Another surreal week where we see the stock market detached further from reality as everyone scrambles for an answer. Even all the top economists and fund managers in the world were wrong-footed last Friday. We may have found the answer this week. And the market had a spectacular 2,000 points crash on Thursday.
I joined an investment group on Telegram a few weeks ago and the founder decided to have our first Zoom call during mid-week. The commonality for all was that we all worked in Citibank, left a few years ago and now moving into our halftimes. Investments were a common interest.
Our first task was to try to make sense of the current market rally. With all the hard facts and numbers in front of us and knowing that Q2 results will probably be very ugly due to the full impact of the Covid19 lockdowns, the rally was unbelievable. Who or what is pushing this melt-up?
The first obvious culprits were the central banks. All were pumping rescue plans in the billions and trillions of dollars worth to support their countries’ economy. The lockdowns had stopped all business activities, disabled supply chains and created an unprecedented economic disaster for everyone. The big developed countries’ central banks like the USA, Europe and Japan were printing money like it was going out of fashion soon. Too much liquidity at super low interest rates had generated waves of hot money chasing assets. I tried to place a new fixed deposit with my bank and was politely told that they are quoting negative rates for all currencies now 🙁
Long ago, there was a wave of day trader from Japan that emerged when online FX trading became popular. They were mostly housewives who had time to kill, with an almost bottomless appetite for risk and were actively seeking higher yields. Japan interest rates were nearing zero and getting a 2% per annum yield was considered good to most of them. These formidable group of traders were named the Mrs Watanabes. They traded in all forms of JPY crosses, from AUD to EUR and even exotic ones like MXN (Mexican) and RUB (Russian) currencies. It was a positive carry trade for them – to sell JPY and buy currencies with higher interest rates as they had lost confidence in their own country – the Japan deficit is more than 200% of GDP now! They could move the markets as most participated in investment chat groups and traded via a herd mentality strategy. Unity is strength! Just don’t be the last one holding the baby when everyone bails out!
https://www.investopedia.com/terms/m/mrs-watanabe.asp
A new phenomenon started to develop in 2019 when American brokerage houses started to offer commission-free trading. Prior to that, an Israeli company eToro successfully pioneered social trading a few years ago where one can “copy” successful traders for as little as a few hundred dollars. Thanks to technology, no client now is too small to participate in the equity markets. CFDs and ETFs allow for multiple strategies and micro amounts to be traded. Apple at $350? You can just buy a fraction of a share. It is like Bitcoin where you can even buy for $1 worth. There is no transaction friction and economies of scale are the game – the more the merrier, no minimum size.
Then came Robinhood https://robinhood.com/us/en/ . Zero commissions and you can open an account for just $100. With the lockdowns and WFH situation, many first-timer stock investors turned to the biggest casino in the world. Aggressive gamers as young as 10 jumped into stocks like never before. To date, Robinhood has 13 million accounts. Like all gamers, chat group clans devise action plans to attack targets and drive up the prices.
One recent ridiculous example is Hertz. The company just declared bankruptcy and its share prices dropped to 50 cents from more than $60. Its bonds were trading at 40 cents to the dollar. Then the retail traders came in and pushed the price to more than $5!! Hertz has now decided to explore if it can issue shares to raise $1 billion of new capital. Amazing that a bankrupt company is actually even trying to raise funds via more equity now. If there is a demand, why not?
We live in amazing times indeed. Throw away the books as history is created every day now. The BLM (Black Lives Matter) rally continues to pick up steam. Trump is in his own alternate reality and adds kerosene to the bonfire every day. Someone forgot to tell him that as president of the USA, he is supposed to bring the country together, not to tear it apart.
Seattle has created CHAZ (Capital Hill Autonomous Zone) as a result of the escalating racial riots protesting. This is in the middle of the pandemic and Trump wants to start his rallies next week. The world has truly gone mad. A brave new world where anything goes and new morality lows are created every week.
New norms mean that we will all have to wear masks whenever we are out because of Covid19. This will continue for a long time, even after a vaccine is found. Many parts of the world like Brazil and India are now only starting to bear the full brunt of the virus. We know more now than 3 months ago when the lockdown started. But there is more to learn. The previous virus scares like H1N1 lasted up to 9 to 12 months, so we may be at a mid-point soon.
On the personal front, I just completed my first set of deliverables for the project I am currently on. It was to set questions for a financial sector certification exam. Initial feedback from the supervisor means more adjustments are needed which I will work on this weekend before starting on the second set of deliverables by early Jul. My younger son has successfully submitted his army disruption application for his medical school term that will start in Aug. And I still go for my daily morning run every day, rain or shine.
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