Dinosaurs & Market Bubbles for Day Traders

No doubt most of our readers will have heard of the "Hubble Space Telescope", it orbits the earth taking breathtaking pictures from space. Fewer people know about the sister project "Bubble Space Telescope", which was sent out to the edges of the Galaxy hoping to shed new light on how so many aggressive, strong and fearless dinosaur species went extinct at the same time, without warning and leaving little trace.
Just days ago, Bubble came across a previously undiscovered blue and oxygen-rich planet. It's not been named but is known in scientific circles as "Dotcom2001", a place where seemingly indestructible beasts were roaming the planet just a few decades ago. Beasts such as "BuyTheDiplodocus", "Robinhood-osaurus", "NoStopLossoraptor", "BetterThanBuffet-e-titan" and the apex predator "DayTrade-o-Saurus-Rex"


The woes of these once majestic beasts started as Dotcom2001 emerged from a lengthy dark and frosty period into one of light, warmth and prosperity created by a planetary alignment anomaly known as "The Internet Age". In this era, small, timid mammals evolved into these large BSDs (Big Swinging Dinosaurs). As they grew in stature, their brains became less important for survival and shrank, specifically in areas that control common sense. It was not unusual for a 15 year old "TechWhizz-o-Saurus" to go into a cave armed with no more than a flimsy paper with "dogbiscuits.com" written on it and emerge as a CEO with a billion dollars in working capital (and debt).

No idea was too silly. No valuation too high. Companies riddled with debt and poor cash flow were floated  and their prices always shot to one of Dotcom's 9 moons. Geological sensors on Bubble show the walls of "CaveBook" are covered with paintings from these majestic beasts, many showing off their earnings (I'm up 30% today!) or about how generally smart and invincible they were. Markets moved only one way. Everyone was a winner.

It was a golden age.

Then a simple virus mutated into what is now being named "Alan Greenspanius". A normally benign virus of the "Federal Reserve" family, the mutation caused an increase in the previously stable population of small brown rodents in the "InterestRatus" family. The explosion of the InterestRatus population was too much for debt ridden companies and too much for the magnificent beasts who, with their complete lack of common sense, carried on regardless and were soon wiped out in the ensuing famine.
And that was just 20 years ago, my friends...

[Reality Mode: ON]
I remember it well. In the late 90's I had to do a roadshow around Australia - presenting in the major cities about technology and business. Most of the audience were big investment firms (mostly big pension companies) - who were keen as mustard to "go .com". Each wanted more customers and the internet was certainly a way to get to them. But they were under the impression you could just pop up a website and the business you got there would be 100x your existing business. And the evidence? The numbers out there, the valuations, the projections - it was clearly all fake. Each week the most ludicrous concepts would get funded and in the blink of an eye they were floated, dumped on the general population and then would go on to double and triple in value. Oh yes - and then finally disappear worthless with very few exceptions.

A new genre of day traders emerged - the type that could make money with one hand tied behind their backs. No experience with anything other than a one-way market where they could do no wrong. To be honest, I was no stranger to trading firms like eBay myself. Although I consider this as "before" my trading career.

Funny thing - it wasn't until I started prepping my presentations for the roadshow in Australia that I realized how bad it was.

When the bubble popped - these day traders got slaughtered. A lot of people did - many long term holders that had 10x or 20x increase in their shares got wiped out when they went to zero. They never cashed out because they were holding out on bigger gains. Imagine that - your stock goes from $5 to $200 and you keep holding it because you think it will go to $2,000 (bitcoin anyone?).

I remember at the time reading a book by Peter Lynch. In it he explained (I will paraphrase as I'm too lazy to find it) "When you get in a Taxi Cab and the Cab driver starts talking about his portfolio gains - the bubble is about to burst". 

Are we in a bubble right now?

Your average Robinhood trader is 31 years old. They were 11 when the .COM bubble burst and 19 during the Global Financial Crisis. There's so many trader who didn't live through this or were too young to care. 

So what's the current situation? Are we in a bubble?
- US Markets have been rising for the past decade with hardly any pullback.
- GFC left interest rates at extreme lows, the result being that corporate debt in the US has gone up by $7 trillion in this time, half of it is considered by many to be junk.
- COVID has caused loss of revenues for an extended period which has put a lot of companies out of business. They didn't have the cash-flow or reserves to service this debt. Yet this doesn't seem to be prominent in the news. 
- The market sold off temporarily on COVID and then recovered as the economic impact of COVID worsened.
- 20 million people were out of work (up by 16 million because of COVID) and when just 2.5 million of them get back to work - we made all time highs.

- People with the mantra "buy the dip" seem to think a 1 day sell off is a dip. 

This isn't normal...

The US government announced a few days ago that they would start buying corporate bonds. In other words, companies can issue bonds to borrow money directly off the government. That's money the FED prints, the government borrows that money from the FED, then pays it back to the FED with interest. If the companies go bankrupt, taxpayers pay for this.

And nobody bats an eyelid. 

Hertz recently went bankrupt and still got permission to float an additional $1bn in shares. As the first $500m goes out - Hertz themselves are saying that they will most likely end up worthless. Yet people are buying it. It's like buying out of date casino chips. Who on earth would buy something like that? Well, anyone who ignores everything but the fact Hertz was once a $70 stock and is now at the 'bargain price' of $2. Basically, in investing terms - 'an idiot'.

Someone new to day trading who hasn't seen a crash and thinks it's a no-lose casino.

So have we got to the "Taxi Cab" test yet? Well, Facebook has no shortage of people patting themselves on the back for how well they are trading. I saw one video recently where a guy made $2,500 in a day - which was 8% of his account and where the account also had around $2,500 in unrealized losses. So yes - I think we have reached "ground zero" in terms of the mass of people that should clearly take their losses. Especially those "unrealized" trades that "must turn around because what goes down must pop up".

The point of an IPO is for the company to raise money. The point of the stock market is to allow people to buy and sell the shares created in an IPO. It is also supposed to be a reflection of the capitalist system. Companies are born and companies die. Survival of the fittest. Better companies do better, bad companies go bankrupt right? Wrong. Not any more. Some companies are too big to fail. Pensions in the US are very heavily invested in US stocks, the government seems to have gotten itself into the situation where they can't 'allow' the stock market to drop. Policy is now built around sustaining stock prices and pensions, at least to the next election.

The government buying corporate bonds will make the debt bubble worse. It's also distorting the capitalist system. Value and price are disconnected. So much money is sloshing around that needs a home - it's distorting prices.

Last week home trader/social media 15-minute-of-famer patted himself on the back announcing "right now, I am better than Warren Buffet". This is the height of ignorance. Buffet is a value investor. He invests in companies he feels are undervalued OR where he feels he can make them more valuable. A pre-requisite of making that work is NOT having everything over-valued, right? The fact that Buffet can't make money isn't anything to do with Buffet but with he markets being disconnected from reality.

I think we can say that yes - this really is a bubble. But that doesn't mean it'll pop next week. We may simply be seeing the end of capitalism and moving to an era of corporate socialism. An era where corporations are kept afloat by the government with cheap loans. Those cheap loans get spent by the company and enters the economy which has so much easy money sloshing around, a lot inevitably makes it's way back to the stock market and keeps it nice and fat.

Predicting the end is problematic. Take a look at Peter Schiff. I was reading his books in the late 90's where he predicted the demise of the US (well at least their currency and markets) and told everyone to buy Gold. He's still saying the same thing now - more than 20 years later. From a timing perspective, the boy obviously has some work to do.

So what to do?

Well as a day-trader, you make hay while the sun shines. Nothing wrong with that. If you are simply throwing money at a no-lose "everything is going to the moon" free money generator, then consider putting some of it to one side. Good traders make money on the upside & downside. Good traders don't try and predict the market but they should always be aware of its state of health so that final 'dip' isn't a fatal blow.

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