No matter what you think about Square (NYSE:SQ) CEO Jack Dorsey, he deploys a discipline and tenacity that’s extremely difficult to find, especially in this day and age. As you know, he performs double duty as chief executive of Twitter (NYSE:TWTR), which is no easy task. Further, the man is a true visionary, which in large part explains the success of Square stock.
But it was the social media side of his professional career that once again caught Dorsey some serious flak. Not too long ago, Dorsey, along with social media rival Mark Zuckerberg of Facebook (NASDAQ:FB), received a senatorial grilling over their respective platforms’ moderation practices. Personally, I didn’t pay too much attention to the substance of the hearings. Unfortunately, I was distracted at how much Dorsey looked a homeless person.
This is the man who will lead Square stock to outsized gains? Fortunately, the market was much more forgiving or understanding. Certainly, though, it did leave an impression, albeit not a good one.
Nevertheless, if you can get over that – I chalk it up to the eccentricities of extreme intelligence – SQ otherwise seems to have adapted very well to the new normal. On paper, Square stock is up 250% year-to-date, which of course is excellent. Furthermore, the novel coronavirus itself offers surprisingly positive catalysts for its business.
For starters, contactless services are the “in” thing now. From curbside to home deliveries to digital payment options which Square specializes in, Covid-19 might as well be a free advertising session for the burgeoning technology firm.
Further, our own Louis Navellier pointed out that Square stock has upside appeal because of the sentiment shift toward cashless transactions. Indeed, one in three Americans have stopped using cash in recent months because of infection concerns. And a study reveals that post-Covid, 58% of us will stop using cash altogether.
But before you dive into SQ stock, you may want to consider the other side of the argument.
Square Stock Is Not Sustainable Under the Current Paradigm
As I mentioned up top, Jack Dorsey is a true visionary. For instance, his team expanded into Japan, a traditional cash-spending country because he recognized the direction the nation was going. As well, SQ has a history of embracing cryptocurrencies. Some have laughed at the strategic move, but I don’t think there are many chuckles now.
Undoubtedly, Asia and virtual currencies are huge markets. If you want to drill into it, there are both spiritual and economic signs that western hegemony is dying. Long story short, Square stock is well positioned to advantage the coming global paradigm shift. But until then, the latter component is what I’m most worried about for SQ shares in the nearer term.
I don’t think I’ll find much opposition if I state that in many ways, Square stock represents an indicator of the health of American small businesses. But in order for such enterprises – or any enterprise, really – to perform well, consumers must be confident in economic stability. And the best measure for that is the velocity of M2 money stock.
The easy way to think about money velocity is that it’s the circulation rate of currency. A robust economy should feature a multiple in the money velocity and the higher the better. This simply means that each dollar earned is circulated via multiple transactions in the economy. But if people are saving money, the circulation rate will get closer to zero – perfect deflation.
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Here are some fascinating statistics to consider:
- Between the fourth quarter of 2015 to Q3 2016, M2 money velocity declined 3% while Square stock dropped 10%, or a positive correlation of nearly 93%.
- From Q4 2016 to Q2 2019, money velocity increased roughly half-a-percent while SQ stock soared 449%, an 81.5% correlation.
- But from Q3 2019 to Q3 2020, the relationship shifted. Money velocity plummeted 20.5%, while SQ jumped 121%, registering an inverse correlation of 69%.
This is the only time (granted, it’s a short history) when Square stock was rising against a declining monetary circulation rate. I’m sorry but there’s no way this is sustainable unless we get a truly exponential increase in consumer confidence.
Not Bearish, Just Concerned
Inevitably, because this is the internet, I’m probably going to get hate mail from Square advocates that I’m turning negative on SQ. That’s not the case at all. Rather, I’m simply pointing out economic realities. In fact, you can run this exercise yourself.
For instance, one of the biggest talking points today is the stimulus bill. Politicians went back and forth about how much money Uncle Sam should give the American people – yeah, it’s a pathetic discussion but it is what it is. But here’s the thing: if money velocity is zero, you can throw the entire U.S. GDP into the economy. It won’t matter.
As you know, anything multiplied by zero will always be zero.
From this simple formula, you can deduct valuable lessons. Primarily, as money velocity gets closer to zero, the effectiveness of monetary injection policies will exponentially decline. Statistically, such policies will likely be less effective because the personal saving rate is at multi-decade highs.
In other words, whatever money is injected into the economy will be saved by the people. That’s good for them but not good for the broader economy as the circulation rate of money will remain deflated. Therefore, I can’t imagine that this is great news for Square stock, unless most of Square’s merchants are involved in the essential goods and services sectors (I doubt it).
Bottom Line
Based on the hard numbers, I believe those who are heavy on SQ should consider taking some off the table. Bottom line, Square’s non-crypto-related revenue channels are largely tied to American small businesses and these channels are under serious threat.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
