While there’s a calm, rational case to be made for ignoring the raging “bubble” cacophony across markets, the shrill tenor is becoming difficult to tune out.
As much as it pains me to say it, this week’s wholly outlandish action catalyzed by armies (don’t call them “hordes,” that’s pejorative) of retail traders congregating on Reddit feels like evidence in support of warnings from folks like Jeremy Grantham, whose bombastic missives cautioning of imminent danger I’ve lampooned recently, in part because the folksy cadence belies the ostensible seriousness of the message.
Now, Grantham’s warnings (and those from others of his ilk) sound more plausible, even as Goldman and JPMorgan understandably think it might be foolhardy to shun stocks just because a motley crew of gamers decided to leverage their collective capacity to shape their own financial destiny.
Lest anyone should forget, I have argued both sides of this issue in an effort to provide a fair and balanced take. For example, in “They,” I essentially (albeit diplomatically) said that the general investing public is oblivious to signs of froth and that the Fed has created a potentially unstable situation.
In any case, SocGen’s Albert Edwards thinks policymakers should be ashamed of themselves.
“The madness has now taken a novel twist with a new warrior class of retail investor roaming the equity savannah,” he wrote Thursday, calling the Reddit crowd a “loosely organized retail mob” which is “gaining strength feasting off each hedge fund kill.”
Albert doubts it’s going to stop. “Intoxicated with success, they will seek out bigger and more powerful prey,” he added. “This farce is of the Fed’s creation – which should hang its head in shame.”
Jerome Powell didn’t exactly “hang his head in shame” on Wednesday. He didn’t want to talk about GameStop, mostly because he was busy claiming the Fed can move quickly to contain any prospective spike in inflation and arguing (ludicrously) that the effort at tightening he presided over in 2018 was a success. (It wasn’t. It was an abject failure, and a clear indication that normalization isn’t possible.)
Albert went on to cite a number of visuals depicting the madness, many of which are all too familiar by now.
Goldman’s most-shorted basket is having its best month ever, for example.
Edwards doesn’t think this is sustainable, and neither do I. He called it a “frenzy.”
On Wednesday, I wrote that “in my opinion, this is one of the most out-of-hand situations witnessed in decades.” Edwards, writing less than 24 hours later, said that,
In my 39-year career in the financial markets I have rarely seen anything as grotesque as the current market conjuncture.
He also cited call-buying and a chart from Sentiment Trader, a ubiquitous source of visuals and quotes for folks. “We didn’t think traders could get any more speculative than they were at the end of August,” the caption on the chart (below) reads. “We were wrong. For the first time, small trader call buying (adjusted for equivalent shares) exceeded 9% of total NYSE volume last week.”
Naturally, Edwards places the blame solely with the Fed. And I can’t say he’s wrong.
But my message is simple: Whoever you want to blame, the inescapable conclusion one comes to is that the farce seen in the shares of names targeted by the Reddit crowd isn’t sustainable. The bottom will likely fall out for some (if not all) of those names eventually. I haven’t been more sure of anything (or anything related to markets, anyway) in quite some time.
The question is what happens next.
“One of the surest signs that a bubble is close to bursting is when the retail investor piles in with leverage, and if the retail warrior millennial mob are angry now, wait until they lose their shirts in any market collapse,” Edwards said Thursday.
I suppose I’d just say one last thing. Life ain’t fair, folks. So, it’s possible that the Fed will eventually be compelled to say something about what are now clearly pockets of speculative excess. If that were to end up pulling the rug from beneath the broader market, the same Fed would doubtlessly move to assuage everyone in order to prevent financial conditions from tightening. But what they won’t do is make anyone whole for catastrophic losses in GameStop or Express or [fill the blank].
This is a rigged system. And the Reddit crowd would do well to remember that all successful “coups” notwithstanding, it’s not rigged for them.
So, for those who are truly up big (and not just saying so or posting doctored account statements to “prove” it), one strategy may be to take the money and run.
Corporate raiders do it all the time.