Everyone is Getting Rich, Except You.
Why have investors become so downright gullible and apathetic?
Everywhere you look, people are making money. Or maybe that’s what it seems. It’s an odd time to be witness to today’s roaring markets, especially when COVID, humanitarian disasters, proxy wars, and chaotic polarization keep headlining national news cycles. But it’s not a hyperbole- regular people are making thousands of dollars investing in essentially, nothing.
Billions of dollars in 2021 have been invested in new and shiny assets just because of the fear of missing out on the ride. GREED. When you see your peers making millions of dollars buy simply building a website outlining how they want to raise money in an empty shell to buy a private company with new technology, and, abracadabra, they’re millionaires- it begs the questions…
Why have investors become so downright gullible and apathetic?
So what is going on here? Why have investors become so downright gullible and apatehtic? Part of the reason is that the Securities and Exchange Commission has lost its meaning, as David Einhorn has correctly pointed out, largely because of the lax regulatory environment encouraged by the Trump administration. There is hope that the new S.E.C. chief, Gary Gensler, might return some regulatory teeth to the agency. For many, its a fear that the new frontier of financial engineering and easy money will come to an end.
Part of the explanation is human nature, of course. From time immemorial, people have latched on to crazy get-rich schemes — YOLO, in the parlance of the Reddit investors — hoping that without a whole lot of hard work, they will find themselves invited to a certain Goldman Sachs conference.
Many of these flights of fancy have been well documented by now, by financial historians such as John Kenneth Galbraith and by
Scottish journalist Charles Mackay, who once wrote that men “go mad in herds, while they recover their senses slowly, one by one.”
In the United States alone, there have been financial crises, on average, once every 20 years or so: a “Railway Bubble” in 1873,
financial panics in 1893 and 1907, the Great Depression, Dot-Com crash, and the mortgage-backed securities mania of the 2000s, which led to the devastating financial crisis of 2007 and 2008. I could go on, but you get the idea:
Humans are quite prone to losing their minds when it comes to money, and they seem to have a powerful sense of amnesia. We are probably now in our own version of a post-pandemic Roaring Twenties, with retail investors YOLO-ing their retirement savings into AMC, GameStop, NFTs, and Bitcoin. How could anyone who lived through what happened in 2008 not be significantly more wary about what is happening now?
The culprit this time around is the Federal Reserve, our central bank, and the originally well-intention policies of Federal Reserve chairs, including Ben Bernanke, Janet Yellen, and now Jerome Powell. It all began with Bernanke, a student of the 1929 financial crisis and the mistakes that the Fed made back then that exacerbated the Great Depression by keeping monetary policy tight, interest rates high, and capital difficult to obtain. Under his watch, during the collapse of 2008, Bernanke did not want the Fed to make those same mistakes. He landed on a plan that we now call Quantitative Easing in order to make money abundant and cheap, on the theory — correctly as it turned out — that huge amounts of low cost capital would encourage people and companies to borrow and spend money on all sorts of things, including new plants and equipment, research and development, and human capital. With plenty of cheap money sloshing through the economy, Bernanke figured, economic activity — seriously subdued by the financial crisis and its aftermath — would pick up. He was right, and it did.
The economy recovered, but financial markets became addicted.
Anytime Bernanke or Yellen or Powell talked about tapering Q.E., the markets literally had a tantrum, spiking downward. Wall Street oves cheap money, after all; it is the raw material for banks, private
equity firms and hedge funds, among others. And the cheaper the cost of raw materials,the more money that can be made in profit.
Not for nothing is JPMorganChase, the country’s largest bank, making $40 billion in profit a year — its cost of goods sold is nearly FREE, thanks to the Fed.
Then came the coronavirus. At first, the financial markets froze up and investors panicked.The long-feared correction in the financial markets was upon us. In the early days of the pandemic, as Americans were coming to grips with its implications and the economy was pretty much shut, the stock markets fell precipitously and the bond market closed up, even for investment-grade companies with the best credit. Then, another miracle. The Fed, now led by Powell, leapt into action again.
In March 2020 and also a month later, the Fed announced that it was literally doubling down on Quantitative Easing, and that it would once again be buying massive amounts of debt securities of nearly all stripes in the markets.
The message was conveyed to the financial markets that the Fed would do whatever was necessary to underwrite their success. And so, in the past year, the Fed’s balance sheet has exploded again, from about $4 trillion to more than $8 trillion in assets.
Once again, the bond and stock markets took off and both remain at all-time highs, following their near-collapse before the Fed’s intervention. Virtually nobody on Wall Street seems to think this state of affairs is sustainable without a sizable correction, and soon.
So the Federal Reserve is expanding “free money” since 2008 and even more in 2020, but how does this effect investor behavior?
Simple. When the government is putting ~ $3k in your account and providing unemployment benefits irrational behavior percolates. When getting a car loan and credit card is done completely online, when opening a brokerage account is faster than opening a bank account… The complicating factors that accompany traditional trade/market analysis — anticipatory activity, complex trades, institutional investment vehicles, etc — just aren’t present.
We’re dealing with three buyers:
- Whales. These are the heavily invested, successful Equity, Commodity, and Crypto traders. They have large pools of cash to play with (SPAC or ETF’s), and they will ape into a promising project, bringing follower traders into play.
- Middle market ecosystem traders. These are experienced buyers/sellers who understand basic investment principles, watch the movements of whales and the signals from platforms like Reddit, Bloomberg, or Seek Alpha and will attempt to make informed decisions.
- Quick traders. These are folks who are entering — and often exiting — for example, the NFT market at high speeds, normally as a result of media coverage, and often in pursuit of short-term gains and wealth. They are unseasoned, inexperienced, and prone to panic.
With the predominant market buyers being so irrational, unpredictable, and volatile its actually quite possible that inexperienced investors fall prey to more experienced whales who are using the Elliot Wave Principal to predict collective trader psychology, also known as crowd mentality, which travels from optimism to pessimism and back in repeating cycles of intensity and time period.
At times a new investor will see a huge gain from entering the market during a major market catalyst, only to lose their unrealized gains along with their initial investments days after the hype dies.
It’s exactly the same psychology casino’s use to capitalize on human behavior.
A downtrend in price in the financial markets is reflective of an uptrend in psychology and another way to say it is that a bull market advances in waves and crashes in waves.
All time scales of trend fluctuate between an impulsive, or motive, and a corrective phase in market prices, according to Elliott. The motive and corrective waves or swings of an uptrend are always present in the same amount of degree as the downtrend to form a motive-corrective combination.
Another fancy word for this type of investment behavior is called irrational exuberance.irrational exuberance is unfounded market optimism that lacks a real foundation of fundamental valuation, but instead rests on psychological factors.
- The term was popularized by former Fed chair Alan Greenspan in a 1996 speech addressing the burgeoning internet bubble in the stock market.
- Irrational exuberance has become synonymous with the creation of inflated asset prices associated with bubbles, which ultimately pop and can lead to market panic.
When investors start believing that the rise in prices in the recent past predicts the future, they are acting as if there is no uncertainty in the market, causing a positive feedback loop of ever-higher prices. But, when the ultimately bubble bursts, investors quickly turn to panic selling, sometimes selling their assets for less than they’re worth based on fundamentals.
The panic that follows a bubble can spread to other asset classes, and can even cause a recession. The investors who get hit the hardest — the ones who are still all-in just before the correction — are the overconfident ones who are sure that the bull run will last forever.
Trusting that a bull won’t turn on you is a sure way to get yourself gored.
