A stock market bubble filled with anger

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SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on January 28th, 2021.

First the Capitol was stormed by users from internet forums. Now it’s Wall Street’s turn. The Gamestop story is a perfect storm of pent-up anger and risky financial instruments that are now traded at the touch of a button.

In the early 2000s, the American journalist James Surowiecki wrote an acclaimed book called “The wisdom of crowds”. His thesis was that a properly composed group of people together arrive at better answers than each individual.

What we have seen in recent days in the Reddit forum Wall Street Bets is closer to “The anger of crowds”. This is not wisdom from a group – it is anger. An anger that is coordinated, risk-prone, and directed directly at hedge funds and the rest of the Wall Street establishment. By coordinating the purchase of heavily shorted shares, the internet forum has succeeded in creating such a sharp rise that hedge funds must buy shares to save their positions – a so-called short squeeze. Surowiecki describes the development with Gamestop and a number of other shorted shares as a modern internet-mediated stock manipulation.

It would be easy to dismiss the events as just that. But if you read more closely in the forum, this is not just a tactic to make money on option contracts. It is equally important that hedge funds lose huge amounts of money. There were cheers, for example, when hedge fund Melvin Capital needed a $3 billion capital injection as a result of their actions. It is seen as legitimate after many years of what they think is inadequate regulation and huge gains on Wall Street. Or as one Twitter user eloquently summed it up: “Oh no, the wrong people are manipulating the stock market.”

What is happening is a perfect storm that we are likely to witness for a long time to come.

We have a generation that has grown up on the internet, and that seamlessly organizes, discusses, and socializes on social media. Their financial situation looks significantly worse than their parents’, while US student debt amounts to $1700 billion – a doubling since 2010. They saw their worldview change with 9/11 and their economy shattered in the financial crisis.

This group has now been armed with financial instruments that were previously inaccessible to the broad market. Apps like Robinhood, which offers brokerage-free mobile trading, have enabled option trading for millions of people. It is high risk and moves fast. Many people see the stock market more as a casino than as a trading place. In this respect, there are also great similarities with the cryptocurrency bitcoin.

These two things combined have created a risk-averse, angry, and skilfully organized new power factor on the stock market. The people’s own activist fund.

The behavior is also extremely difficult to regulate. The Wall Street Bets forum has over 3.5 million members. On Tuesday, Gamestop was the world’s most traded security. These are not institutions that act. It is crowds of individuals who synchronously do it with the same kind of outcome. But who is then responsible?

What we saw in connection with the storming of the Capitol and with Gamestop this week are two sides of the same coin. These are self-organized groups that are tired of a system that they think has disadvantaged them. They are angry, and now they are taking matters into their own hands – albeit in very different ways.

The rules of the game are now being rewritten very quickly and have no real precedent in history. The personal financial risks are enormous, and can be a severe blow if the air goes out. As Bloomberg journalist John Authers put it: “I don’t want to see the consequences when history’s first angry bubble bursts”.

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