According to a recent E*Trade survey of retail investors, 75 per cent of respondents fully or somewhat agreed that the stock market is in a bubble - in financial speak an investment so pumped up that it must burst. Yet 61 per cent still felt great about the future pros­pects of shares. In other words, the majority of DIY punters know that what they are buying is terribly overpriced but still think it wise to put more money into it. Such sentiment is not simply crazy. It reflects the recent experience of the shortest stock market crash on record. In the last 12 months everybody who played the stock market could make money, seasoned investors and novices alike. What we are experiencing is the mother of all bull markets, born, one could argue, in 2009.

It is not possible anymore to ignore the attitudes of retail investors, as they have grown during the pandemic to a formidable force. They are estimated to chip in 25 per cent of all money invested and are capable to wrong foot hardened buffs, as the Gamestop story has proven. Gamestop, an almost bankrupt, hapless video­game retailer was carried by a loyal fan base to stock market gains of comical dimensions: its shares rose 12,712 per cent within a few days. A few crashes later the stock is still worth 2,900 per cent more, despite the retailer’s inveterate loss-making.

Armoured with unexpected transfer payments from the government, DIY investors gamble with their windfall money and celebrate the pain they inflict on some unsuspecting hedge funds, which would still profit once they understand the direction of the trip. According to FAZ, retail investors invested in the last five months more money into stock funds than in the previous 12 years put together. Their voice is imperative, even when they talk nonsense. Professionals fear to miss out.

Crypto-currency Bitcoin rose tenfold within the last year. It is difficult to call it a bubble as it bursts so regularly that it can’t be a bubble. The same is true for the seemingly unstoppable rise of Tesla. Its recent billion-dollar-investment in Bitcoin brought more paper profits than its car sales will fetch in the foreseeable future. Is this still a car company, or just an investment idea? These bubbles are not only re-growing very quickly after each pop, they seem to be interdependent.

Take the bible-reading, investment-demigod Cathie Wood. Her ETFs (!) invest in ‘disruptive innovation’, which means rather concentrated bets on Tesla, Zoom, Bitcoin, or Spotify – not to forget large cross-investments between her funds. It is difficult to fathom the mess when these ETFs start to unravel in tandem.

Retail investors’ voice is imperative, even when they talk nonsense. Professionals fear to miss out

And then there are the SPECs, listed money bags which do not quite reveal what their business purpose will be once their investors’ pennies are brought to use.

When the dotcom bubble burst so spectacularly 20 years ago, the wise men on Wall Street quipped that “when the tide goes out we will see who was swimming naked”. Internet start-ups were vying for the largest ‘cash burn rate’, funded by gullible investors and their wild, uncalculated bets on an unknowable future. Enron, a rather pedestrian gas pipeline company, grew into a 100 billion dollar energy trader based largely on fictitious income. The Italian dairy company Parmalat created income by Xeroxing non-existent bank deposits. Fraudster Bernie Madoff’s investment fund was caught out a few years later. His ‘fund’ was the equivalent of a chain letter, inflicting losses of 64 billion dollars. The crash of 2009 was triggered by collapse of a real estate bubble. It toppled banks, manufacturers and insurance companies.

What we see happening around us now is the same trickery and fraud which was until now only revealed by a crash. In June last year we learned that Germany’s most revered electronic payment provider Wirecard, grown into the darling of the stock market by inventing income from partners which either did not exist, or swore to never have heard of Wirecard. The Greensill saga which unfolded a few months ago had the same, familiar ingredients. Meant to provide low-risk supply chain finance, whereby outstanding invoices are bought at a discount, it soon ventured into unsecured lending, loosely based on ‘future’ invoices. The bank’s single largest client was the pop-up steel empire of Sanjeev Gupta, who embellished his accounts with invented trades and fictitious, ‘expected’ invoices. Greensill used to securitise these shaky loans, to insure them and then to sell them on to Credit Suisse and its unsuspecting retail investors. When insurance cover was suddenly withdrawn, Credit Suisse pulled the brakes, with ten billion US dollars of investors’ money on the hook.

It should not be the last wound inflicted on the Swiss premier bank. Shortly later it would suffer a loss of 4.7 billion US dollars from Archego. This unassuming, small ‘family office’, consisting of the bets and trades of stock market operator Bill Hwang, made exorbitant, 50 billion US dollar wagers on a handful of US and Chinese companies, entirely funded by such illustrious banks as Morgan Stanley, Goldman Sachs, Wells Fargo, UBS, Deutsche Bank, Mitsubishi UFJ, Mizuho, Nomura and Credit Suisse.

The banks seemed oblivious to the aggregate outstanding risk, each of them safe in the belief that in emergencies, when Hwang would not provide for appropriate margin payments, they could always sell the underlying shares. It proved difficult once it dawned on them what a fire sale worth 50 billion US dollars would do to the share price. An attempt by the banks to syndicate their problem failed. While they were still talking, Goldman Sachs and Morgan Stanley had already sold 20 billion US dollars’ worth of shares en block. A few others were equally swift; the rest was bitten by the dogs.

After the shock of the flash crash in March 2020 there seems to be only one route for stocks now: up to ever new heights. This is all brought upon us by menacing walls of money, crystallised in vast savings and seemingly unlimited, cheap credit. If things get wobbly, everyone pins their hopes in the Fed as an investor of last resort. We perceive crazy volatility, bubbles bursting and again reflating as a temporary phenomenon.

A New York-based fund manager, a friend of my daughter, called her up recently to quiz her boyfriend, an art evaluator for one of the big auction houses. What she needed was a crash-course in fine art, as she wanted to set up an art-themed investment fund. She didn’t want to be bothered with details. She only wanted a plausible growth story, oblivious to the fact that a fire sale of a few Rembrandts would make the liquidation of Archego’s mainstream shares a child’s play.

Investors’ excitement and abandon build up pressure in a bubble. Their enthusiasm feeds recklessness, which in turn overrides all inbuilt safety valves. After the bubble burst we learn how it all happened. To see both recklessness and exuberance with such clarity already before the accident is unsettling. What to do then? It would be wise to stop investing until it’s all over. Yet we keep dancing until the music stops.

The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.

Andreas Weitzer, Independent journalist based in Malta

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