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Economics research firm Capital Economics says the Wallstreetbets saga of recent days highlights how technology allows asset bubbles to inflate more quickly than in the past

Economics research firm Capital Economics says the Wallstreetbets saga of recent days highlights how technology allows asset bubbles to inflate more quickly than in the past

Global economics research firm Capital Economics says the turbulent sharemarket events of recent days involving the Reddit forum Wallstreetbets demonstrate that technology is allowing asset bubbles to inflate more quickly than in the past.

Capital's group chief economist Neil Shearing said while the developments of the past week don't represent a systemic threat to the global economy "they contain some ominous warnings for the future".

Users of the Wallstreetbets forum have caused huge sharemarket ructions by buying up stocks such as GameStop, driving the prices up and causing big problems for some hedge funds that had been 'short-selling' the stocks.  

One of the hedge funds Melvin Capital reportedly lost US$4.5 billion in assets value in January – a 53% drop – and that's after a US$2.75 billion cash infusion from previous investors, who jumped in to save the fund from collapse. 

Shearing, in posing the question as to whether the recent market upheaval poses a significant threat to the global economy, says probably not.

He says the price of the assets targeted by Wallstreetbets forum have inflated rapidly and are now clearly detached from their underlying fundamentals - and history is littered with examples of how this can wreak havoc in the real economy when boom turns to bust, and asset prices fall back to earth.

"However, when it comes to the macroeconomic fallout, not all asset price bubbles are equal," he says.

"The ones that cause the greatest macroeconomic damage tend to have two characteristics. The first is that they centre on a large and widely held asset class. The second is that they involve a substantial amount of leverage. For this reason, housing has often been at the centre of the biggest macroeconomic crises.

"These factors don’t apply to the recent saga. In aggregate at least, leverage is currently low (indeed, as noted above household savings are unusually high). At the same time, the asset classes that have so far been targeted are relatively small. For this reason, the direct macro fallout should be limited."

But having said that, Shearing then adds that in terms of the potential for indirect effects, the "huge losses" faced by a few hedge funds last week had some clear implications for financial markets beyond the handful of stocks that dominated the headlines.

'Worst week for a couple of months'

"The S&P 500 had its worst week for a couple of months, even as the shares of many smaller firms with substantial short interest surged – a pattern consistent with the reports of long-short hedge funds substantially reducing the size of their positions.

"This raises a question: could the coordinated actions of retail traders cause problems at a hedge fund with much more serious consequences for the financial system, as the collapse of LTCM threatened to do in 1998?"

Shearing notes that hedge funds are "notoriously opaque", so quantifying risks in this area is particularly difficult.

"But what we can say is that the largest hedge funds today are smaller than LTCM was at its peak.

"On the basis of the latest data collated by the SEC, they are also far less leveraged than LTCM was immediately before its collapse. Meanwhile, as a result of actions taken by regulators since the global financial crisis, banks are less directly involved in risky asset markets, and much better capitalised today than they were in the 1990s or 2000s.

'Should be better able to cope'

"So, in principle, they should be better able to cope with any losses stemming from their exposure to problems at specific hedge funds. In other words, it seems fairly unlikely that the kind of targeted retail trading we have seen recently will have a serious domino effect on the broader financial system."

However, Shearing says a second risk is that the traders target assets that have more direct links to the real economy, such as commodities.

"Admittedly, the scope for retail investors to cause commodity shortages and related supply chain disruption is limited because few commodities have physically backed [Exchange Traded Funds].

"But investors could bid up commodity prices. While higher commodity prices are beneficial for commodity producers, they also generate inflationary pressures. We have already flagged that commodity prices are set to push up headline inflation significantly this year.And the continued surge in shipping costs adds to upside risks.

"Retail investors bidding up commodity prices could add fuel to the fire and drive inflation rates up to uncomfortably high levels. This would risk prompting some central banks, particularly those in [emerging markets], to tighten policy at a time when large output gaps would otherwise warrant sustained policy accommodation."

Lessons

In terms of the key lessons from the saga, Shearing says there are likely to be "several twists and turns over the coming days".

"But perhaps the biggest takeaway so far is that it reinforces a point we’ve made before: namely that a combination of negative real interest rates and high household savings, set against a backdrop of a recovering economy, provides the sort of environment in which asset price bubbles tend to inflate. A related lesson is that technology now allows those bubbles to inflate more quickly than in the past, and in corners of the market that are difficult to anticipate in advance.

"In this respect, while the developments of the past week don’t represent a systemic threat to the global economy, they contain some ominous warnings for the future."

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47 Comments

Hmm.. "commodity prices are set to push up headline inflation significantly this year. And the continued surge in shipping costs adds to upside risks."

Hello, stagflation.....

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Reckon we'll get interest rate increases with that inflation?

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Property is a far better bet than shares/ equities.

TTP

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Markets seem to be pricing in higher inflation (perhaps even rate increases) into longer-term bond yields this week.

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Technology also allows bubbles to be more resilient and continue for far longer. Online publications such as One Roof can continually bombard naive readers with eye-catching pornographic-like pictures and articles, which often means fundamentals are ignored (by the masses) and bubbles continue unabated for longer. This of course means once the bad times arrive they last much longer and the drop is far greater.
As I understand it (or probably don't) this is the main criticism of MMT and QE.

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I am so repulsed by Oneroof. Media with absolutely no moral compass. I wish People see NZ Herald for what it is. Not a news publication but rather sensationalised opinion pieces for whoever pays the most money. Media garbage.

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Personally I categorically refuse to pay for news feeds. If the fourth estate want "freedom of speech" privileges they can damn well pay their own bills. With the rise in advertising content now they should at a minimum be break even. There was a time when tv owners paid a Broadcasting fee - when it got rolled into the general tax take that was the beginning of the decline in actual investigative journalism - if MSM want more money go see the Govt.

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In my view, there is absolutely no doubt the property market has been, in part, over heated by popular mass media. Every day, the public were bombarded by endless pieces promoting FOMO stories. And puff pieces pushing the appeal of get rich quick notions to potential investors. Thus, it became part of the NZ community psyche.

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...and the media do their bit too in order to sustain and push prperty bubbles! Weekly "What's your property worth?" headlines and "Location, location, location" style TV shows to continually push ideas of easy capital gain.

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Asset prices are alarming and bubbles dangerous. As are hedge funds. But those were a problem long before this recent Reddit dustup.

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You can see the angle though - the markets themselves are "too big to fail". Time to regulate then away from the commoners.

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While the risks of mass hysteria are clear, I like what is happening. I equate it to the 'democratisation' of the asset markets which for so long were restricted and manipulated by the wealthy and influential. The consequences of this that could be good are the Boards of companies being challenged more on what they do, and facing more accountability, large funds and individuals be less able to manipulate the markets, and finally Governments forced to enact and enforce regulation to the benefit of everyone not just a few. But then I am an optimist and I suspect more than a few people will seriously lobby Governments to regulate to keep the ordinary people 'OUT!'

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Also the decentralised information gathering. Some on the WSB board are asking some interesting questions - why for instance with only 70m issued shares, the market seems to be trading over 100m shares in GameStop and where the ‘extra’ shares have come from. There’s a whole conspiracy rabbit hole about how the big players create and trade shares that don’t exist with people now researching if the whole market is actually full of fraudulent shares not issued by the company traded. Fascinating stuff and scary if true

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What a terrible perspective peppered with half truths. Central Bank and institutional actions, policies, and dogma are undoubtedly a far greater driver of asset bubbles than 'technology.' Furthermore, the volatility seen is probably a good representation of reality. The last thing we need is centralized authority telling us and determining the value of everything. It's bad enough as it is now.

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Think they've moved onto silver this week.

I don't see their actions as a threat except to positions that are excessively shorted.

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No WSB hasnt, it is being pumped by MSM and a multitude of bots. WSB do not want to pump silver, know why? because the top 6 positions are all massive American banks and hedge funds. They are just trying to use this to pump their bags

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Yeah, I was surprised when I read it. Silver is a much larger and more liquid market.

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Max Keiser (bless him) owns one ton of physical silver.

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Why the GameStop stock frenzy is likely to end in financial crisis
https://www.scmp.com/comment/opinion/article/3120021/why-gamestop-stock…

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As well as hedge funds selling long positions in MFST, AAPL etc to cover massive short losses, potentially causing overall market drop, when GME tanks, if the millions left holding the bag are in margin accounts, and the RH crowd was allegedly a key driver of the TSLA bubble, if that's the main thing they have to sell to cover their margin calls, it could get very interesting, very fast. As added spice in the land of "what if", with Musk now getting a taste for BTC, if TSLA buys a billion or so in BTC, we might get to see what happens when a bubble in a bubble buys a bubble, while shorts and options panic sell at peak 'GME bubble' and peak 'GME bubble pop' immediately after. Not a prediction, and I may have it all wrong, but the Tesla logo is a tulip, right? And all that even assumes that RH doesn't fall over at the same time, freezing millions of traders simultaneously...

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Tesla buying Bitcoin with their reserves would be an example of a single stock bubble turning into a rock hard concrete wall. Unless you believe bubbles last for 10+ years going up at a rate of 200% annually and performing flawlessly in the same timeframe, which is BTC in a nutshell. The only other thing that's come even close to that in the last 40 years is the internet, which incidentally is another network that stores value.

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Mixed messages though aye.
Over here Orr tells the kids to step up and borrow against arguably a most beautiful speculative asset bubble called "NZ Property", but when a group of people take that same speculative mania out on a retailer getting effed by Wall Street, and cause massive losses to Hedge Funds suddenly there's a problem.
Hey kids! We want your speculative fever - but only in servitude to the ponzis we've created.
Technology is not the problem. Technology facilitates the symptoms of the problem. The symptoms are speculative fever and a desire to store value. The disease is excessive money creation and low interest rates and underproductivity in the Western democracies. There you go - free of charge too.

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The ones that cause the greatest macroeconomic damage tend to have two characteristics. The first is that they centre on a large and widely held asset class. The second is that they involve a substantial amount of leverage. For this reason, housing has often been at the centre of the biggest macroeconomic crises

Exactly:
Banks will always look to maximise return on capital on behalf of shareholders, hence lending priorities will be determined by the asset class that demands the least capital and provides the most liquid collateral - there is a reason why the risk weights for sovereign bonds are zero.

Residential property standard risk weights can be reduced by implementing 'the internal models based approach'. ANZ has reported a figure as low as 27%.

Banks have migrated away from lending to productive business enterprises because the risk weights can be as high as 150%. Thus around 60% of NZ bank lending is dedicated to residential property mortgages held by one third of already wealthy households.

The number of households eligible to participate will inevitably diminish as the value of bank lending to this sector ratchets upward.

Bank lending to housing rose from $50,788 million (48.36% of total lending) as of Jun 1998 to $292,645 million (59.71% of total lending) as of November 2020 - source

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Over here Orr tells the kids to step up and borrow against arguably a most beautiful speculative asset bubble called "NZ Property", but when a group of people take that same speculative mania out on a retailer getting effed by Wall Street, and cause massive losses to Hedge Funds suddenly there's a problem.

You get it Rosey. But Orr does not tell the kids to do anything. It's not his mandate nor his role. That being said, he's party of a 'complex' that nudges behavior. That 'complex' includes the govt, media, banks, and society. Isn't it any wonder that property bubbles are seen as 'normal' while something like Bitcoin is seen as 'speculative nothingness'?

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Yes, this is what most people do not understand, or do not want to understand, but approx. 1/2 to 1/3 the value of their property is what is known as non-value-added cost, ie a price that is paid above what a product should cost and which is due to the rentier monopolistic advantage that the developer/seller has when supply cannot or is not allowed to equal demand.

This excess amount would not exist if there was true free-market competition, but the product you would receive would be exactly the same.

Think of it as the extra money someone could ask to give them if they were holding a gun to your head as opposed to without a gun.

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With smart phones and all, information is at everyone’s finger tips. The economy ups and downs can no longer be “operated” the old fashion way. The internet can tell you everything and Facebook will share where the good deals are or where/when not to buy/invest in certain things.
The only thing that the internet can not tell us is when/where a virus is or when a pandemic will stop.
We are in a new age economy, boom of all booms for some and recession for others.
The titanic is leaving and many will miss the boat for good. And no this time the titanic isn’t going to sink thanks to the technology, it will sure break down here and there and few people might jump off the ship when they go crazy.
Life is speculation.

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If you are getting your "good deals" news from facebook, you are already behind the curve.

Real time news is reddit and twitter.

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Booohahaha - if either of you rely on or even listen to the garbage recommendations on those platforms then the saying "A fool and their money.." is made for you

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Not all of us can afford the guilded print edition of the NBR Hook. Nice to flick through in the sauna at the club though right?

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Twitter is the single most amazing resource there is for someone to research a topic. You have people who are world leaders in their fields interacting with everyday Jo and pumping out fantastic content. You obviously have to chose not to follow shit "influencers" and other waste of spaces. Like any tool is comes down to how you use it.

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I am wondering if technology is also doing the same thing with house prices, now that people are no longer using the CV as a guide for the price.

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I would say so, it becomes self-fulfilling.

People see price rises on x website, expectations increase, offer is increased, highest offer is accepted, this increased sales price is then fed back into system x, which shows the price rises.

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I noticed on one property I was interested in, that the websites estimate increased significantly in the same month it was listed. Previously it was trending along a line with the town it was in. People seem to be expecting double the 2017 RVs in my area, and some are selling for that amount. Outlier sales seem to mean that other houses then expect to get what outliers are getting, and are quite a lot more than the estimated market value, and almost double the RV. Not good for FHBs like me.

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My understanding is the REA can change the values, so wouldn't surprise me they go up just before they are listed.

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If the website was realestate.co.nz - the real estate agents can manually change those estimates based on their own re-estimate of the property's value. Stick with the average percent above RV/CV for actual sales in the close-proximity of the specific neighbourhood you are looking at.

You can find those actual sales prices on realestate.co.nz as well (they are marked in red) and the website also tells you the property's RV/CV (they refer to CV - Capital Value). Do the calculation of average % over RV/CV yourself based on actual sales - not on the websites estimates as they may well have been individually inflated by the listing real estate agent..

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Who cares what the market is doing? what matters is what you are doing....
To be fair there is only one benefit to shares and that is it's generally liquid meaning you can sell tomorrow and have cash in your bank the same week

I still prefer property as you have more control over the cost, the opportunity and you can leverage it - not even considering the tax advantages (assuming you have a good accountant)

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Can't wait for Karma to happen to the Reddit kids. It will come when Gamestop prices eventually loses steam and panic selling ensues. I know a lot of eagle eyed hedge funds are pre-positioning to short them out of their tution fees and welfare checks. Hey, even I am interested to get my hands on some of their money too- just being honest. The real winners are Gamestop owners and executives who cashed out rich beyond their dreams while the drama was played.

Everyone likes a feel good David versus Goliath story but these kids ain't no David.

Whatever makes them feel good but I know what really makes me feel likewise.

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How would that be karma for the Reddit kids? It wasn't them behaving fraudulently and illegally.

If you think WSB will panic sell, you clearly don't understand them. But it isn't surprising, given your stance, that you can't see any motive beyond greed.

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"How would that be karma for the Reddit kids? It wasn't them behaving fraudulently and illegally." For starters shorting a stock is neither fraudulent nor illegal. These Reddit driven "investors" are playing with fire and will get burnt - in fact many probably already have been, especially the ones that got in late. David's only a hero until Goliath squashes him, and then he's forgotten.

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Where did I say shorting was illegal?

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These Reddit driven "investors" are playing with fire and will get burnt - in fact many probably already have been, especially the ones that got in late

Stupid comment. All those buying GME do so at their own risk. Of course some people get burnt. That is the nature of speculation when you're betting against short / long trading strategies. Nevertheless, some people will win big. This is a far more natural, sustainable market environment where everybody 'wins' and the house wins even more, even though you're totally oblivious to it.

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Now say it without crying

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Play stupid games, win stupid prizes

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Well GameStop is STILL over 120% shorted. That's crazy. That means there are commitments to buy over 100% of GME stock. Hedge funds had all weekend to pony up a good price.. they only have themselves to blame.

Retail investors don't ordinary have the ability to short, so they can only profit by the price going up.. this should get interesting.

It's a grand financial tug-of-war. Will hedge funds use their silver profits to cover margin calls or draw down on some of their GME shorts.

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Or will they just stop retail buyers?
Looks like that'll be it.

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