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January 28, 2021 | The Revolutionaries

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

What came first? The app or the attitude?

The big story is not about GameStop, Blackberry, AMC or whatever single stock gets blown up next. It’s about sentiment and technology, and how both (especially the former) just made dabbling in individual equities more suicidal. Whatever the outcome, it will be drenched in the bodily fluids of a million (at least) newbie ‘investors.’

Let’s start with the app. Then the fuel. Then the fools.

The Street calls them Hoodies – those DIY investors (overwhelmingly young) who have downloaded the Robinhood app and turned instantly into day traders. There are millions and millions of them now, attracted by an application that feels like a video game, costs nothing and allows free trades. It’s fun. It’s instant. There’s no set of weird, detailed know-your-client questions. No adults in the room. A few clicks and you’ve bought some shares. Empowering, and powerful.

There are more Hoodies now than clients of Schwab and E-Trade combined. They’re frenzied, too, trading about 40 times more shares than users of those other platforms. In many cases they own a security for just a few days. Sometimes just a few minutes. Researchers have found the Hoodies move in herds, rushing into publicized stocks with no real knowledge of the underlying business, based on ‘most popular’ or ‘trending’ lists. Two-thirds of the investors end up losing money, since the equities that are inflated inevitably plop, leaving the last ones in stranded. It’s not investing. It’s rolling the dice.

As for the fuel, these days it’s Reddit’s Wallstreetbets discussion board. That’s where the oxygen came from to push a crappy video retailer (GameStop) from nothing into orbit. Up 1,700%. It happened with BlackBerry too, now AMC, and previously it was Tesla and Doordash. Even crypto is being goosed beyond Bitcoin, with Dogecoin being pumped and inflated  77% in a few hours. But a lot of Hoodies don’t actually know much about the companies or the currencies. They focus on the ticker symbol and push the buy button. A TickTok stock-tip vid the other day featured a moister giving the secret to his success: “I just buy stocks that are going up and when they stop going up, I sell them.”

What could possibly go wrong with that depth of understanding and experience?

Well, the consequences just started. On Wednesday brokers stopped giving margin for these trades, forcing the kids to use their cash, and on Thursday the GameStop orgy can to a halt as platforms (including Robinhood) pulled the plug after it touched $500 a share – the pinnacle of absurdity. Imagine if you were one of the horde that joined the party just as the cops were pulling up outside.

This is stock market insanity on an historic scale. More to come. But it’s the attitude that’s the real toxin. On this blog yesterday we were awash in comments like, “Stick it to the man!!,” and “Bring the big boys to their knees,” and this gem: “It’s a beautiful thing Garth, watching the fortunes of lifelong money movers ruined, embrace it, just like the prostitutes at the Capitol cowering before the mob, brings a tear to the eye.”

GameStop etc. is being heralded as a white-vs-dark, David-Goliath, retail-institutional, moister-Boomer, fintech-paleo war. The kids are digging it. Regulators and capital market professionals are having a cow. When a $1 billion company with dim prospects becomes a $24 billion corporation with dim prospects, every alarm bell goes off. As stock prices detach from either profits (like the banks) or the potential for them (like Tesla), everybody knows what comes next. Slaughter. It’s not the hedge funds shorting the stocks and being swarmed by the Hoodies that we care about. It’s the integrity of the financial system which backs the economy.

Do the Mills think they’re paying back ‘the man’ for making them go to uni for 14 years in order to graduate into a jobless pandemic-addled world when nobody can afford a house while their parents’ portfolios plump? Hmmm. Well then, it’s another fail.

Look what happened yesterday to those kids who bought GME at $500 a pop overnight. The smart money bailed. The stock crashed, gyrated and shocked. It dropped $200 a share in five minutes during the afternoon. It lost 45% of its value on Thursday. The rabble at the bottom learned what a Ponzi scheme is. Redditers may end up investigated for market manipulation, especially those insiders who lit the fuse. Quelle mess.

Securities trading rules exist for a reason. To curtail fraud, cheating, criminality and unethical behaviour, of course. But also to protect complete idiots, especially the greedy ones, from themselves. What have Reddit and the Hoodies proven? Yup, that more regs are needed. The stock market is not a casino, nor can it be allowed to become one. The advent of mass trading by ingénues gassed up by a social media rabble is a fresh threat – not just to a system where corps get financed in order to expand and create jobs – but to all the naïve players tricked into thinking they’re noble.

It’s not the first time markets have been rocked by technology. Telephone trading morphed into online discount brokerages, then came high-frequency trading, algos, quants, hedgies, now fintech, trading apps, the Reddit rabble, DEFI and web3.0.

Well, the kiddos are too young to have been in the market when the dot-com euphoria turned to dust, wiping out 80% of the value of tech darlings. And they weren’t yakking on chat boards when Bre-X went to the moon before being vaporized. They weren’t in existence when people lined Toronto’s Yonge Street to buy gold as it hit the highest-ever price point – and everyone said it would go up forever.

This is not investing. It’s not a revolution. It’s not even new. It’s financially-illiterate, greedy sheep being manipulated by the unscrupulous and the irresponsible. They’ll learn the way the suckas of the past did. And ‘the man’ once again will move in and try to corral human nature. Good luck with that.

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January 28th, 2021

Posted In: The Greater Fool

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