The Paranoid Style in American Investing

The year 2021 will be remembered as the year in which the markets collapsed into a rabbit hole and entered financial wonderland: a once elitist company has grown more populist, tribal, lawless and often downright bizarre. .

Retail investors have eclipsed hedge funds, crypto has taken on fiat currencies, and financial flows have crushed fundamentals. Goodbye stocks, hello stonks: memes count now.

Here’s a taste of the madness: Entrepreneur and social media puppet master Elon Musk has become the richest person in the world. Tesla Inc.’s market capitalization exceeded $ 1.2 trillion, more than the other nine largest automakers combined.

One of those others, Rivian Automotive Inc., went public in November and only started generating revenue recently. It was soon valued at $ 150 billion.

Hundreds of Special Purpose Acquisition Firms, or SPACs, have together raised more than $ 150 billion to find a company to go public, often their goals being more of a business plan than a company.

Cryptocurrencies, most of which have no intrinsic value, were at one point collectively worth over $ 3 trillion. A symbolic, non-fungible (NFT) work of art – in this case, a JPG file by an artist named Beeple – sold at a Christie’s auction for $ 69 million.

Ailing video game retailer GameStop Corp. and the movie chain AMC Entertainment Holdings Inc. climbed to 2,450% and 3,300%, respectively, when Redditors coordinated online to punish hedge funds that gambled on the disappearance of the companies. (1)

And because there is no gold rush without pickaxes, retail brokerage Robinhood Markets Inc. and cryptocurrency exchange Coinbase Global Inc. have become two of the biggest initial public offerings in the world. year: at their peak, they were valued at 59 and 75 billion dollars. (In December, the home of WallStreetBets, Reddit Inc, announced that it had confidentially filed for an IPO)

Investors have invested $ 1,000 billion in cash in equity funds over the past 12 months, more than the combined inflows of the past 19 years. At its peak in January, retail investors accounted for nearly a quarter of U.S. equity trading, according to Bloomberg Intelligence.

An estimated 16% of American adults have invested in crypto, according to the Pew Research Center; for men in their twenties, this proportion is closer to half. In 1929, shoe-shiners gave tips; teenagers today ask their parents to open a crypto trading account on their behalf.

The brief explanation for all this feverish activity is that thanks to stimulus measures by the central bank and the government, far too much money is flowing through the financial system. The aggregate money supply has increased by $ 21 trillion since the start of 2020 in the United States, China, the euro area, Japan and eight other developed economies. “Stocks keep going up” is not just a tongue-in-cheek slogan – it is essentially about the experience of young investors over the past decade. And so they ignore the nosebleed valuations and buy the decline.

But something has also changed in the culture of investing. It’s no longer enough to admire a company or asset and buy the stock or token. Some of the biggest trends in investing have become an extension of personal identity, similar to your religion or your sports team. Sometimes that connection is obvious: Starting on Christmas Day, the home of the LA Lakers will be renamed Arena. Footballer Tom Brady has launched his own NFT collection.

These moves can be fun and challenging, but the financial super-fandom can quickly turn toxic. I’m concerned that the same forces that diminish modern politics – partisan divisions, widespread mistrust, social media echo chambers, disinformation, culture cancellation and conspiracy theories – are seeping into the investment world, where they are. distort the allocation of capital, inflate a series of bubbles and challenge the ability of regulators to protect investors and markets.


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