Can’t Fight This Feeling

When I left home for college, the dot-com bubble was bursting.

The unfortunate events of March 2000 were already in the rear-view mirror, but the summer months gave at least some renewed hope to speculators and investors alike. That was the certainly the spirit on-campus at Wharton, anyway, where it seemed that just about every other undergrad was still supplementing work-study income (or draws from mommy and daddy’s trust fund) with stock speculation using the miracle of E*Trade on university-provided high speed internet.

Not me. Not really. Sure, I sold the shares of stock in the way-too-boring-for-1999 Dow Chemical Company I had gotten from them as part of a scholarship when I graduated and played around a little bit. But I was terrified of risk, didn’t really care about trading stocks and hadn’t the foggiest idea where to start. I also didn’t have any money.

But I remember how I felt.

I remember how class working groups broke down into late-night discussions of upside-maximizing options strategies. I remember upperclassmen talking about how the hardest class at Wharton to get into – by a HUGE margin – was speculative markets, the name for the options course. I remember penny stock discussions, the perfunctory nonsense that passed for “doing your DD”, which is very much the same perfunctory nonsense that passes for “doing your DD” today. I remember the elaborate hoops everyone jumped through to obscure the fact that they were just screening for excitement, sentiment and trailing price performance. I remember how clear it was that people explicitly looking for price, technical or other analogs to stocks that had been 8-baggers the year before, were wrapping their interest in made-up stories that would sound better to b-school students who would still have Graham and Dodd stuffed down their hungover gullets the next morning. I remember the validation that everyone sought from others about their particular elaborate charades, and how willing everyone was to provide that same validation to others.

I remember when discussions of strategies became discussions of tips became discussions of plays. When everything sort of shifted from figuring out how to evaluate a stock to figuring out how to identify what the smart money was doing to…well, maybe figuring out what people who had real, insider knowledge were doing. Not that anyone said that out loud, but c’mon. It was the tail end of a dying bull market, and we were grasping for whatever was left.

I remember how all of this felt as if it were yesterday, and I haven’t felt that way in a long time.

Mark Cuban, on the other hand, has felt that way. Several weeks back he joined our friends at RealVision to make a video about his experiences in the dot-com bubble, how he was able to protect the value of his position in Yahoo, and why some of what is happening today reminds him very much of the frenzy of leverage, risk-taking and asymmetric position-seeking that typified late-90s speculation in technology stocks.

I didn’t agree with Mark when he said it in June. I think our unprecedented connectedness today makes historical comparisons really difficult. It’s the same problem we all run into in our news consumption: are so many ridiculous things really happening, or are we just hearing about it more because we are so connected to news and instant-reaction social media? Are people really more sensitive, more aggressive, more divided and more hateful, or are the mechanisms through which missionaries promote that common knowledge more ubiquitous?

I don’t know. But after the past couple weeks, I can’t fight this feeling any more. I think Mark Cuban is right.

No, I don’t have any reason to think we’ve got a bubble that’s about to burst. No, I don’t think we’re looking at a crash in markets supported explicitly by a comically overzealous and inflation-indifferent Federal Reserve. But for the first time, the boundary-testing behaviors of retail speculators really do remind me of how I felt in 1999 and 2000.

The implications of these behaviors are big, even if I think they are likely to be very different this time around.

Let me share with you a post I read this morning.

This fare will be familiar to any who have perused the more casual Robinhood-inspired masses of /r/Stocks or /r/Wallstreetbets on Reddit. Let me assure you, it will be downright banal in comparison to what you’d find on the associated private Discord channels designed to avoid regulatory recordkeeping requirements and public disclosure.

If you follow financial markets much at all, the big news today for markets and for the company in question was the Trump administration’s announcement of a deal with Moderna, Inc. for 100 million doses of an experimental vaccine candidate for COVID-19. That is what the Reddit post above refers to. Moderna stock traded up more than 11% before the buy side and sell side alike did the math to realize that barely profitable vaccines were much better news for the market and economy in general than to producers that had been trading on far higher prices per dose.

The curious part, of course, is that there is a direct allusion to there being some indication of deep out-of-the-money options activity before any announcement was made. That is made less curious by the limited scale of that activity, but more curious again by the casualness with which retail participants bandy about the expectations that it might indicate insider activity.

The post, and many other posts in both subreddits, link to a service – “not advice”, naturally – that tracks unusual volume and activity in both stocks and options markets. The service itself is not novel. This has been basic stuff for traders and institutional investors since well before even I entered the industry. What is novel is that the service’s pinned tweet references early indications on a stock whose activity is now under investigation by the SEC for allegations of insider trading.

What is novel is that the very next promoted post, a retweet of an earlier promo, is a celebration of indications of unusual and early insider volume on a pending split by the ur-stock of the Robinhood revolution – Tesla.

I don’t really care about these guys, this service, or what they’re doing. Truly, I don’t. It’s (probably) not illegal, it uses information available to anyone willing to pay for it, and it is far more of a crapshoot than anecdotal examples where unusual activity was beneficially predictive will ever show. If that weren’t the case, the stat arb guys and other short-horizon quants would have mined this to oblivion before you could animate Stonks! into a GIF featuring the sea-dwelling mammal of your choice. Far more importantly, whatever mild impropriety exists here would pale in comparison to the actions of the grifters at the actual issuers, their political allies and the banks who serve them who know that they can get away with just about anything right now.

No, the real implication here is far more powerful: there is a new common knowledge. Everybody knows that everybody knows that the way you make a killing is to bet that grifters are gonna’ grift, and nobody’s going to lift a finger to stop them.

For most of the late 90’s through the summer of 2000, when you heard the rumors from energy traders you knew about what was going on at Enron and saw them get away with it, when you had heard of a hundred guys who’d made a killing on a stock tip from a guy they knew at a bank, you knew that you could either play or get left behind. When the courts came for Enron and when evaporating institutional asset price support came for tip-following retail speculators, those who bet on grifters learned a powerful lesson.

But this time? This time I don’t think the lesson the world is delivering is “bet on inside info at your own peril” or “bet with leverage on aggressive, sexy new business models that are probably frauds and get burnt along with management.” This time I think the lesson is different:

That nobody gives a shit what you do.

It doesn’t sound like much of a lesson, I guess. But if you care about why we do capital markets at all, about why we designed our economy to rely on markets to funnel rewards to the most productive owners of capital, it is a far more terrifying lesson. If you care about why we believe that governments should operate for the general welfare of the people and not for the concentrated pecuniary interests of a particular privileged few, it is a far more terrifying lesson.

It doesn’t matter that retail investors are trying to figure out what shenanigans Kodak insiders are able to get up to to see if they can tag along. It doesn’t matter that retail investors might be doing the same with Owens and Minor or 3M or Honeywell. It doesn’t matter that retail investors want to detect ways to ride the coattails of grifters at Tesla or Moderna or anywhere else.

What matters is that the transformation of capital markets into political utilities also appears to be the transformation of capital markets into entertainment and gambling utilities.

What matters is that no one in any position to do anything about it seems to care.

What matters is that none of that will change until you and I DO.