A Warning For Black America: 7 Signs The Everything Speculative Bubble Is About To Pop (Stocks, SPACs, Bitcoin, More)
The “everything bubble” that investors worried about is showing some indications it’s about to burst.
It refers to the correlated impact of monetary easing by the Federal Reserve on asset prices in most asset classes — equities, housing, bonds, many commodities, and cryptocurrencies, according to Bloomberg.
The everything bubble isn’t exactly a bubble (although some individual stocks are in mini-bubbles), The Wall Street Journal reported. And it doesn’t exactly include “everything.”
In August 2020, The Wall Street Journal reported, “The not-everything part is obvious: Oil stocks are in a terrible place. Retailers are going bust in droves. Banks are still down 30 percent this year in the U.S. and are worse in Europe. Travel and tourism stocks are in a hole. Smaller company stocks have rebounded, but only back to where they stood in January 2018. The worst-rated junk bonds have missed out on easy money entirely, with their yields rising this year. This isn’t indiscriminate buying of everything.”
Still, the Federal Reserve’s current rate-hiking cycle, which started in 2015, is set to pop “the everything bubble,” veteran speculator and author Doug Casey reported in International Man.
The most recent moves on the market have been extraordinary, to say the least. The situation has many nervous about the bubble popping.
A speculative bubble is a sharp, steep rise in prices that is fueled by market sentiment and momentum, more than underlying fundamentals, according to Investopedia. “Prices spike as investors jump in to avoid missing the boat, believing that prices will continue to rise and that an opportunity will be lost if they don’t invest.” In other words, fear of missing out, or FOMO.
Here’s a warning for Black America: Seven signs that the everything speculative bubble is about to pop (stocks, special purpose acquisition companies or SPACs, Bitcoin, etc.).
1. The kids are trading in one-way overvalued markets, not investing
The GameStop stock surge got kids, many of them under the age of 18, interested in investing for the first time, The Washington Post reported.
Typically, teens and children aren’t playing the stock market. You might see them playing video games, but now they have become interested in playing the investment game, thanks to the GameStop market episode aka revolution. Kids aren’t investing, they are merely trading in one-way markets. Some have made substantial money doing so, and others have lost a ton.
Ten-year-old Jaydyn Carr, who is African American, received $60 of GameStop stock as a Kwanzaa present in 2019. During the recent GameStop market surge, the stock rose to $3,200 before he decided to sell. That was a return of more than 5,000 percent for the young San Antonio, Texas, trader. His mother made the transaction for him.
“In December 2019, Jaydyn, then 8, was buying discounted games at GameStop and wishing for an Xbox One. Spying a way to use her son’s enthusiasm for video games to teach him about investing, Jaydyn’s mother, Nina Carr, decided to invest in 10 shares of GameStop at $6.19 a share for a Kwanzaa gift,” The New York Times reported.
After that, Carr and her son would monitor the stock.
“All of a sudden, I heard ‘ding, ding, ding, ding, ding,’” Carr, 31, referring to the stock alerts, said to The New York Times. “I grabbed my phone, and I was looking at it, and it said $351. I was shocked: ‘I bought this thing at $6,’ I thought, ‘there’s no way this can be right.’”
According to Carr, she pulled her son out of virtual learning and asked him what he wanted to do. “I was trying to explain to him that this was unusual,” she told mySanAntonio.com, a segment of the San Antonio Express-News. “I asked him, ‘Do you want to stay or sell?’”
He cashed in and said he had decided to save $2,200 and invest the remaining $1,000, most likely in shares of Roblox, a multiplayer gaming universe popular with young children, if and when Roblox goes public.
“Long-term investing is important because that is how I got this money,” Jaydyn said.
Carr said it is important that her son is financially literate. “In the African-American community, that’s a huge gap that I wanted to fill in,” Carr said of teaching her son about the stock market. “I wish more parents would do it. I think it would definitely interrupt a debt cycle to teach your kids about financial responsibility.”
Billionaire Mark Cuban said his 11-year-old son made money by trading with Reddit board wallstreetbets and that he loved how the Reddit day-trading forum became the main catalyst f orthe epic GameStop short squeeze.
“The recent news has sparked a lot of interest. Parents should strike while the iron is hot. Sign them up for a class, get them a book,” said Keallah Smith, who teaches students age 9 to 19 about financial basics via a class on online education site Outschool called “Financial Literacy for Kids.”
Many of the online trading apps have taken note of the interest of young investors and made it easier to lure them in. Savings and investment app Acorns, for example, launched a product specifically for parents and guardians earlier this year called Early. Parents still have to be involved, said Kennedy Reynolds, Acorns’ chief brand officer.
“You make anything look like a game, and kids are going to find a way to play,” Reynolds said. “This moment is a really important reminder of our responsibility to provide support responsibly. Give everyone a path, yes, but give guidance on that path.”
Part of teaching children about the stock market is to educate them about bubbles and how to spot when they might burst. President John F. Kennedy’s entrepreneurial father used a simple trick to spot market bubbles.
“In 1929, JFK’s father Joseph Kennedy Sr. picked up on one of those subtle signs and didn’t just get out at the top, he scored a massive windfall on the way down as well,” Business Insider reported.
The trick involved a shoe shine.
While getting his shoes shined, Kennedy Sr. was intrigued when the shoeshine boy gave him tips on which stocks he should buy. After the shine, Kennedy went back to his office and unloaded his stock portfolio.
“In fact, he didn’t just get out of the market, he aggressively shorted it — and got filthy rich because of it during the epic crash that soon followed,”’ Business Insider reported. “They don’t ring bells at the top, but apparently when shoeshine boys start giving stock advice, it is time to head for the exits.”
2. Margin debt, borrowing to buy more stocks
Margin debt can be dangerous, especially when everything is at an all-time high and there are signs a bubble might pop.
“Margin debt is not a technical indicator for trading markets. What margin debt represents is the amount of speculation that is occurring in the market,” Seeking Alpha reported.
Margin debt can drive markets higher as the leverage — or borrowed funds — provide for the additional purchasing power of assets.
The problem is that the “leverage” also works in reverse. It supplies the accelerant for more significant declines as lenders “force” the sale of assets to cover credit lines without regard to the borrower’s position, Seeking Alpha reported.
3. Michael Burry called it a bubble last time, says this one is bigger and about to pop
“Big Short” investor Michael Burry has a habit of predicting when bubbles are going to burst. He’s warning of another pop.
Burry’s billion-dollar bet on a U.S. housing-market collapse was so epic it was chronicled in Michael Lewis’ book “The Big Short.” He even laid the groundwork for GameStop shares to skyrocket.
“We are in a blow-off top in all things,” Burry recently tweeted, referring to a chart pattern that shows a steep increase in an asset’s price and trading volume, followed by a rapid price decline, Business Insider reported.
“Markets have now bubbled over in a dangerous way,” Burry said in an earlier tweet.
4. Bubble pop: Warren Buffett’s favorite indicator says so
Here’s a sure sign, some experts might say. The favorite indicator of billionaire business tycoon and guru investor Warren Buffett suggests that stocks are significantly overvalued.
The “Buffett Indicator,” as it’s called in Wall Street circles, takes the Wilshire 5000 Index (viewed as the total stock market) and divides it by the annual U.S. GDP. That indicator “is now at a record high amid the latest climb to records in the broader market,” Yahoo reported.
Crunching the numbers, the Buffett Indicator stands at about 194 percent — up from 175 percent-or-so when applying third-quarter GDP data.
Before the dot.com bubble, it was at 59.2 percent. “The stock market is significantly overvalued according to the Buffett Indicator,” said researchers at GuruFocus. “Based on the historical ratio of total market cap over GDP (currently at 194.6 percent), it is likely to return -3 percent a year from this level of valuation, including dividends.”
5.Crypto that was created as a joke is now worth billions, like Dogecoin
Can a meme actually become a cryptocurrency worth billions? It happened incredibly with Dogecoin. And what does that say about the reality of the crypto world?
“It started life as a joke, but within months was one of the world’s most highly valued cryptocurrencies,” CNet reported.
Dogecoin was a tweet, then it became a cryptocurrency worth money in the real world. It was invented by software engineers Billy Markus and Jackson Palmer. They wanted to create a payment system that was fun and free from traditional banking fees. Dogecoin features the face of the Shiba Inu dog from the “Doge” meme.
At the end of 2013, Palmer, an Australian marketer, made a joke combining two of the internet’s then-most-talked-about topics: cryptocurrency and Doge. As a joke, he combined the two.
“Investing in Dogecoin,” Palmer tweeted, “pretty sure it’s the next big thing.”
The tweet went viral.
Palmer bought the Dogecoin.com domain and created a coin with a Shiba dog on it.
Then he dared the Internet to make it Dogecoin a reality. That was when Billy Markus, a software engineer at IBM, got involved. Markus offered to help build Dogecoin.
“Dogecoin,” said Markus, “from ‘that seems like it’s funny’ to actually doing it, took about three hours. It’s almost trivial to create a new cryptocurrency.”
Still, the pair wasn’t totally serious about Dogecoin. “We thought it was this big joke that would die off,” Palmer said.
But in online crypto circles, Dogecoin became popular, CNet reported. “It was moving at light speed,” Markus said. “Within minutes we were like, ‘Wow, this is way out of our control.”
Reddit helped drive Dogecoin into the stratosphere. If a user posted something to the effect of, “Hey ‘dogebot’ tip this person five dogecoin,” that Reddit user would get five Dogecoin. Suddenly, people were sending Dogecoin back and forth.
“At the time, Dogecoin wasn’t worth anything, but getting five Dogecoin felt better than getting two cents,” Markus said.
“Pretty much everyone who used Reddit had Dogecoin,” Palmer said. “I think that was key to its success.”
6. Crypto bubble: Bitcoin explodes to $50K and businesses deviate from their core business to chase it
Everyone seems to want to jump on the bitcoin bandwagon as it explodes to $50,000. But when companies deviate from their core business models to chase the bitcoin wagon, how can it be a good thing?
Take MicroStrategy, for example. The company’s shares dropped more than 7 percent on Feb.16 after it announced plans to sell convertible debt to buy more bitcoin. In other words, it jumped on the bitcoin bandwagon.
The Virginia-based enterprise software company already owns nearly 72,000 units of bitcoin, as of Feb. 2, CNBC reported. Soon after stock fell, they rose more than 5 percent in premarket trading.
Other established financial firms such as BNY Mellon and Mastercard also announced moves in the crypto space.
“MicroStrategy shares have been on a tear since August as some investors looked at the stock as a way to gain exposure to bitcoin. Shares had been more than 660 percent since Aug. 11, the date the company revealed its first bitcoin buy,” CNBC reported.
7. SPACs can’t lose: ‘Every single one of them has gone up’
The rallies in SPACs have caused experts to worry about a bubble bursting.
New SPAC deals just this year recorded an average jump of 6.5 percent on their debuts. This marks a nearly sixfold increase from their historical levels, according to University of Florida finance professor Jay Ritter.
The proprietary CNBC SPAC 50 index, which tracks the 50 largest U.S.-based pre-merger blank-check deals by market cap, is up nearly 14 percent so far this year, CNBC reported.
The SPAC boom has raised concerns about “rampant speculation detached from reason that could leave retail investors fresh off the GameStop bust holding the bag,” CNBC reported.
“Every single one of them has gone up in price. It’s not driven by one or two outliers,” Ritter said.
SPACs are different from traditional IPOs where debut pops are viewed as a sign of healthy investor appetite and a bullish market. When SPACs experience an initial rally, they are less rational in nature.
“These blank-check companies are empty corporate shells that raise money from investors and then merge with a private business within two years, while taking it public,” according to CNBC.
As such, when investors bid up prices of SPAC deals, they are taking major risks and it doesn’t bode well for the market’s future.
“Many believe the rise in SPAC prices could be a sign of speculative behavior in a new bull market with massive liquidity and unchecked animal spirits,” CNBC reported
“There’s a lot of money coming into the market,” said JJ Kinahan, TD Ameritrade’s chief market strategist. “That lends itself to people going outside the course of the S&P 500 or Nasdaq 100. You will continue to see this behavior just because people are looking around to see what else is there besides buying the same stocks everybody else is buying.”