GameStop mania didn’t happen in a vacuum. It’s just the most glaring example of the bubble-like behavior running rampant in the financial markets.
Long before an army of Reddit traders sent GameStop, AMC and other stocks “to the moon,” evidence of extreme market speculation had been mounting.
Shares of Airbnb, DoorDash and other unprofitable start ups have gone straight up on their first day of trading. Shell companies with no operating assets have raised gobs of money thanks to a phenomenon known as SPAC mania. Tesla is now worth nearly $800 billion — more than every other major automaker combined.
None of this is normal. Rock-bottom interest rates are forcing investors to take extraordinary risks — and for some, this will end badly.
“I think we’ve had a bubble for some time. This is just icing on the cake,” Richard Fisher, the former president of the Dallas Federal Reserve, told CNN Business. “When things get out of control like this, it is a sign that you should be very worried.”
GameStop has skyrocketed about 1,700% this year as traders on the Reddit board WallStreetBets helped push it sharply higher — and that’s after losing nearly half its value Thursday. The CEO of the money-losing video game retailer is now worth nearly $1 billion.
“Someone is going to get hurt,” Fisher said. “As happens with crowd behavior, you end up having people come in at the end at a very high price and getting burned.”
Indeed, the SEC warned Thursday that “extreme stock price volatility” has the potential to cause “rapid and severe losses” for investors and to undermine market confidence.
Robert Shiller, a Nobel Prize-winning economist, said the Reddit movement is being driven by not just historically low interest rates, but by social trends, too.
“It has something to do with Trumpism,” Shiller told CNN Business. “There is a pass-it-on mentality. A sense that ‘those experts are just self-important; they don’t know anything.'”
He added that there is a desire to outsmart those experts and prove them wrong.
“I can imagine that story being contagious at this time in history,” Shiller said. “It’s going to be extra humiliating when the bubble pops.”
Fisher, the Dallas Fed president and a former hedge fund manager, agrees there is a social dynamic and hint of populism at play.
“They have seen the rich get extremely rich by taking advantage of cheap money — and they want to get their piece as well,” Fisher said. “This is sign that we are getting a blow-off top.”
Goldman Sachs warns of ‘bubble-like sentiment’
FOMO (fear of missing out) has helped drive an enormous amount of money into bitcoin and other cryptocurrencies. There remains a massive divide over the future of bitcoin, but establishment figures such as BlackRock are increasingly voicing support — and throwing money behind it.
Yet bitcoin can at times move dramatically for reasons that may seem dubious. The leading cryptocurrency surged 20% early Friday, for example, after Tesla boss Elon Musk added the hashtag #bitcoin to his Twitter bio.
Meanwhile, special purpose acquisition companies, or SPACs, are all the rage. Once reserved for the back waters of Wall Street, major companies including Virgin Galactic, DraftKings and Playboy are all going or have gone public through SPACs.
Collectively SPACs have raised $16 billion during the first three weeks of 2021 alone, easily surpassing the $13 billion that was raised in all of 2019, according to Goldman Sachs. In 2020, 229 SPACs raised a staggering $76 billion.
“Bubble-like sentiment surrounds SPACs,” Goldman Sachs analysts said in a recent research report.
Fisher agreed that SPAC mania is another concerning sign.
“What you’re doing is throwing money out there — and hoping to find an idea,” he said. “It’s another indicator that money is too cheap.”
Lofty market valuations
Cheap money has set off a V-shaped recovery in the broader stock market as well. Even after a sharp selloff Wednesday and another significant retreat Friday, the S&P 500 is not far off its record highs. That’s despite the fact that the United States remains mired in a once-in-a-century pandemic.
To be fair, investors are looking through the ongoing health crisis and focusing instead on the prospect that vaccines will allow a swift reopening of the economy.
Still, market valuations have rarely been as lofty as they are today. Shiller’s CAPE (cyclically adjusted price to earnings ratio) for the S&P 500 is at 35. The only other times it’s ever been above 30 were in 1929, just before the Great Depression, and during the late 1990s dotcom bubble, according to Loup Ventures, a venture capital firm.
The frenzy has gone mainstream. Even sports franchises are tweeting about the market.
“ZACH LAVINE TO THE MOON,” the NBA’s Chicago Bulls tweeted Thursday, with a stock chart-like graph showing the shooting guard’s rising point totals.
“There are certainly some pockets of the market exhibiting bubble-like behavior driven by retail speculation, but who knows when they’ll pop,” Doug Clinton, managing partner at Loup Ventures, wrote in a report Thursday.
That’s the thing about bubbles: they can continue — and get much bigger — until they don’t.
“No one can time these things,” Fisher said.
For his part, Shiller doesn’t think the overall stock market looks all that out of whack, mostly because interest rates are so low. That makes stocks a more attractive option compared to other assets.
“It’s not a great time to buy stocks,” he said. “But it’s maybe OK to stay in.”