The Stock Market Bubble Has Burst, But The Party Hasn't Stopped
- 4 months ago
Originally posted on our newsletter: https://www.overlookedalpha.com
It was obvious in the fourth quarter of 2020 and the first quarter of 2021 that retail-favorite growth stocks had become disconnected from reality and valuation. In retrospect, it might have been the official announcement on Feb. 23, 2021 of the merger between Churchill Capital IV and Lucid Motors (LCID) that marked the top. The rally in what was then CCIV stock, which followed accurate reporting on the merger valuation, was best explained, and likely only explained, by the fact that buyers that day literally didn’t understand how SPAC mergers worked.
In some respects, the bubble that started in Q4 2020 has popped. In many others, it’s still going. The fundamental errors across the market (to be fair, hardly limited to retail investors) stem from rather garden-variety bubble behavior. But the last two years have added something else — a staggering sense of arrogance and importance. Investors in the 1999 equity market or the 2005 real estate market thought making money was easy — but not necessarily that they were smarter than the professionals. (To be fair, in both cases many of the professionals were egging them on.)
To coin a phrase, this time has been different. A struggling, unprofitable movie theater chain has roughly 4 million retail shareholders based on a conspiracy theory that is insane by the standards of conspiracy theories. Assume that base is roughly two-thirds US (and the figure is probably higher); that means that more than 2% of US households own AMC stock despite there being literally zero fundamental case of any kind. So committed are the ‘apes’ that AMC is now renting out its meme-ness.
There are, still, thousands of Twitter accounts dedicated to "trading" the market, based on at best a perfunctory understanding of that market. Combined, those accounts have probably three years of professional experience, $3 million in total bankroll, and somehow millions of unique followers. Reddit’s investing forums are a staggering cesspool of ignorance and groupthink (the platform’s algorithms literally keep contrarian views out), yet those forums have become so powerful that institutions actually are tracking them.
Crypto enthusiasts and Tesla ‘stans’ aren't just content to make money. They need to claim to be a part of a world-changing mission at the same time. NFTs are the apotheosis of the "greater fool theory," and almost proudly so. Web3 not only is looking to normalize Ponzi schemes, but to turn customers into owners.
Across the board, there is a staggering sense of entitlement. Early adopter of an online platform? Well, not only should you get to enjoy the service you've found, but you should get paid for your time (and your ‘likes’). Read about Bitcoin on a Reddit forum? You're set to profit.
Your stock goes up? Tell your Twitter followers you're a genius. It goes down? Must have been hedge fund manipulation. After all, whether it's equities, crypto, options, or just using a product, the profits should be easy.
It was obvious in the fourth quarter of 2020 and the first quarter of 2021 that retail-favorite growth stocks had become disconnected from reality and valuation. In retrospect, it might have been the official announcement on Feb. 23, 2021 of the merger between Churchill Capital IV and Lucid Motors (LCID) that marked the top. The rally in what was then CCIV stock, which followed accurate reporting on the merger valuation, was best explained, and likely only explained, by the fact that buyers that day literally didn’t understand how SPAC mergers worked.
In some respects, the bubble that started in Q4 2020 has popped. In many others, it’s still going. The fundamental errors across the market (to be fair, hardly limited to retail investors) stem from rather garden-variety bubble behavior. But the last two years have added something else — a staggering sense of arrogance and importance. Investors in the 1999 equity market or the 2005 real estate market thought making money was easy — but not necessarily that they were smarter than the professionals. (To be fair, in both cases many of the professionals were egging them on.)
To coin a phrase, this time has been different. A struggling, unprofitable movie theater chain has roughly 4 million retail shareholders based on a conspiracy theory that is insane by the standards of conspiracy theories. Assume that base is roughly two-thirds US (and the figure is probably higher); that means that more than 2% of US households own AMC stock despite there being literally zero fundamental case of any kind. So committed are the ‘apes’ that AMC is now renting out its meme-ness.
There are, still, thousands of Twitter accounts dedicated to "trading" the market, based on at best a perfunctory understanding of that market. Combined, those accounts have probably three years of professional experience, $3 million in total bankroll, and somehow millions of unique followers. Reddit’s investing forums are a staggering cesspool of ignorance and groupthink (the platform’s algorithms literally keep contrarian views out), yet those forums have become so powerful that institutions actually are tracking them.
Crypto enthusiasts and Tesla ‘stans’ aren't just content to make money. They need to claim to be a part of a world-changing mission at the same time. NFTs are the apotheosis of the "greater fool theory," and almost proudly so. Web3 not only is looking to normalize Ponzi schemes, but to turn customers into owners.
Across the board, there is a staggering sense of entitlement. Early adopter of an online platform? Well, not only should you get to enjoy the service you've found, but you should get paid for your time (and your ‘likes’). Read about Bitcoin on a Reddit forum? You're set to profit.
Your stock goes up? Tell your Twitter followers you're a genius. It goes down? Must have been hedge fund manipulation. After all, whether it's equities, crypto, options, or just using a product, the profits should be easy.