The guest commentary below was written by Jesse Felder of The Felder Report. This piece does not necessarily reflect the opinion of Hedgeye.
Last year I started a series of posts titled, “One For The Ages,” (here are Part One and Part Deux) intended to chronicle what I see as a frenzy in speculative activity in the markets that typically comes around only once in a generation (although it seems my generation has had more than its fair share). This is the third in the series.
J.P. Morgan famously said, “Nothing so undermines your financial judgement as the sight of your neighbor getting rich.”
And only in the age of social media could we ever have as many neighbors getting so fabulously rich all at the same time as we do today.
We are social creatures. So when those around us begin to behave in a much riskier way, it makes extreme risk taking seem normal.
Today, social media makes it seem like we are surrounded by consummate risk takers and so many of us are taking risks in the markets that would seem utterly deranged outside of the context of the larger social group.
Combine the social proof of widespread risk taking, magnified by social media, with the addictive properties that a platform like Robinhood is built upon, adapted from social media, then throw in free trading and you have a recipe for a speculative mania like we have never seen before.
Oh, yeah. And then give them all free money to play with.
It’s not hard to see exactly where all those “stimmy” checks went.
They went into Robinhood accounts and then into so-called “blank check companies”…
…and if those weren’t speculative enough, they went into meme stocks.
And if those near-bankrupt companies weren’t risky enough, they piled into the penny stocks of delisted names…
…many of which have already filed for bankruptcy, like Blockbuster.
And if bankrupt stocks weren’t risky enough, there’s the case of a blatant hoax garnering enough speculative interest to achieve a valuation equal to the GDP of the Cayman Islands.
Of course, Robinhood also makes it extremely easy for novice traders to get approved for options trading.
Those “stimmy” checks sure do buy a lot more call options (most of which are far out-of-the-money and expire in less than a week) than they do outright shares.
And if you think this new wave of newbie traders isn’t affecting the broad markets, think again.
Of course, it’s not just retail traders; it’s also wannabe George Soroses at large institutions, “adding fuel to the fire.”
And boy have they gone “risk on” lately.
The combination of retail crowding into popular “gamma squeeze” names and institutions following, or more likely front-running them…
…has resulted in an incredible run in the prices of those stocks.
And this phenomenon isn’t relegated to some obscure group. It can also be seen in the largest stocks in the market.
Coming back to Soros, the incredible performance of those mega-cap tech stocks over the past year has reflexively created an unprecedented surge in the expectations for long-term earnings growth.
All told, it appears the current stock market mania has infected everyone from teenagers playing hooky from their zoom classes to day trade options to major institutions trying to piggy back on those trades to analysts tripping over themselves to try to justify the highest valuations in history.
Perhaps it would behoove them to remember another famous J.P. Morgan quote: “I made a fortune getting out too soon.”
This is a Hedgeye Guest Contributor piece written by Jesse Felder and reposted from The Felder Report blog. Felder has been managing money for over 20 years. He began his professional career at Bear, Stearns & Co. and later co-founded a multi-billion-dollar hedge fund firm headquartered in Santa Monica, California. Today he lives in Bend, Oregon and publishes The Felder Report. This piece does not necessarily reflect the opinion of Hedgeye.