULUS — Our Caitlin Emma: “Congressional Democrats are moving toward a political gamble that could finally help control the coronavirus pandemic in the U.S. — or leave the national response strained.

“As Democratic leaders take steps this week toward … Biden’s first legislative push, there is increasing anxiety within the party about how much coronavirus assistance they can deliver and how quickly, with little room for error. Democrats are mostly united behind Biden’s $1.9 trillion plan, and are moving quickly to muscle it through without GOP votes … Still, lawmakers fear that a single misstep could force Congress to sputter over yet another cliff””

STIMULUS IMPACT — Via S&P: “In our analysis … Biden's proposed $1.9 trillion stimulus package brings U.S. GDP back to precrisis levels by second-quarter 2021, one quarter sooner than our $1 trillion base case …

“The boost is demand-driven and temporary, with GDP decelerating to trend growth by 2023. - Additional stimulus lowers our estimated risk of recession over the next 12 months to 20%-25%, near the bottom of the range (from 25%-30% estimated in December).”

AND VIA CBO … Our Caitlin Emma: “The economy will bounce back over the next several months, even without more stimulus aid from Congress, but employment levels are unlikely to fully recover until 2024, the Congressional Budget Office forecast

“Much of the economic recovery hinges on the pace of vaccinations, the effectiveness of fiscal and monetary policies to curb the pandemic, and the evolution of the coronavirus as new strains turn up across the U.S., the independent budget office said in its latest economic projections.”

BIPARTISAN COVID DEAL REMAINS UNLIKELY — Our Tyler Pager, Anita Kumar, and Laura Barrón-López: “Biden was eager to meet with Republican senators Monday to discuss Covid relief legislation. But the show of bipartisanship is likely to be just that — a show.

“Advisers to the president say they are mindful of getting bogged down in talks with Republicans, whose offer didn’t even meet the president halfway on his $1.9 trillion package. And current White House aides who served in the Obama administration confess to being particularly wary after Republicans drew out negotiations and stonewalled much of the former president’s agenda.”

Markets

WALL STREET ENDS HIGHER, LED BY TECH GAINS — Reuters’ Caroline Valetkevitch: “U.S. stocks ended sharply higher on Monday, led by gains in technology shares after last week’s steep market sell-off, while mining shares rose as the retail trading frenzy shifted to silver. Investors also watched talks over the latest U.S. Covid-19 relief package.

“The iShares Silver Trust ETF, the largest silver-backed ETF, jumped as silver broke above $30 an ounce for the first time since 2013, with retail traders jumping into the metal after betting billions of dollars on stocks last week.”

GAMESTOP SAGA MAKES WALL STREET AN ISSUE FOR BIDEN TEAM — AP’s Marcy Gordon and Ken Sweet: “The drama surrounding the trading in shares of GameStop, AMC Entertainment, Blackberry and other beaten-down companies has suddenly thrust Wall Street near the top of a crowded list of issues that President Joe Biden’s regulatory team needs to tackle early in its term.

“A number of wealthy institutions on Wall Street bet the stocks of these companies would fall, only to be thwarted by small investors who banded together on social media and sent the prices higher. Many of the small investors trade on online platforms such as Robinhood, which suddenly restricted the buying of shares of GameStop and other companies, sparking outrage from the social media crowd and politicians alike.”

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Fly Around

ROBINHOOD RAISES ANOTHER $2.4B FROM SHAREHOLDERS — WSJ’s Peter Rudegeair: “Robinhood Markets Inc. raised another $2.4 billion from shareholders, days after investors agreed to pump $1 billion into the online brokerage to help it ride out a trading frenzy in talked-up stocks like GameStop Inc.

“The big infusion — the $3.4 billion brought in since last Thursday is more than the company had previously raised in the eight years since its launch — gives Robinhood a cushion to cover a surge in collateral requirements stemming from the trading boom. The cash should also allow the company to remove many of the trading restrictions that angered customers of the popular brokerage, people familiar with the matter said.”

KASHKARI: FED SHOULDN’T PULL BACK ON AID — WSJ’s Michael S. Derby: “The U.S. economy has a long way to go before it fully recovers and will need strong support from the Federal Reserve and the broader government to get there, Federal Reserve Bank of Minneapolis President Neel Kashkari said Monday.

“‘The key now is for the Fed to keep its foot on the monetary policy gas’ to help the economy overcome the coronavirus pandemic, Mr. Kashkari said. He also said it is critical that fiscal aid be in the mix as well, adding the central bank will use all available tools to help achieve its job and inflation goals.”

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For Your Radar

BOOK DEAL — Via Talking Biz News: “New York Times banking reporter Emily Flitter has signed a contract to write a book on racism in the financial system. The book, which does not yet have a title or a release date, will be published by One Signal, an imprint of Simon & Schuster.”

TRANSITIONS — Mark Epley is joining Arnold & Porter’s legislative and public policy practice as a partner. He was most recently a senior adviser at the Managed Funds Association and is a Speaker Paul Ryan alum.

JOIN WEDNESDAY - AN UNEQUAL BURDEN FOR WOMEN DURING THE PANDEMIC: Covid-19 dealt a significant blow to working women as household work, child care and the care of older adults disproportionately fall to them. A recent report found that 1 in 4 women considered cutting back hours spent at their jobs or dropping out of the workforce altogether, citing increased household and child care responsibilities during the pandemic. How do we start even the burden? Join POLITICO for a virtual discussion on women, work and caregiving during Covid-19.