GameStop’s mania didn’t come true overnight. It’s just the most obvious example of a rampant bubble taking shape in the financial markets.
Evidence of extreme speculation in the stock market emerged long before Reddit’s army of retail investors pushed GameStop, AMC and other stocks to sky-high prices.
Stocks of Airbnb, DoorDash and other yet-to-be-profitable start-ups shot up on the first day of their IPO listings. Shell companies with no operating assets raised money through a phenomenon known as the SPAC boom. tesla now has a market cap of nearly $800 billion, far more than all other major automakers combined.
None of this is normal. The rock-bottom interest rates are forcing investors to take huge risks, and for some, the results are tragic.
“I think the bubble has been around for a while and now it’s just icing on the cake,” said Richard Fisher, former governor of the Dallas Fed (Fed). “When things get out of control like they are now, it means you should start to get very worried.”
GameStop shares had soared about 1,700 percent over the year, with the main push coming from an army of retail investors in Reddit chatroom WallStreetBets. The CEO of the still-losing video game retailer is now worth nearly $1 billion.
“Someone is bound to get rippled,” Fisher said. “As the mass behavior continues, eventually someone is bound to get into the stock market at the highest price and then get badly trapped.”
Indeed, the SEC warned that “extreme stock price volatility” could cause “rapid and severe losses” to investors and undermine stock market confidence.
Fisher believes that social unrest and populism is also a factor.
Fisher said: “Many people have seen rich people become very rich by using cheap capital, and they want a piece of the action.” “That’s the main reason why certain specific stocks are being pushed up hard.”
Goldman Sachs warns of “bubble-like sentiment”
The “FOMO” (fear of missing out) mentality is driving a lot of money into bitcoin and other cryptocurrencies. Bitcoin’s future prospects remain deeply divided, but increasingly prominent firms like BlackRock are voicing their support and putting money behind it.
However, bitcoin’s movements can sometimes change dramatically for strange reasons. For example, after Tesla boss Elon Musk used the #bitcoin hashtag in a tweet, the most iconic cryptocurrency shot up 20% on the same day.
Meanwhile, specific purpose acquisition companies (SPACs) are all the rage. Key companies like Virgin Galactic, DraftKings and Playboy will or have gone public through SPACs as long as they are backed by enough money on Wall Street.
Goldman Sachs statistics point out that SPACs have raised $16 billion in the first three weeks of 2021 alone, easily exceeding the $13 billion raised in all of 2019. 229 SPACs raised a staggering $76 billion in 2020.
In a recent research note, Goldman Sachs analysts said, “Bubble-like sentiment surrounds SPACs and lingers.”
Fisher agrees that the SPAC fad is another worrying sign.
“All you have to do is just shell out your money and hope to find an investment business,” he said. “That’s another pointer to money being too cheap.”
Cheap money also triggered a V-shaped rally across the stock market. Even after the GameStop-induced sharp shakeout under the stock market, the Stamp 500 is still not far from its all-Time high. Not to mention that the U.S. is still deep into the once-in-a-century New Coronavirus (Chinese Communist virus) pandemic.
To be fair, investors are looking at the ongoing public health crisis and are focusing on the prospect that the vaccine will reopen the economy quickly.
Even so, stock market valuations will rarely be as large as they are today. Shiller’s calculations for the historical index yield a CAPE (cyclically adjusted cost-benefit ratio) of 35. According to the historical record of the venture capital firm Loup Ventures, the years before CAPE ever exceeded 30 were 1929, before the Great Depression, and the dot-com bubble period of the late 1990s.
Today the frenzy has become mainstream in the stock market. Even the sports professional media has started tweeting about stock market postings.
Doug Clinton, a running partner at Loup Ventures, wrote in his latest report, “Some areas of the stock market have certainly seen bubble-like behavior generated by retail speculation, but there is no telling when they will burst.”
That’s the nature of a bubble: It can continue to take shape and get bigger until it eventually bursts.
Fisher says, “No one can calculate the beginning and end of these things.”
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