As if following the latest COVID-19 news while trying to work from a household full of children wasn’t enough, now the financial press is reminding us to worry about a stock market bubble.
The latest market turmoil caused by a battle between iconoclastic amateur traders and Wall Street traditionalists adds to a growing, recent tone of caution in pro-business publications that usually prefer to be upbeat.
Many Canadians don’t keep a close eye on the business pages. But last week, coverage of the strange case of rebel traders, coordinated on Reddit, sticking it to the man by bidding up shares such as video game retailer GamesStop and Waterloo-based Blackberry seemed to strike a chord with the broader public. The CBC’s blow-by-blow reporting on the story has repeatedly been among the most-read stories on our site.
Even before the hoopla around GamesStop, commentators at credible financial publications such as the Wall Street Journal, the Financial Times and Bloomberg, plus the business sections of Canadian newspapers such as the Report on Business and the Financial Post, seemed nervous about the state of the markets.
Among established investors, the latest “frenzy” — as the ROB called it in Friday’s banner headline — has only added to the sense of apprehension; even fearless market traders seemed shaken.
‘Unnatural, insane, and dangerous’
Even after he made a reported 1,500 per cent gain on GameStop stock, market guru Michael Burry, made famous by the movie The Big Short after he risked big and won in the 2008 subprime crash, expressed concern.
“What is going on now — there should be legal and regulatory repercussions. This is unnatural, insane, and dangerous,” Burry said in a tweet, now deleted, but widely quoted in the financial press.
There is little doubt that the arrival of non-traditional traders buying and selling on non-traditional platforms like Robinhood has added a new layer of tension to the market. This trend led Scott Barlow, one of the Globe and Mail’s established stock analysts, to pen the headline: “How Robinhood traders could kick off a broad market sell-off.”
Even the name Robinhood, with its reference to the tale of the outlaw who stole from the rich to give to the poor, might be enough to make billionaire hedge fund managers nervous. The irony of Reddit traders being attacked by wealthy speculators for gaming the system has not been lost on satirists like The Beaverton.
Financial sector aghast the poors are gaming system designed to be gamed by the rich<a href=”https://twitter.com/hashtag/GameStop?src=hash&ref_src=twsrc%5Etfw”>#GameStop</a> <a href=”https://twitter.com/hashtag/stonks?src=hash&ref_src=twsrc%5Etfw”>#stonks</a><a href=”https://t.co/dov1yORse2″>https://t.co/dov1yORse2</a>
But whether triggered by a new cohort of amateurs using their phones to trade the same way they’ve learned to call an Uber, or just a flood of traditional money looking for an alternative to low rates on GICs and bonds, many credible analysts have expressed the view that asset markets may be in a bubble.
“One of the tricky things about asset bubbles is that they cannot be conclusively identified while they still exist,” said Robert Armstrong, the U.S. financial editor for the Financial Times last month, well before GameStop had agitated trading, in a video report titled “Are we in a stock market bubble?”
“Only once a bubble has popped can we be sure that it was even there at all,” he said.
Tesla trading like bitcoin?
In trying to answer the question in his headline, Armstrong used a series of charts to demonstrate that instead of exhibiting a traditional relationship between share prices and company earnings, hot stocks such as Tesla have traced a pattern of speculation more like bitcoin, which he said has no underlying value.
Those of us who keep a closer eye on the business media have noticed an increase in stories such as how to keep your investments safe from a market decline. A news search of “dotcom bubble” — a reference to 2002 when markets fell nearly 80 per cent from their peak, reveals a flurry of recent hits.
But even in racy pieces such a recent report titled “The Stocks Bubble-O-Meter Is Flashing Bright Red” by influential Bloomberg columnist John Authers, the conclusion usually isn’t that shareholders should run and hide.
Many market analysts continue to insist that high share prices are by no means irrational in a world where interest rates, and thus the returns on safer investments, are so low. Predictions of crashes in stocks and in Canada’s high-flying property markets have repeatedly been proven wrong.
Mark Kamstra, a scholar at Toronto’s Schulich School of Business who researches market bubbles, said interest rates set by central banks to near zero are at the heart of the problem. It’s a little like dividing by zero in math — the results become meaningless.
WATCH | GameStop stock sees price drops after restrictions put on trades:
“It makes it much harder to do conventional valuations,” said Kamstra.
The implication is that by cutting rates, first to stabilize markets, then to boost the economy, central bankers may have created a new kind of instability that is not easily solved. If asset markets are unstable now, most experts say raising rates would only make things worse.
Kamstra worries markets, intended to raise capital for useful investments and to share risk, not to speculate on “wild valuations,” may have lost their way, at least for now.
“A lot of us are nervous,” he said.
Follow Don Pittis on Twitter @don_pittis