Aricle by Carson Block in Financial Times
The recent boom and bust of GameStop shares is a wake-up call that world markets and economies are precariously positioned, and pose serious risks to political stability.
The US is patient zero for this sickness and as the US goes, so too will much of the world. GameStop illustrates clearly that capital markets are driven by flows and investor positioning, rather than by the underlying fundamentals of businesses.
The primary causes of this market dysfunction are the prevalence of passive investing and leverage enabled by low interest rates. The combination has resulted in grotesque distortions of capital allocation while further bifurcating society into haves and have nots.
The increasingly obvious fact is we do not know whether the government will be able to perpetually bail out markets. With interest rates already hovering around 0 percent, the traditional levers of monetary policy may not be able to rescue markets and prevent another depression.
These phenomena are a big part of the Tesla stock story. Ever-rising share prices that have no basis in fundamentals have birthed yet another meme, “Stonks!”, which is feeding frenzied retail speculation.
Cheap money leading to excessive speculation contributed to the 1990s dotcom bubble, the 2000s housing bubble, and now the stonk bubble.
The real risk to markets is that passive flows go negative (if widespread lay-offs lead workers and employers to cut their 401K contributions). If that were to happen, passive fund selling would quickly overwhelm the market. Such a crash could resemble 1929-1932 in magnitude but at 2021 speed.
We must find a way to deleverage our economies and markets. We live in a time when …..
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