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Just in my experience as an investor, I have never seen anything like this. And I am somewhat familiar with financial history, and I have never heard of anythin

Just in my experience as an investor, I have never seen anything like this. And I am somewhat familiar with financial history, and I have never heard of anything like this happening either. It isn't just all the fraud SPACs, it is GME, it is AMC. You can have a business that is overvalued based on the fundamentals, but the future is always unknown. What is interesting about now is that you have companies with huge risks, that are already doing poorly today, and the market is just ignoring it (and btw, you have started to see papers appearing, both theory and practical, that explain how retail money is pushing these stocks...this is something that people in the market already understand but there is point blank ignorance from govt, media, economists, etc.). With dot-com, there was theoretical growth there. With housing, there was structural reasons why the market didn't function. There are often fundamental reasons why these things happen. With this, it is just a wave of money crashing into this small section of the market. The only exception that occurs to me is HTZ. There was a huge media furore about that, and it turned out that was totally wrong (people who bought at the bottom got more than 10x their money in six months).

andybak 5y ago
HTZ = Hertz?
- hogFeast 5y ago
  Yes...I think it is HTZZ now they are out of bankruptcy.
CPLX 5y ago
One thing you’re ignoring is that investment doesn’t occur in the abstract. It’s literally an investment in the company, and it’s not just a bet on future results it actually can and does change the outcome. For example GME and AMC were able to wipe out their debt snd get a bunch of cash in the door to run their business with via all this retail investment. It’s quite possible having that money will change their story from failure to success. Betting on horses doesn’t make the horse go faster but betting on companies can.
- hogFeast 5y ago
  Are you familiar with Mogdilani-Miller? Being able to pay off debt does not increase the value of equity. The capital structure has changed but that makes no difference for the actual value of the business (which is determined by cash flows). And, ofc, it is massively value-dilutive in practice for shareholders. Debt is extremely cheap and equity is expensive. And, in this case, massive amounts of value have been destroyed by issuing equity at a valuation that can't be sustained by cash flows. Indeed, what has happened is the exact opposite of what you think has happened: the share price has increased, and that has given management the opportunity to destroy value by rinsing shareholders. Debt holders that were facing total loss have been bailed out by equity. Whatever the value of the debt was, that is the close to the amount that has been lost (because the value of that debt was close to zero). This is Corp Finance 101 but the marginal investor today doesn't understand this (unf, debt investors do, bankers do, mgmt do...they have made out with a couple of yards, equity got rinsed once again). Nothing goes anywhere in finance. All that is happening in AMC and GME is people trading capital loss between themselves (and debt investors finding someone to buy their capital loss at 100c in the dollar).
  - CPLX 5y ago
    It’s not that deep. The basic premise I’m putting forward, which is that in general investing in an company might have the potential to help that company succeed, is utterly trivial and obvious. Also trivial and obvious is that fact that an excessive debt burden can cripple and kill a company that might have otherwise succeeded. There is indeed subtlety to this, needless to say. But basic observation is essentially unarguable: when a whole ton of people decide to buy stock in a company it affects that company’s prospects.
    - hogFeast 5y ago
      Correct. Lots of people bought into the stock at a valuation in excess of fundamental value, bankers saw an opportunity, equity holders got rinsed, and debt holders got paid in full immediately on a junk credit.
hef19898 5y ago
I am by no means an economic expert, far from it. To me it seems so, that there is way to much money flowing around, looking for an outlet. And with interest rates being all time lows since 2008 parking that money at a bank doesn't work anymore. Before 2007/8, the problem was too much money being made too easily. We solved that by creating more money. And we repeated that with Covid.
- Apocryphon 5y ago
  That's ZIRP for ya. https://www.readmargins.com/p/zirp-explains-the-world https://www.readmargins.com/p/zirp-explains-the-world
  - hef19898 5y ago
    This article summarizes my thoughts extremely well, thanks for that! I would throw in food and drink delivery with scooters, so!
- hogFeast 5y ago
  I have thought a lot about this. I am not sure that I have an answer because the way in which everyone (inc. myself) thinks about financial markets appears to be totally wrong (I am in the UK, we have had several rounds of QE since 2010...every time, the BoE gave a different explanation of how QE works). But it is easier to comprehend that, most obviously in the EU, there is a shortage of risk-free assets. It is less that there is too much money and more that there is a mismatch between assets required by investors to match liabilities and what there actually is. My guess is that over the next ten years, we see a move to understand the demand for financial assets in more depth (and from this perspective, QE seems like financial vandalism). Framing purely in terms of supply doesn't really explain what is happening or why people are doing things that make no sense. I also don't think 2007/08 was a function of too much money at all. It was a combination of structural issues, poor regulation, and a relatively normal financial cycle (people buying things because other people were buying them). What happened in 2008 was the market working effectively. It was after 2008 when the odd things started happening (one very interesting thing to me was Blackstone's property business...they were doing the most overvalued deals at the very top of the market in 2006/07...and they ended up making multiples, that really isn't normal, and the bailout in the view of the Fed was the market working...which is, ofc, totally backwards).

andybak 5y ago

HTZ = Hertz?

hogFeast 5y ago
Yes...I think it is HTZZ now they are out of bankruptcy.

CPLX 5y ago

One thing you’re ignoring is that investment doesn’t occur in the abstract. It’s literally an investment in the company, and it’s not just a bet on future results it actually can and does change the outcome. For example GME and AMC were able to wipe out their debt snd get a bunch of cash in the door to run their business with via all this retail investment. It’s quite possible having that money will change their story from failure to success. Betting on horses doesn’t make the horse go faster but betting on companies can.

hogFeast 5y ago
Are you familiar with Mogdilani-Miller? Being able to pay off debt does not increase the value of equity. The capital structure has changed but that makes no difference for the actual value of the business (which is determined by cash flows). And, ofc, it is massively value-dilutive in practice for shareholders. Debt is extremely cheap and equity is expensive. And, in this case, massive amounts of value have been destroyed by issuing equity at a valuation that can't be sustained by cash flows. Indeed, what has happened is the exact opposite of what you think has happened: the share price has increased, and that has given management the opportunity to destroy value by rinsing shareholders. Debt holders that were facing total loss have been bailed out by equity. Whatever the value of the debt was, that is the close to the amount that has been lost (because the value of that debt was close to zero). This is Corp Finance 101 but the marginal investor today doesn't understand this (unf, debt investors do, bankers do, mgmt do...they have made out with a couple of yards, equity got rinsed once again). Nothing goes anywhere in finance. All that is happening in AMC and GME is people trading capital loss between themselves (and debt investors finding someone to buy their capital loss at 100c in the dollar).
- CPLX 5y ago
  It’s not that deep. The basic premise I’m putting forward, which is that in general investing in an company might have the potential to help that company succeed, is utterly trivial and obvious. Also trivial and obvious is that fact that an excessive debt burden can cripple and kill a company that might have otherwise succeeded. There is indeed subtlety to this, needless to say. But basic observation is essentially unarguable: when a whole ton of people decide to buy stock in a company it affects that company’s prospects.
  - hogFeast 5y ago
    Correct. Lots of people bought into the stock at a valuation in excess of fundamental value, bankers saw an opportunity, equity holders got rinsed, and debt holders got paid in full immediately on a junk credit.

hef19898 5y ago

I am by no means an economic expert, far from it. To me it seems so, that there is way to much money flowing around, looking for an outlet. And with interest rates being all time lows since 2008 parking that money at a bank doesn't work anymore. Before 2007/8, the problem was too much money being made too easily. We solved that by creating more money. And we repeated that with Covid.

Apocryphon 5y ago
That's ZIRP for ya. https://www.readmargins.com/p/zirp-explains-the-world https://www.readmargins.com/p/zirp-explains-the-world
- hef19898 5y ago
  This article summarizes my thoughts extremely well, thanks for that! I would throw in food and drink delivery with scooters, so!
hogFeast 5y ago
I have thought a lot about this. I am not sure that I have an answer because the way in which everyone (inc. myself) thinks about financial markets appears to be totally wrong (I am in the UK, we have had several rounds of QE since 2010...every time, the BoE gave a different explanation of how QE works). But it is easier to comprehend that, most obviously in the EU, there is a shortage of risk-free assets. It is less that there is too much money and more that there is a mismatch between assets required by investors to match liabilities and what there actually is. My guess is that over the next ten years, we see a move to understand the demand for financial assets in more depth (and from this perspective, QE seems like financial vandalism). Framing purely in terms of supply doesn't really explain what is happening or why people are doing things that make no sense. I also don't think 2007/08 was a function of too much money at all. It was a combination of structural issues, poor regulation, and a relatively normal financial cycle (people buying things because other people were buying them). What happened in 2008 was the market working effectively. It was after 2008 when the odd things started happening (one very interesting thing to me was Blackstone's property business...they were doing the most overvalued deals at the very top of the market in 2006/07...and they ended up making multiples, that really isn't normal, and the bailout in the view of the Fed was the market working...which is, ofc, totally backwards).