Welcome To Market Mania

Dogecoin, the cryptocurrency with the golden Shiba Inu as its logo, is rallying as I type. A coordinated Internet pump that spanned from Twitter to TikTok and other sites pushed Dogecoin to being up more than 120% in a few hours. The funny thing about Dogecoin is that it literally has no value. It was actually invented to be a worthless coin. Seriously.  Those words do not come from me, they come from the founder.

The other day a company called Nikola, one with no actual product or any meaningful revenue or earnings, exceeded a market cap of $20 billion. At one point it was worth more than Ford. Nikola is a dream at that valuation of flawless execution, delivery, and outperformance. They’ve managed to convince everyone that “hey, if you’ve missed out on the Tesla rally, just come to us at a much earlier starting point.” I mean maybe this company is the real deal, but also the CEO was recently tweeting how upset he was with a small Facebook group because they were bashing his stock.

That’s what this market has come to.

https://twitter.com/nikolatrevor/status/1279486593384890369

I have no problem with frothy or exciting markets. I think it’s cool that young kids are opening brokerage accounts and trying to trade and learn. We all started somewhere. Myself included. I cut my teeth in the 2008/09 financial crisis, when I only had burrito money in my pockets. Major banks and brand names from Bank of America to Ford were trading for $2 or less. It just made sense to get involved because buying those stocks for $2 was unheard of.

The difference between now and then, however, is back then the markets were exhausted. Speculators were cleaned out. Everyone was just trying to save, grow, and avoid risk at all costs. It was like one of those movie scenes were the lead character is finally making it out of a scorching hot desert alive with battered clothes and desperate for water.

The other day, I was reading the famous book about manias, panics, and crashes, the book that’s actually titled “Manias, Panics, and Crashes” by Charles P. Kindleberger. What interested me while reading was the policy responses between both crises: the Financial Crisis and the Coronavirus Crisis. I don’t disagree with fiscal stimulus or unemployment benefits. In-fact, I think we need more of it. What I do wonder about is the actions taken by our lender of last resort, in this case our boy J Pow at the Fed. He rescued markets in a remarkable way, but I am a tad perplexed by the bad companies, scammers, and charlatans who have benefited from this crisis. They were bailed out way too easily with emergency credit, lending facilities, and the buying of corporate bonds.

“After a crash has occurred, it is important to wait long enough for the insolvent firms to fail, but not so long as to let the crisis spread to the solvent firms that need liquidity.” – Charles Kindleberger

We have somehow created a market even crazier and frothier than before the Coronavirus was a thing. Ultimately, I’m not sure how that will help anyone in the long-term. In my opinion, we’ve created an environment the encourages the ultimate YOLO and the biggest risks when instead smart, long-term thinking is probably a much healthier alternative.

Let’s take this post full circle and look into what the founder of Dogecoin once wrote about market mania:

“As I quickly learned, a passionate community of people throwing around money is like blood in the water to the shark-like scammers and opportunists who, in late 2014, co-opted the Dogecoin community and fleeced its members for millions of dollars.” – Jackson Palmer, Dogecoin founder

I write this post as an observer of market mania, someone who has learned to embrace it. I did not have the time to dive into Hertz, the trading activity in bankruptcy stocks or the surge of Robinhood accounts and day traders, but it is all happening today. And it will keep happening. Cycles like this seem to be a common occurrence since the dawn of the Buttonwood tree. The thing is, it’s impossible to time and only those in policy making can fix it. For small fries who are trying to save a buck like me, just knowing that it’s there, knowing you don’t ever need to rush in or invest in something because everyone around you is, can help your decision making going forward. Embrace it, don’t chase it.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s