From Peter Reagan
During my career, I’ve watched three speculative financial bubbles inflate, and two of them pop (the dot-com bubble, the 2007-08 housing bobble and today’s Everything Bubble).
These bouts of “irrational exuberance,” to use Robert Shiller’s trenchant description, are remarkably similar. They follow well-established patterns. Yet somehow people delude themselves with what Sir John Templeton called “the four most costly words in the annals of investing.”
“This time is different.”
Economic scholars Carmen M. Reinhart & Kenneth S. Rogoff used those four words as the title of their award-winning book, which includes the warning:
More money has been lost because of four words than at the point of a gun. Those words are this time is different.
Today I want to remind everyone that this time is never different. Technology, culture and fashion change over the years, but human nature doesn’t. In 1852,Charles Mackay described speculative investment bubbles that inflated and collapsed during both the 1600s and 1700s which followed the same well-established patterns as they do today.
I’ve written about the meme stock craze before. You’d think, between the 90% collapse of the NFT marketplace, a Federal Reserve determined to cool the economy and a 30% plunge in home sales, that meme stock mania would’ve ended by now. Wouldn’t you?
You’d be wrong.
Bloomberg’s Matt Levine summarized the latest speculative financial behavior well in a recent issue of Money Stuff:
Stock markets were invented to let people finance productive businesses and share in the profits. You and 100 other people give a railroad company some money to build tracks, it builds tracks, it runs trains, it makes money, it pays you all a nice 7% dividend out of the money it makes.
In roughly 2021 the pendulum swung back again. Now the way you invest in stocks is by guessing which stocks other people will want to buy, math and financial statements are worthless…
According to legendary investor Benjamin Graham, Levine’s first paragraph refers to “investing” behavior, and his second refers to “speculation.”
The key difference between investor and speculator?
Investors tend to buy assets based on their long-term value, and hold them for a long time.
Speculators tend to buy assets based on sentiment, and hold them briefly (hours or days).
When an asset, or an entire financial market, is priced based on sentiment rather than the actual value of the asset(s) in question, you know you’re in bubble territory.
Here’s a recent example, also from Levine’s Money Stuff, regarding meme-stock favorite AMC.
AMC enjoyed an incredible 400% gain in stock price from May to June 2021. Keep in mind this is a movie theater chain that bought a mining company and gives shareholders their very own NFT. This week, AMC released a second share class under the ticker symbol APE. (Why APE? Die-hard AMC “to the moon” fans call themselves “apes.”)
Why a new share class? Levine tells us:
The business of being a meme stock is largely about getting attention…
Did AMC buy a mining company and start giving away NFTs and create a new share class because these are sound financial decisions?
Today’s stock market, exemplified by this AMC example, is the business of turning attention into cash. It’s not about building a sustainable, long-term business to deliver profits to shareholders over decades. It’s about getting into the headlines by enacting silly stunts like AMC has since the beginning of the Everything Bubble.
So how is this “turning attention into cash” business model working out? Well, AMC stock is down 79% over the last 12 months. That pretty much answers the question. (Maybe the free NFTs they hand out make speculators feel better about losing…)
AMC is far from the only recent example of today’s meme stock mania.
You could look at AMC’s hijinx above and give them the benefit of the doubt. But this next case treads perilously close to outright market manipulation…
Bed Bath and Beyond (belief)
Bed Bath and Beyond has had its share of financial troubles, including having its Standard and Poor’s credit rating dropped and lacking sales.
But sometime in late 2020 manic investing behavior ensued, the Bed Bath and Beyond (BBBY) stock price doubled, and billions of dollars in capital changed hands.
Once again, it’s important to note that nothing fundamental about the company improved. Revenues or profits didn’t rise. It seems like the entire value of BBBY was based on the attention it was getting from retail investors.
Institutional investors, especially bond traders, remained skeptical. Wolf Richter cited as an example Bed Bath and Beyond’s recent bond collapse:
The $675 million of senior unsecured 30-year bonds that meme-stock darling Bed Bath & Beyond issued in 2014, and that are due in 2044, with a coupon interest of 5.165%, collapsed to a new closing low of 15.8 cents on the dollar today, with some trades being below 15 cents, after having plunged all last week from the meme-stock inspired dead-cat bounce.
Why does this matter? Because individual corporate bonds don’t typically trade directly with the retail public. The sheer disparity in outlooks between the meme-stock maniacs and professional bond traders implied that one side or the other was completely wrong.
Guess which side was wrong?
Then Bed Bath and Beyond’s stock price “collapsed 69% in four days” on news the company is considering filing for bankruptcy – something not even the most ardent meme-stock maniac wants to hear. They’ve fallen up to 90 days behind on payments to vendors.
So where did all this enthusiasm come from? Bed Bath and Beyond’s stock price activity from August 11-22 looks like a classic “pump and dump” scheme.
And you know what? It might have been! Turns out that Ryan Cohen, one of the original big-name meme stock influencers, bought low and sold high:
Ryan Cohen, five months after hyping the shares and disclosing that his firm RC Ventures had taken a 9.8% stake in the company, and then imposing some changes on the company, dumped his entire stake, causing the shares to re-collapse.
SEC filings show that RC Ventures dumped the shares on August 16 and 17 at prices ranging from $18.68 to $29.21, cashing out a profit of $69 million, while the meme-stock traders that hung on to their shares or bought the falling knives got carried out on stretchers.
So any investor who got caught up in the short-term hype surrounding Bed Bath and Beyond, ignored the bad news and the fundamentals, and didn’t’ sell before Cohen did? Not a single one of them expected they’d be the one left holding the bag – and now they’re getting “carried out on stretchers.”
Getting caught up in media frenzies like “Wall Street Bets” and other manic “meme stock investing” activities comes with a lot of risk. Before you know it, you could flush a ton of cash down the toilet.
There’s only one “free lunch” in investing
One good way to avoid any investing “mousetrap” is to stick to fundamentals like company financials and historical performance. But that’s a very time-intensive and nuanced process, and it requires special knowledge – and even if you’re very thorough in your research, you can still pick a dud. Would you be better off following the meme stock mania?
…probably not. Wolf Richter maintains a list of imploded stocks including failing SPACs and fallen meme-stock darlings (the list is nine pages long).
It’s never a bad idea to do your own research and understand what you’re buying. Unless you’re a financial professional, that can be a daunting task. Each and every one of us is responsible for our own financial security. That’s both a blessing and a curse. Personal responsibility means you and your family are on the hook for any mistakes you make. On the other hand, it means you can blaze your own path through the financial market jungle.
Simplicity is one of the many considerations that attracts everyday Americans of all income levels to diversifying their long-term savings with physical precious metals. You don’t need to read years and years of 10-Ks or financial reports, attend shareholder meetings and cast votes. Knowing that a portion of your savings is immune to meme stock mania and stock market bubbles can be a huge relief. And a huge comfort during uncertain economic times.
With global tensions spiking, thousands of Americans are moving their IRA or 401(k) into an IRA backed by physical gold. Now, thanks to a little-known IRS Tax Law, you can too. Learn how with a free info kit on gold from Birch Gold Group. It reveals how physical precious metals can protect your savings, and how to open a Gold IRA. Click here to get your free Info Kit on Gold.
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If, if you’re still active in the market look at companies you like doing business with. That have a great product which other people enjoy. If it has a “moat” (essentially not much competition or a difficult market to enter) then look at the financials.
I haven’t been to a movie theater in years. So, I’d never invest with AMC
Gold? Pfffft!
When the US has to print several $Trillion a year just to pay interest on the debt, and several $trillion more to run the government, (fill in the blank) the $ will _______ and Gold will ______. Just trying to make it simple for stupid asses that think they have common cents.
“In roughly 2021 the pendulum swung back again.” [from ROI considerations to momentum-chasing]
What a bullshit line, cited (and left unrefuted) by the author.
When it doesn’t matter it no longer matters. Climate change will destroy the earth, rendering it uninhabitable, and we have ten years to stop it or it will be too late. Al Gore et al, circa the year 2000, a paraphrase. What difference, at this point, does it make? Hilry Clinton, quote, regarding the Benghazi debacle. It doesn’t matter to the people who died there, nothing has since they died because they’re dead.
Why go through the agonies of learning how to, then actually reading, a financial statement? G’lord that’s some dry chow, no water in sight! Why work cheap or learn complicated subjects (organic chemistry comes to mind, makes financials look tasty) when the world’s ending?
Give up on all that old school crap, have a party, throw some money at an exciting gamble worst thing happens, you’re broke, and you might make a million (whatever that is anymore).
What we teach people, people learn. Tribes gather and sing songs and do chants of the ancestors, of the seasons, the animals they hunt and those they fear. They aren’t singing about how awful they are, how they’re destroying their ecosystem and extinguishing their prey animals. They’re singing about how great they are, how strong and heroic their history and how they’re growing the people, gaining territory, becoming greater.
Our songs? Listen to them, the music. The news is a chant, like a song, driving our cultural story. Listen to it!
When it doesn’t matter it no longer matters.
So long.