Shining Light on the Market

This week caught me by surprise as I reviewed the numbers.  Between the polar vortex affecting most of the United States and hearings in the House regarding the GameStop/Robinhood debacle, this week felt a lot worse than it turned out.  In fact, both the Dow and the S&P 500 look to finish the week flat with only the Nasdaq off slightly.  With valuations a bit stretched, it is both understandable and perhaps desirable that things cool off a bit.  And by cool off, I don’t mean a repeat of the cold snap in Texas.

Let’s start with one bit of trivia that may shock you. This week Japan’s Nikkei stock average exceeded 30,000 for the first time since 1990. While stock averages in the U.S. and other parts of the world have risen to new highs in recent months, the Nikkei is still approximately 30% below its record of 38,915 that was reached at the end of 1989. After touching that high, the stock average lost more than half its value over three years as Japan’s economic bubble burst. Without going into too much detail, a few of Japan’s major issues are its declining birth rate which isn’t high enough to support economic growth, an increasingly older population, and an immigration policy that is among the strictest in the developed world. So what happened? An explosion of loan growth, dictated by Japan’s central bank, helped inflate the Japanese economy to bubble proportions. Trying to keep inflation in check, Japan’s central bank raised interest rates in 1989 and the subsequent collapse is now history. Three decades later and the Nikkei are still trying to recover.

In other news, Ford made a big EV announcement this week. I’ve mentioned occasionally over the past year how the advancements in technology appears to be accelerating. From smart homes, to vegetable-based meats, and soon to be space travel and electric vehicles. What started as a novelty has quickly become a norm. The switch to electric vehicles is happening fast as consumers increasingly accept the industry shift. Ford announced its entire passenger vehicle range in Europe will be “zero-emissions capable, all-electric or plug-in hybrid” by 2024, with a “completely all-electric” offering by 2030. While I’ve anticipated the shift to electric vehicles, I genuinely believed it would be something that might occur over the next twenty-five (or more) years. By the look of things, I might have been off by a couple decades.

I mentioned the gamification of the stock market last week. Platforms, such as Robinhood and Public.com, have opened the doors for novice investors as was never possible before. I say novice, because these platforms tend to cater to young investors with less money and, generally speaking, less experience. While that isn’t necessarily a bad thing, it can present problems on occasion, i.e. GameStop, AMC, and the other meme stocks. However, there is another issue that has come up a couple times and which happened again this week. Clubhouse Media was up 123% by mid-day Tuesday, contributing to the over 1,000% YTD rally (as of Tuesday) as the Clubhouse audio app gains more press attention. The problem is that Clubhouse Media has nothing to do with the audio app. It is a social media branding marketplace benefitting from some investor confusion. The audio app Clubhouse hasn’t yet filed for an IPO and is therefore not a publicly traded company. It begs the question, do these platforms do more harm than good? Are these young investors being empowered or are they being taken advantage of?

In closing I want to address the lack of transparency that still exists in many areas of the stock market.  While everyone understands, in theory, how markets work and how the different actors each play a role in keeping the machinery running smoothly, in practice the means by which these actors play their part are proprietary and mostly opaque.  Non-disclosed backroom deals remain the norm, not the exception.  For example, in the wake of the GameStop trading frenzy, the Securities and Exchange Commission (SEC) is considering whether to require more transparency of short selling and the network of stock lending/borrowing that supports it.  However, much to my surprise, I was reminded this week that in 2010, as part of the Dodd Frank financial overhaul law, the SEC was ordered to impose such rules, but never followed through with it.  If I didn’t know better, I might think that the vested interests, with billions to lose, may not want transparency.  It seems a lot of work remains to be done.  Now you know.

Bruce J. Mason, MBA