by Eliza Haverstock, Chris Helman, Halah Touryalai, Sergei Klebnikov, Matt Schifrin
Despite the Covid-19 crisis, a presidential impeachment and ongoing stimulus angst, the stock of a failing video game retailer took center stage last week. Best known for its mall outposts, Grapevine, Texas-based GameStop became the focal point for an angry mob of millions of young investors on a Reddit community known as r/WallStreetBets. Their collective might, empowered by novice Robinhood traders and stimulus money, sent the stock up more than 600% in little more than a week, making fortunes for some but also effectively bankrupting seemingly sophisticated hedge fund investors in the process. Their triumph inspired similar bullish raids on other declining companies now referred to as “meme stocks”, including Blackberry and AMC Entertainment.
To make sense of the madness, Forbes reached out to some of the most respected market minds and practitioners who offered their perspective and predictions.
Princeton’s Burton Malkiel’s classic A Random Walk Down Wall Street has guided investors since 1973. (Photo by Fairfax Media via Getty Images)
Fairfax Media via Getty Images
Burton Malkiel
Professor of Economics, Princeton University, author, A Random Walk Down Wall Street
“It’s the same phenomenon as the Dutch going crazy in the 1600s buying tulip bulbs. It’s happened time and time again. These speculative manias are likely to be a fact of life forever…In some sense like a game of musical chairs, there’s somebody who’s going to be left standing.”
“It seems to me to be very much like the raid on the Capitol building. It is a speculative craze sparked by social media. We certainly very much value free speech. And yet, I think we clearly see some things happening with the social media phenomenon that raised a lot of issues…As a country, we’ve really got to think very carefully about how we deal with this.”
Wharton’s Jeremy Siegal hopes that speculative days traders will embrace a long-term view of markets.
ASSOCIATED PRESS
Jeremy Siegal
Professor of Finance, The Wharton School, Co-founder WisdomTree Investments, author, Stocks For The Long Run, The Future For Investors
“GameStop is no where near worth what it was trading at but it’s a perfect example of the greater fools theory where it’s possible to make money on something if it’s overvalued so long as there’s someone willing to pay a higher price…I hope that these [Reddit] investors can be turned into long term investors where the odds are actually for you and not against you. We want to get them on the side of investing rather than speculating, because you don’t need to speculate to make money in the market.”
Albert Edwards
Global Strategist, Société Generale
“The Fed has become trapped by a monster of its own creation as the financialized economy would implode if stocks collapsed…Fed liquidity has washed away the weighing machine and left only the voting machine standing, together with his printing machine.”
Michael Steinhardt, once regarded as Wall Street’s greatest trader. (Photo by Jason Kempin/Getty Images)
“What’s been happening really is a reflection of the quality of analysis, the quality of work, the quality of input that is coming to Wall Street. And it’s a sorry tale, that something like this can happen.”
“It’s unlikely that [stocks like GameStop] could create the sort of [systemic] problem [that we saw in 2008]. And then, even if some random brokerage firm felt some problem from these crazy moves, so what? In the end GameStop and some of these others are going to go down a lot. And, it’s that phenomenon which is going to create pain for investors who can least afford it.”
Peter Garber
Retired economics professor, Brown University, former Global Strategist, Deutsche Bank, author, Famous First Bubbles
“It’s not at all about the item of speculation (GameStop, in this case), it’s about the financing of the two sides. Who has access to credit and cash to withstand the tug of war. The Panic of 1907 was triggered by an attempt to corner shares of United Copper Company. Drove the price up. Shorts entered the scene. And then there was an attempt to squeeze them. Players went bust. A large number of banks got stiffed. There was a bank run, a shortage of cash, and John Pierpont Morgan had to step in to supply cash to the market. He became the de facto central bank. It led to the creation of the Federal Reserve.”
“Who’s the mob? People disemployed by government fiat. And they are working from home and given money to spend. They banked it and nothing else to do with it. Somebody just had to plant the idea.”
Ciamac Moallemi
Professor of Business in the Decision, Risk & Operations Division, Columbia Business School
Principal, Bourbaki LLC
“If I was a short seller, I would be very, very concerned. And I would be continuously monitoring [social media] for the names that I’m interested in. I’ve heard of quantitative investors who’ve gone to sort of scrape these forums and try to mine them and build signals. I think this will change things.”
“These [hedge funds] are sophisticated investors, and they’re not gonna set themselves up for anything. I think people just weren’t aware that this was possible. But now that you’ve seen it once? It’s sort of like after 9/11, people didn’t think you could take over airplanes or crash into buildings, you know, Now, that doesn’t happen anymore.”
Investor Mohnish Pabrai sees human nature in the short squeeze. (Daniel Barry/Bloomberg News)
DANIEL BARRY/BLOOMBERG NEWS
Mohnish Pabrai
Founder and Managing Partner, Pabrai Investments Funds
A lot of this is human nature, it’s lemming-like. When you see your dumb neighbor making money you think ‘gee, I’m smarter than him, I should get in on that’. Everyone wants to join the party. And now this has gone beyond Reddit because it’s international. There’s a housewife in New Zealand who’s seeing all this and wants to be a part of it.”
“In the past if you had a group colluding the SEC could come in and use its rules and regulations to end it. But this is a group of people on Reddit who don’t know each other on a public forum, and maybe it’s not exactly colluding but it has the same effect of moving a stock. It’s a network without a central nervous system, without a core.”
Ben Inker
Head of Asset Allocation, GMO
“What we’re seeing now is way beyond the 2000 Internet bubble excesses. People buying GameStop do not care about the underlying company. Its future is irrelevant to them. Instead, with GameStop we see a strong element of anger. It is ‘I’m going to screw this guy. Wall Street has been taking advantage too long.’ Occupy Wall Street was that.”
“The end of Covid lockdowns could be the catalyst to pop this bubble. People have been buying the companies that are Covid immune. When the world can go back to normal those stocks no longer deserve their premium.”
Billionaire value investor Ron Baron. (Photo by Chip East/Bloomberg News)
BLOOMBERG
Ron Baron
Founder and CEO, Baron Funds
“Robinhood is a joke. This is the gamification of the stock market. They say there’s no commissions – but that’s also a joke, they sell customers’ order flow…Sooner or later, people who are investing in that fashion are going to lose a lot of money.”
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
