Action in the stock market has become extremely reckless with sensational rallies in sectors such as in Bitcoin as well as in some rigged short squeezes in individual “old” stocks such as GameStop. Bitcoin from its trading start in 2015 at $216 soared to $63,000, which in percent gain and overall size is likely without precedent. Also, it is not a company. As a stock, GameStop has been around for a long time with operations not all that strong. Hedge funds that were short (sold stock they didn’t own) were caught offside in a massive rigging that drove the stock from $2.57 in less than a year to $483 in February.
In a short squeeze those who have sold stock they don’t own must buy it back. Thereby joining the buying mania.
Both involved very bold stock market operators and both have sold off hard. Bitcoin to $37,000, which put all the buyers since February at a loss. GameStop plunged to $39.
Senior stock indexes such as the S&P are the most overvalued relative to earnings or GDP in history
Furthermore, senior stock indexes such as the S&P are the most overvalued relative to earnings or GDP in history.
Every sensational mania in the past has had a focus that turned out to be nothing more than relatively brief speculative passions. In Holland in 1637, it was in tulips. Forever called Tulip Mania, it cost novice traders their hard-earned money and in dislocating the financial markets forced a brief contraction in business.
Great financial bubbles have had much in common, with 1929 being the last classic example. Once the buying craze completed massive declines and a recession followed.
The opening sentence mentions Bitcoin as an exceptional example in an exceptional field. Beyond this it is an item that has a unique cost to generate what is the equivalent of stock certificates. Creating “crypto currencies” requires some 0.55% of the World’s production of electricity. As reported in the Harvard Business Review, this is the amount used by a country the size of Sweden.
Even at full trading volume, the New York Stock Exchange consumption of electricity would be relatively negligible.
And history shows that the cost of operating a speculative market is important. Veteran traders are wary of ongoing expenses as the party fades.
“Crypto” gains have been driven by the allure of technical mystery. However, it is not much more than a counter or gambling chip, but with extraordinary “mining” costs that could become excruciating as the “value” of the “product” plunges.
The gambling palaces at Monte Carlo provide glamour and elegance at a huge operating cost. But has been set up in a business-like manner with cost controls. Any business has to be, including stock exchanges.
"Bucket Shops” in New York back in the early 1900s
As opposite as you can get, were the “Bucket Shops” in New York back in the early 1900s. These were walk-in shops with customer chairs, a chalk board for posting stock quotes and a ticker tape. The customers would place small bets on changes in stock prices but without actually executing a stock trade on the NYSE. In so many words, it was a gambling parlour.
Quotes on a chalkboard were the chips. One of the costs was usually a young clerk, the “board marker”.
As with the many ways to make stock transactions, costs were not much of a concern during a boom, but become very much so in the busts. Whether it was in London’s coffee houses in the late 1600s or trading under the “Buttonwood Tree” in New York in the 1790s, professional traders learned to keep the costs down.
1720 Mississippi Bubble in Paris
In the 1720 Mississippi Bubble in Paris, trade was done in the open. And an enterprising hunchback rented out his hump as a writing table so that traders could record their “bargains” on notepaper.
In the late 1860s “New Financial Era” some junk bond traders rented open floor space for trading. As did those for trading gold when President Lincoln went off gold convertibility in 1861. No need to be too big, as trades were shouted down to the crowd on the sidewalk below.
When each party crashed, such trading spaces were vacated as fast as possible.
The creation of what has become nothing much more than “counters” for trading has been the most expensive such example in history. Shutting down, avoiding or running from the enormous costs of “mining” Cryptos will be fascinating
Ironically in this sector, a surplus of electricity and chagrin looms.
To be serious. Every great financial bubble completed in a frenzy of buying by the public generally new to such speculation. As with this one, they have run for about a decade and all, repeat all, have suffered a liquidity crisis in the Fall.
Trading has become so reckless that it is now time to become cautiously pessimistic.
Bob Hoye (BobHoye.com) has been researching investments for decades, which eventually included the history of financial and political markets. He considers now to be the most fascinating time for both since the Great Reformation of the 1600s. Bob casts a caustic eye on all promotions and, having a degree in geophysics, is severely critical of the audacity that a committee can “manage” not just the economy, but also the temperature of the nearest planet. He has had articles published in major financial journals and, as a speaker, has amused assemblies in a number of cities, from London to Zurich to Tokyo.
