“Where, Exactly, Did $800 Billion in PPP Money Go?” (Bloomberg):
Billions of dollars of federal funds may have been misappropriated as part of the government’s well-intentioned but loosely monitored effort to support entrepreneurs and their employees during the Covid-19 pandemic. Meanwhile, the Small Business Administration, which has supervised the massive rescue since last year, decided recently to speed up its completion by making it easier for borrowers to have their loans forgiven.
Analysts remain split on how best to assess the success of the PPP and the related Economic Injury Disaster Loan program. The Government Accountability Office puts the spending at $910 billion, of which $800 billion is PPP money. Any assessment, however, will rely on the release of more sweeping data about the push from the government and borrowers. It’s also becoming clearer that fraud may have been much more rampant than originally understood, although the likelihood of massive misappropriation because of lax supervision was obvious from the start. Any funds that wound up in the wrong pocket or were steered toward insiders also blunted the program’s effectiveness.
The question for today is not whether any of the $800 billion was obtained fraudulently (or whether forgiveness was obtained fraudulently), but what businesses actually did with the money. For example, my friends who own small-to-medium-sized companies enjoyed reasonably strong revenue in 2020 (a dip in the spring and then roaring back in the summer and fall), so the PPP money ended up being a an untaxed bonus of $millions that went straight into personal checking accounts. From there, what did or could they do with, e.g., $2-5 million? Mustafa Qadiri bought himself “a Ferrari, Bentley and Lamborghini” and got in trouble because he faked the number of employees that he had. But my friends were in a similar position, showered in cash that they had no use for in their respective businesses (which were continuing to show a profit).
Let’s assume that half the companies that got PPP didn’t need it. That’s $400 billion in cash that business owners needed to invest in stocks or real estate. This is only about 1 percent of the total value of the U.S. stock market, but it could still be significant if we believe the Wall Street Journal. “What Determines Stock-Market Prices? Here’s a New Theory” (11/6/2021):
A new study shows how much the flows of money into and out of the stock market affect stock prices—perhaps more than many investors realize.
Specifically, a dollar of cash from outside the stock market that is invested in equities will cause the combined market cap of all stocks to rise by about $5, while a dollar withdrawn from the market will have the opposite “multiplier effect,” the study says.
The reigning academic theory of the market up until now, in contrast, has insisted that investors are extremely sensitive to price, very willing to sell when prices go up. As a result, flows into the market that have no relevance to a company’s fundamentals should play no role. That is why academic orthodoxy up until now has been that the flow-based multiplier must be zero.
The new study that finds to the contrary, titled “In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis,” was written by Xavier Gabaix, a professor of economics and finance at Harvard University, and Ralph Koijen, a finance professor at the University of Chicago’s Booth School of Business.
Another reason is investor psychology: We become more bullish as prices rise—not less. An illustration is how much stock market timers’ recommended equity-exposure levels have risen since the March 2020 bottom. According to my tracking of nearly 100 such timers, they on average were completely out of the market at that bottom, when the Dow Jones Industrial Average was below 19000. Today, with the DJIA nearly double where it stood then, the average exposure level is 63%. If these timers were more price-sensitive, you would expect their equity-exposure levels today to be a lot less.
It could the same phenomenon in real estate. In a country where it is ever-more-challenging to build anything (but we’ll bring in 59 million more migrants and hope to find somewhere for them to live!), extra money in bank accounts will generate insane bidding wars among those who were blessed by the Great Covidcratic Wealth Reallocation of 2020-2022.