These bubbles may not have burst for good; retail investors may just have shifted their attention once more. They began feverishly buying Apple Inc. call options, for example, helping to push the iPhone maker’s valuation toward a mind-boggling $3 trillion. Shares of new Reddit favorite Ford Motor Co. have lately outperformed Tesla.
Speculative excesses aren’t all bad: Some of the cash that’s poured into markets into 2021 will fuel real innovation — Musk’s technological achievements are impressive.
However, the longer manias persist, the more capital is misallocated and the greater the risks for financial stability. The implosion this year of property giant China Evergrande Group, family office Archegos Capital Management and U.K. fintech Greensill Capital revealed fragilities that ever-rising markets conceal, as well as the dangers lurking in leverage, derivatives and concentrated exposures. Moreover, today’s most speculative assets are often interconnected — people who own Tesla also own Bitcoin; indeed Tesla owns Bitcoin!— amplifying potential volatility.
So I’m glad Gary Gensler, the new head of the U.S. Securities and Exchange Commission, has outlined an ambitious policy agenda, spanning the “gamification” features of trading apps, SPAC financial disclosures and “Wild West” crypto markets, including lending and so-called stable-coins (the most important of these, Tether, is supposedly fully backed by dollar financial reserves but not everyone’s convinced).
Here’s my non-virtual two cents: I think we need greater oversight of crypto trading platforms and more digital assets should be regulated as financial securities. And I’m in favor of tightening access to options trading to prevent inexperienced investors losing their shirts.
But let’s face it: Regulators can’t turn back the clock. It’s not their job to heal societal divisions and they can’t police everything investors do and say on the internet. Democratized finance is here to stay. We must learn to live with it.
In a world of social media hype and increasing financial abstraction, teaching basic financial literacy and how to find unbiased investing advice will be vitally important.
Sadly, I fear the current generation of young investors may have to learn the hard way. Eventually people will tire of phony financial prophets and pump-and-dump markets. And then, as everyone makes for the exit, of the losses that pile up in their Robinhood accounts.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.