Many investors big and small, institutional and private, are at a loss to explain what the heck is going on with global, and especially US, stock markets.
I follow Ockham’s Razor – if you’re looking for an explanation of why markets are shooting ahead, you simply follow the tsunami of money printed by central banks. That said, a new rationale has emerged in recent days: bonkers private investors are at fault.
In fact, I think I do this narrative a great disservice without pulling together a number of linked stories.
Let’s start with the wonderful Matt Levine, a Bloomberg Opinion writer who is always worth reading. He has been quietly developing a theory called the ‘boredom matters hypothesis’ which goes something like this:
The basic theory…is that ordinary people will do more trading (1) if trading is entertaining and (2) if other things are less entertaining: The more bored they are, the more they will trade stocks.
An even more current version of this thesis is that there are lots of bored, young American men who can’t bet because of lockdown and who have turned to investing in high risk, small cap, value and technology stocks. Here’s another wonderfully amusing summary of what’s called the Dave Portnoy Stocks Theory.
Dave Portnoy, founder of the popular website Barstool Sports, has turned to day trading, sharing regular proclamations to his 1.5 million Twitter followers as he scans his portfolio. ‘Stocks only go up, this is the easiest game I’ve been part of!’ he said in a video on 4 June, with Dire Straits tunes in the background. ... ‘It took me a while to figure out that the stock market isn’t connected to the economy,’ he said. ‘I tell people there are two rules to investing: Stocks only go up, and if you have any problems, see rule no.1.’
What has made this troubling trend even more kinetic is the rise of free online trading platforms such as Robinhood in the US. This has grown hugely popular with younger investors and if you look down the top 100 list of stocks traded on this platform here you’ll see some rather fruity names sitting alongside more slightly more boring, though contrarian stocks such as Ford.
What we see here is another iteration of an age old story: blame bonkers market moves on late-to-the-party private investors. To grey-haired cynics such as yours truly, this sounds a familiar story.
I grew up on penny stock outrages. Other highlights have included the oft-noted average holding time of Saudi stocks (once liberated by their authorities) measured in seconds just a few years ago, capped by the Bitcoin fiasco, when everyone and their aunt was predicting a new top. Then there’s the urban myth that, before the Great Depression, it was when the lift attendant was tipping stocks that you knew we were in trouble. See a pattern emerging over the last hundred years?
The contrast to this narrative is that institutions are more sensible. Better to trust a fund manager with your money as they won’t behave as crazily as we do. Except that is also, pardon my French, cobblers.
There are endless examples of well-paid big institutions making outright stupid trades. Where to start? Maybe all those pension funds and sovereign wealth funds knew what they were doing when they invested in the Long-Term Capital Management hedge fund that collapsed in 1998? Or what about those super clever risk parity trades which recently blew up? Or perhaps one can point to the most recent example of insanity involving our trusted UK private wealth managers.
You may not be aware but these houses – all trusted brands – are busily merging with each other, prompted by their private equity owners to scale up like crazy. As they get ever larger, their investment functions are being centralised in new silos run by lots of clever people who go on about asset allocation.
The net result is that decision making gets taken away from the person you used to deal with and placed with someone in head office who is a ‘specialist’.
There’s an echo of this in mainstream equity markets where unimaginable amounts of money are flooding into the mega cap tech stocks. What’s driving this is a complex mix of deep liquidity, technology trends and mega cap stocks deepening their competitive advantage in the post Covid world.
Step back from it and you see ever more crowded trades in deeply liquid stocks, driven by a dwindling bunch of ever-bigger institutional fund managers. Surely this could never go wrong?
David’s daily blog is available at www.adventurousinvestor.com.