The lifeline of any civilization is its economic activity. In an interconnected modern society with hyper-specialization and hyper-dependency, the power of economic activity cannot be overstated. If anyone needed a reminder of this fact of life, the coronavirus pandemic was eager to oblige.
What was a normal activity and expected income one day can easily be crushed overnight. The government can cross that thin line under the umbrella of an external threat such as a novel virus. As the habits of millions of people are overturned, new habits emerge. And sometimes, these new habits linger long after the lockdowns.
“Davey Day Trader” and the New Generation of Day Trading
In truth, it could have been almost anyone, but the fates willed it that Dave Portnoy of Barstool Sports fame would be the one to popularize day-trading. The leading stock trading apps were just waiting for it. In fact, Dave popularized it to such an extent that market analysts are starting to caution traders to beware of the “Portnoy Top” phenomenon. Meaning, when you introduce a large pool of risk-seeking new traders into the market, you inevitably skew the market prices for everyone.
To add an extra dose of confusion into the mix, Dave Portnoy’s often repeated mantra of “stocks only go up” creates an effect in which inexperienced traders, spurred by rambunctious Dave, inch ever closer to a financial cliff, on top off warping price signals. Looking at the “Portnoy Top” phenomenon now, it does seem a predictable outcome as coronavirus recalibrated our society:
- Among other things, lockdowns shut down sports events, which includes sports betting. Moreover, sports betting done offline is excluded during lockdowns, likely to never go back to the same level again.
- Commission-free and user-friendly trading via stock trading apps like Robinhood becomes an even more attractive alternative.
- An exuberant personality like Dave Portnoy, with his massive Twitter following of 1.6 million, breaks the “seriousness” of trading and puts down establishment investors like Warren Buffett. This perfectly matches the already existing cultural climate of people deeply distrusting elites.
- Prolonged imposed isolation and stimulus checks provide an extra incentive to “beat the odds”.
In this context, it is exceedingly easy to frame conventional trading practices as a clash of generations, something that the elites have been withholding from the beleaguered masses. Of course, when your own name becomes synonymous with reckless trading, you don’t back down but double down:
“All I hear is old-timers say that the retail bros are going to get crushed. That they’ve lived through this before. That the pride comes before the fall. … Yet here I am. Beating them like a drum for the past three months at their own game.”
Getting all of these ingredients into the same cauldron, and spicing it up with the effects of isolation, boredom, and extended freedom to invest with stimulus checks, created a soup that is now dubbed the “Portnoy Top”.
Is the New Generation of Traders Accelerating Bubble Inflation?
The chasm between Main Street and Wall Street has been a long-standing source of friction in the society. It was the primary motivating force behind the Occupy Wall Street movement. At this point in history, the divide is more extreme than ever before:
At some point, economic affairs have to come to a breaking point when Wall Street is too far away from Main Street. If there is anything certain about reality it is that it always asserts itself, no matter how long we run away from it. Nobody knows how much longer we can rely on the Modern Monetary Theory (MMT) to keeps us away from this realignment of reality.
The median age of Robinhood users is 31, with millions of more accounts being created in the first half of this year alone. According to Barclays’ analysis, this investor surge creates an environment in which more people are losing money than raking it in.
“And while it’s true that many high-return stocks have had a substantial increase in retail ownership, low-return stocks have also had a big increase.”
That is to say, the popularization of day-trading, in no small part thanks to Davey Day Trader, may add extra instability to an already unstable market. Portnoy may casually belittle investment legends like Warren Buffet or Jeremy Grantham, but it would be wise to heed their words:
“My confidence is rising quite rapidly that this is, in fact, becoming the fourth ‘real McCoy’ bubble of my investment career…the great bubbles can go on a long time and inflict a lot of pain, but at least I think we know now that we’re in one.”
Apps make it easy to do everything now for free, thus drastically expanding access. Do you fear that trading apps will become a double-edged sword by infusing the market with faulty price signals? Let us know in the comments below.
About the author
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.