Stock market overshootings and stock market bubbles will only be fully identified after the bubble bursts. So again this time, writes Special Editor Jan Hurri.
But while the causes, time, or consequences that trigger the onset of a bubble cannot be predicted, the development of a bubble can still be monitored before it begins to burst.
From the market events and news of recent weeks, the classic signs of the development of this year’s speculative hype into an already manic phase have begun to stand out more and more clearly.
Each follows the evolution of market background variables, fashion phenomena and the “bubble cycle” as they wish, from the side or “involved”. Therefore, it is also up to everyone to choose whether to interpret the omens of the manic phase as warning or tempting signs.
However, regardless of each approach, it is clear that signs of market mania also point to an increase in exchange rate tempo risk, ie volatility risk.
There are many signs of manic overshoot in the market, followed here by a brief but not exhaustive description of the three examples highlighted by the news flow of recent weeks.
These examples can be found in market phenomena other than stock prices, their changes, or valuation metrics.
Leverage breaks old records
The first example is the explosive growth of so-called margin debt investment loans granted by Wall Street brokers to an all-time high.
These are usually short-term loans that day gamblers and other speculators take out to “get the most out” of the short-term exchange rate movements they imagine.
Such loans are typically secured by securities held by the client – including securities acquired with that credit.
The purpose of a debt gambler is to use leverage to increase the profits of successful trades, but leverage can just as effectively increase losses – and drive the gambler into forced sales of collateral. This possibility of loss risk and forced sale risk also means an increase in the market risk of debt-free investors.
Last year, U.S. securities brokers ’margin debt customer loans swelled to a total of just over $ 720 billion. The amount is not only the largest ever but also $ 200 billion higher than a year earlier.
The double record – a record increase in the number of records – is reflected in the investment credit statistics compiled and published by the country’s financial market regulatory agency Finra.
The increase in investment credit recorded in one year was most recently close to last year’s figures in 2007, just before the subprime bubble burst and shortly before the financial crisis erupted.
The previous 12-month previous record growth was recorded in the records in March 2000 – just before the techno bubble burst.
With a bunch of power for course bounces
The second example is probably related to the previous one, as it tells the story of the debt lever adventures of overzealous day gamblers.
It is also a phenomenon that has rapidly become widespread in the United States and has been highlighted in recent weeks, with potentially inexperienced but even more enthusiastic speculators instigating each other on various discussion and tip forums at any time to buy shares of either stock.
Often, the targets of such mass actions have been smaller and relatively few traded cent shares, so sudden mass purchases have resulted in sudden price increases of up to several hundred percent.
One example of the early part of the year is the bouncing of the price of a small company called Gamestop by 685 per cent since the beginning of the year – and the fact that the hedge fund Melvin Capital, which had previously sold short due to weak earnings prospects, ran into difficulties.
Perhaps some of the gamblers in the discussion boards see fun or glamor in the setup as a “spontaneously” assembled group of amateurs cram large leverage funds with their forces.
However, the figure may warrant the intervention of a market supervisor, the SEC, as short selling is legal, but assembling and inciting pools and forces to raise or lower prices, on the other hand, is illegal.
In recent days, an example of such a questionable force of day gamblers has apparently also been seen in a Nokia stock, whose price suddenly began to bounce with several percent fluctuations without a single issue related to the company or its outlook.
It was also possible to read the features of the same mass mania and foolishness on the news of the news agency Bloomberg, according to which the online store Etsy’s share bounced Elon Muskin Twitter praise for buying this gift for your dog.
An inventive way of financing is through listings
The third and apparently soon-to-be sign of the manic phase of stock hype is the rapid spread of the so-called SPAC shell company structure as a new kind of investment intermediary in stock exchange listings.
A SPAC (Special Purpose Acquisition Company) is a special purpose company set up to buy and list another company (even an unspecified one).
It is, in a way, an imaginative financial innovation and a kind of roundabout of listing, which, however, is likely to be more beneficial to its organizers than to investors joining as side publishers.
One thorough and critical introduction to the SPAC phenomenon can be found in Harvard Law School researchers entitled “A Sober Look at SPACs”. Descriptions and observations of the phenomenon have been compiled from the main features of SPAC listed on the stock exchange in the last 50 and second years and the results of the listings.
According to the study, SPAC arrangements have for the most part been a fairly affordable and attractive listing tool for listers and organizers – but mostly unprofitable for outside investors.
The idea of the SPAC pattern is to first sell the shell company to investors and list it “hollow” on the stock exchange, and then use that already listed SPAC to “quick list” another real business company by getting an already listed SPAC to buy and merge that other company.
Apparently, the rapidly growing popularity of the SPAC structure is due to the attractive opportunity for organizers to list any company on the stock exchange without the hassles of traditional listing, such as meeting listing and prospectus requirements set by stock exchanges and authorities.
Listing with a turbocharger
It is more difficult to understand the direct SPAC enthusiasm of investors than to know how fascinating the quick listings of new growth companies to be marketed by the effects of the “hype” and “buzz” created in marketing.
Apparently, investors want SPAC listings as an opportunity to share even more succulent quick wins than in traditional IPOs.
However, this is an unlikely wish, as even in standard IPOs, average quick losses are even more likely than usual due to the infrastructure of the SPAC system.
Most SPAC projects so far appear to have generated a loss for investors after the acquisition and merger of the target company.
However, the popularity has been great – as the latest fashion innovations often have in the manic phase of the market.
According to statistics from Refinitiv, which compiles market data, SPAC listings have raised more than $ 20 billion from investors in the United States this month.
The SPAC pot for the whole of last year was less than one hundred billion bucks, and again it was more than all previous years combined. The moderate growth rate is also indicated by the fact that the number of SPAC listings is already higher this month than in the whole of last year.
Even such examples of manic features of the market certainly do not prove anything about the size of the bubble or, in particular, the time of its outbreak.
As long as the U.S. Fed and other major central banks pump more liquidity into the market under high pressure, mania may still accelerate and intensify no matter how long.
I hope you are in health and well.
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