by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Let’s start here; overregulation creates bubbles, not speculators. West Virginia University Professor of Finance, Alexander Kurov, offers an op-ed which comes to the conclusion that speculation from Reddit bros could wreak havoc on capital markets:
So markets fail sometimes, and we need sensible regulation and enforcement to make such failures less likely.
Taken in isolation, the GameStop craze is unlikely to trigger a disruption to the overall stock market, especially if its price continues to fall more in line with the company’s fundamental value. Unfortunately, this was not an isolated case. Nor was GameStop the first sign of problems.
In recent days, Reddit users have also driven up the prices of silver SI00, -2.28% and companies such as BlackBerry BB, 0.25% and movie theater giant AMC Entertainment AMC, -18.63%. Popular trading apps like Robinhood have made trading easy, fun and basically free.
The share price of Tesla TSLA, -1.16%, for example, skyrocketed 720% last year, in large part when investors bought the stock because it was already rising. This is called momentum investing, a trading strategy in which investors buy securities because they are going up — selling them only when they think the price has peaked.
If this continues, it will likely lead to more financial bubbles and crashes that could make it harder for companies to raise capital, posing a threat to the already limping U.S. economic recovery. Even if the worst doesn’t happen, large price movements and allegations of price manipulation could hurt public confidence in financial markets, which would make people more reluctant to invest in retirement and other programs.
At face value, his theory makes sense, especially in this “everyone is out of step but my Jimmy” world which government, academia, and rent-seeking businesses created (let’s call them them “the Technocracy”, just to give them a name). I might ask the Professor to read Bastiat and Hazlitt, and look for the unseen consequences of his conclusion You don’t have to look far to wonder why Reddit bros are trading speculative stocks like baseball cards. I attribute this populist interest in day-trading to three things:
1- The Federal Reserve Banking System. Artificially low interest rates encourage borrowing over thrift.
2- Cheaper Trading Platforms. Fintech has virtually eliminated all costs for active traders. The knee-jerk reaction of The Technocracy will be to raise the retail investors’ costs or limit their ability to trade frequently. If The Technocracy does that, they will deny populist speculators the most important lesson of investing; most speculators lose money. As a young man, it was by losing money from trading that I learned that Lou Mannheim was right. Had my speculative trades been limited, and I hadn’t blown up my trading account, I may not have learned Mannheim’s lesson of investing
3- Boredom. Government-imposed COVID policies wrecked the economy and subsidized a slacker culture among young adults. The average 22-year old needs to conquer something: a nation’s enemy, a business, a mate etc. Take away his/her ability to do to work and date, and he/she will simulate “war”. After he/she gets bored with video games, he/she will take those stimulus checks and deposit them into an online trading account, borrow money on the AMEX, log in to Reddit, and join the fight against the hedge fund bros.
Cheap money encourages borrowing. Restricted employment opportunities and subsidized unemployment encourage sloth. It should not be shocking that perverse incentives would encourage the Reddit bros to max out their credit cards and “take down the man”.
What happened with Gamestop and silver are a tiny, tiny slice of our capital markets. They make great news items but “big money” paid no attention to those blips. The pension fund managers, investment bankers, money managers, private equity, and real estate financiers chuckled at drama. In the last three weeks, at least 76 companies have completed initial public offerings on listed exchanges. Mortgage originations set a record in 2020 and purchase loans are expected to set a record in 2021. Private equity is pouring money into start ups. Money doesn’t sleep and it certainly ignores blips.
Government intervention won’t restore confidence in capital markets. The Reddit bros aren’t the problem, hedge fund bros aren’t the problem, and private equity bros aren’t the problem. The Federal Reserve Bank and COVID restrictions are.
Look for the unseen consequences, of government interaction Professor and you will realize that capital markets have never been more robust or efficient as they are today. Leave them alone, end the Fed, and open up the economy.
