{"id":43,"date":"2021-01-30T13:32:47","date_gmt":"2021-01-30T18:32:47","guid":{"rendered":"http:\/\/blogs.harvard.edu\/jolivierporte\/?p=43"},"modified":"2021-01-30T19:23:20","modified_gmt":"2021-01-31T00:23:20","slug":"one-month-into-2021-plus-ca-change-plus-cest-la-meme-chose","status":"publish","type":"post","link":"https:\/\/archive.blogs.harvard.edu\/jolivierporte\/2021\/01\/30\/one-month-into-2021-plus-ca-change-plus-cest-la-meme-chose\/","title":{"rendered":"One Month Into 2021… Plus \u00e7a change, plus c’est la m\u00eame chose…"},"content":{"rendered":"

We are just one month into 2021 and already it feels as if things have started off on the wrong foot. Several countries \/ cities have re-declared state of emergencies and re-imposed lockdowns due to the virus, the distribution of vaccines has not gone as smoothly as expected (which I predicted in my previous post<\/a>), oh, and for the first time in nearly 207 years, the United States Capitol was overrun… On January 6, 2021, a mob of Trump supporters stormed the Capitol Building and disrupted a joint session of Congress that was in the middle of certifying President Elect Biden’s victory in the 2020 election. Some have called this an act of “domestic terrorism” or “insurrection.” What we can say with full certainty is the last time the United States Capitol was overrun dates back to 1814 when the British Army sacked the Capitol during the War of 1812.<\/span><\/p>\n

Do you know what else dates back to the 19th century? The publication of Charles Mackay’s “Extraordinary Popular Delusions and the Madness of Crowds”<\/a>\u00a0in 1841. Over the past month, I spent some time re-reading this classic and the lessons contained within are just as relevant today. The first three chapters of Mackay’s seminal work focuses on economic bubbles. Chapter 1 is about the\u00a0Mississippi Company bubble of 1719\u20131720, Chapter 2 highlights the South Sea Company bubble of 1711\u20131720, and Chapter 3 focuses on the Dutch tulip mania of the early 17th century. What could these three episodes dating back 300+ years (almost 400 years in the case of the Dutch tulip mania) possibly have to do with 2021?<\/span><\/p>\n

Quite a bit, in fact.<\/span><\/p>\n

The long bull market that we have experienced in the aftermath of the Great Recession has now evolved into an undeniable bubble of spectacular proportions. The “Warren Buffet indicator” (the ratio of total stock market capitalization to GDP) is about 190% (well above the record high of ~143% at the peak of the dot-com bubble in March 2000) There have been 480 IPOs<\/a> in 2020 and more than half that number (248) in backdoor listings through Special Purpose Acquisition Companies (SPAC).\u00a0Due in part to services such as Robinhood, the volume of small retail purchases (less than 10 contracts) of call options on US equities has increased 8X compared to 2019 levels.<\/span><\/p>\n

Speaking of small retail purchases and Robinhood, a community of retail traders on the online discussion forum Reddit have recently received widespread national media attention after their trading activities caused shares of the struggling brick & mortar video game retailer GameStop (ticker: GME) to soar from less than $20 a share at the beginning of January to a high of $483 a share on January 28 at 10:01 AM<\/a>\u00a0(Sidenote: You can retrieve such precise stock market data from Alpha Vantage), causing investors who were short the stock (betting that the stock would decrease in price) such as Citron Research and Melvin Capital to incur massive losses. Many of these retail investors used Robinhood’s “free” brokerage app to buy GME stock.<\/span><\/p>\n

I use the words “free” in quotation marks because the service is not really “free,” much in the way services such as Facebook are not really free. Yes, it is free<\/em> for Robinhood users to buy and sell shares or options on the app, but the reason behind that is because Robinhood users are not actually the “customer” but are in reality the “product.” The outspoken venture capitalist Chamath Palihapitiya – who incidentally was an early employee at Facebook who led the team at Facebook that created features designed to systematically increase the addictiveness of Facebook<\/del> grew the user base from 90 million (the level at which Facebook’s user base was stagnating at the time) to a path towards 1 billion by the time he left\u00a0\u00a0– recently put out a tweet describing as such:<\/span><\/p>\n

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Facebook and @RobinhoodApp<\/a> are the same:<\/p>\n

They both trick you into thinking you are the customer. But, in fact, you are the product and your data is the asset. <\/p>\n

These assets are then sold to their true customers who pay them money and always at your expense.<\/p>\n

STOP BEING TRICKED!<\/p>\n

— Chamath Palihapitiya (@chamath) January 29, 2021<\/a><\/p><\/blockquote>\n