Money & Markets: The Financial Mob vs The Hedge Funds

Ochlocracy is my favourite word right now and it is a flash way of saying ‘mob rule.’ Flash mobs are a thing too and they are facilitated by technology. Mobs, as opposed to structured governance, have been facilitated by technology at least since the Renaissance dragged societies from the twilight of the medieval.

A new technology facilitating the rise of mobs was the printing press, a cheap mass producer of ideas that could be spread virally. Initially it was the ability to produce bibles on the cheap that morphed into versions in local languages that produced a new scale of social fragmentation between the mechanised, localised unauthorised interpreters and the legacy producers of handwritten Latin dogma.

Then in the 17th century it was the pamphlet that spread the sort of ideas that the powers that be would have preferred to have been left unspread.

The pen is mightier than the sword unless someone is pointing a blade at your throat, but nonetheless ultimately the press became the fourth estate, a para-governmental structure itself. Press barons literally became barons.  

What has this got to do with markets? Quite a lot right now.

The web and its internet infrastructure, a high-tech mutation of the printing press, is likewise producing mobs everywhere, be it on the street, in politics or the financial markets.

This has now reached the financial markets from a surprising direction: Reddit, the chatty community of young people who are famous for their love of memes and all things feline. As a disclosure, I have run stock market trading communities for 20 years and like any internet communities there is always a flowing ditch of controversy, but in the US Reddit has just taken this uproar to a whole new scale.

Until recently, apart from technologists, stock investing has been the province of the rich, the old and the possibly degenerate gambler. It has been a small audience. But now, care of Berners-Lee’s promethean invention, a new generation of young people have discovered the stock market, and several trends have come together. For every generation there is a stock bubble when a new children’s trading crusade marches singing to the coast of wealth only to be crushed by the slavers of the financial service industry. They are never seen again. The last instance was the dotcom boom in 2000 and here we are with the next generation singing their favourite song, ‘stonks go boom.’

This has been facilitated by the intersection of events: the introduction of free trading, gigantic financial stimulus from central banks flushing the world with easy money, mass social media communities easily whipped up into a mob mentality, and the generational amnesia of a new naive cohort bent on speculation who for now still have the shirts on their backs.

They have formed a mob and like all mobs are making a major impact, at least while they are marching, but they are doomed like all mobs to be dispersed in panic by the merest setback or left hanging upside down from the financial barricades.

As I always ask would-be traders, and I would repeat to these trading Gavroches, “Would you play a game of tennis for money against Federer?”

For me, more importantly, this emergence of financial mobs is a sign that all is not well in the system itself, and that is unsurprising when the global situation is considered. The global economy is in deep trouble because of the pandemic and is being held together by giant monetary manipulations coming from the world’s governments, who are in effect paying for today by mortgaging our future. It is no surprise then that this is distorting markets, the financial system and the way it behaves. The mantra of ‘stocks only go up,’ which is the rallying cry of the Reddit stock mob, is purely a creation of these deeply disrupted times and the unprecedented liquidity operations (cash injections) of the likes of the Federal Reserve, the ECB, BOJ et al.

As I write, the Reddit stock mob are already being put to the sword and it doesn’t take a conspiracy to do so. You cannot fix a market by breaking it. History is littered with people or groups trying to beat the market or corner it.

The market pays out to people that help make it more efficient but takes the rest to the cleaners.

Going up against abusive shorters is such an opportunity to get paid but only as far as their distortion goes. Cornering a stock too high is just as likely to create losses as fixing it too low. The mob has, as mobs do, moved on to some new cause, believing the grumpy precious metal brigade that cheap silver is all a conspiracy. This in turn has proved to be a short-lived uproar which will likely wipe out another section of the excitable crowd.

One thing seems clear to me: the stock mob on the wallstreetbets section of Reddit indicate that the stock-market cycle is well into bubble territory. It may have months to run but not years. Those of a nervous disposition should think about lowering their risk profile, in other words start gently selling, but for those with the constitution now is the time to strap yourself in to take part in and make the most of the wild ride ahead.

Meanwhile I hope my DeFi and Bitcoin columns made you money!