International Man: There is growing interest on social media in gambling on companies based on hype rather than business fundamentals like growth and profits.
What do you make of the rise of so-called meme stocks?
Doug Casey: First, let’s define some relevant words: Investing, speculating, and gambling.
When you invest, you’re allocating capital to create more wealth. In effect, you’re planting a seed of corn to get back an ear of corn. That’s how you grow wealthy in a free and stable society. In a highly taxed and regulated economy, good investments dry up.
How to Trade In Stocks
Best Price: $6.82
Buy New $13.53
(as of 11:37 UTC - Details)
Speculation is very different. A speculator isn’t necessarily looking to create more wealth but rather take advantage of anomalies in the market. In a free and stable society, there are relatively few speculators because there are relatively few distortions in supply, demand, or price created by government.
Gambling is simply betting money with the hope of gain through random, unpredictable chance.
A lot of people confuse investing with speculating, and they confuse speculating with gambling.
The way I read the markets right now, most people are just gambling and don’t even know it. Trillions of dollars created by the US central bank, the Fed, now permeate society. That’s created a paradox: people feel wealthier while they’re actually poorer. Fiat money has driven a very long bull market, punctuated by periodic collapses, for a couple of generations. After every collapse, more money is created, and the market roars back to ever higher levels. It’s gotten a lot of people interested in financial markets who otherwise wouldn’t be. The public is almost forced into the markets, trying to outrace currency debasement.
Loose credit, fostered by the Fed, created the stock market bubbles of the late ’20s and the late ’60s. Word of mouth, radio and TV broadcasts, and newspaper articles alerted the public to fortunes being made. Those media still exist, but now, omnipresent social media and smartphones have involved the public much more than ever before.
What we’re looking at today is a really wicked hyperbubble. Trillions of new dollars and trillions of new credit and debt, plus instant and pervasive communications via omnipresent cell phones, have made the average guy feel he can be a Master of the Universe. There’s no need to cadge hot tips from shoeshine boys anymore.
International Man: Some people made fortunes with Dogecoin, a dog-themed cryptocurrency.
Dogecoin was created as a joke, with no practical use case. Still, its market cap peaked at over $88 billion, which is roughly the recent market cap of multinational computer maker Dell Technologies.
What is really going on here?
Doug Casey: I understand that there are about 40,000 cryptocurrencies out there. The crypto market has turned into a mania spawned by the success of Bitcoin, which has a very real use.
But as Nick Giambruno has pointed out, most of these things serve absolutely no useful purpose. People think they’re investing in them. They’re not even speculating in them. They’re gambling with them but don’t know it. Most cryptos have less value than Chuck E. Cheese tokens or airline frequent flyer miles. They have absolutely no value or use. To reference the old joke, they’re “trading sardines,” not “eating sardines.” They amount to play money, like that in a game of Monopoly.
But because Dogecoin (I like to call it “doggy coin”) was mentioned and mildly promoted by a couple of celebrities, it somehow captured the imagination of gamblers and wannabe masters of the universe and got traction. People started buying and selling it for no reason other than the fact everyone else was doing it. Dogecoin became a financial meme.
Let me make a prediction. I don’t know if it’s going to be a week from now or a year from now, but the $88 billion in Dogecoin will disappear. It’s going to zero because that’s what it’s worth. The same will happen to 99.9% of other cryptos. Let me hasten to add that Bitcoin has real value as a money, however.
Stories will be told about Dogecoin, much like those about the tulip mania of the 1630s in Holland.
International Man: Many meme stock gamblers are younger people who are heavily in debt and have poor job prospects. They feel that getting lucky in the stock market casino is the only way to get ahead.
What’s your take?
Doug Casey: Perhaps we’re approaching the stage of what happened in Germany in the early ’20s when the average German couldn’t get ahead by working. Since the currency was losing value so rapidly, it made no sense to save. It barely made sense to work. To stay ahead of the collapse of the currency, everyone tried to get lucky with scams and schemes they didn’t really understand. This led to instability in society and the degeneration of norms and morals. Many looked for radical political solutions, with the Communists or the National Socialists.
That seems similar to what’s happening today in the US. Its financial aspect is facilitated by the fact that anyone can open an account with Robinhood, and everybody has an iPhone. Therefore, everybody can buy and sell stocks and options. But only a tiny, tiny portion of these people have any real understanding of the stock market, securities analysis, money, or economics.
I’d say it’s an indication that the economy and the markets are on the edge of a precipice when the modern-day equivalent of shoeshine boys think that they actually know what they’re doing.
International Man: In one of the more famous examples, meme stock investors aggressively bought the shares of GameStop, which several prominent hedge funds had heavily shorted.
When it looked like the hedge funds might end up on the losing end of a big trade, they called up their friends to halt GameStop’s trading. It starkly illustrated how powerful and connected people can flagrantly rig the markets and get away with it.
What do you make of this?
Doug Casey: This is reminiscent of what happened with Bunker Hunt in 1980, when he and his brothers cornered the silver market and drove it from $6 to $50. Many large players in the commodity markets, seeing that the Hunts’ corner created a bubble, went short too early and lost fortunes.
They had the exchange raise margin requirements. The Hunts were forced to liquidate a huge number of silver contracts they held on margin. This collapsed the silver market and nearly bankrupted the Hunts, who were billionaires at a time when that meant a lot more than it does today.
Some hedge funds researched GameStop (a failing retailer) and AMC (a failing movie theater chain), correctly concluded that they were crappy businesses on their way to zero, and shorted the stocks. But when you short a stock, unless the company actually does go bankrupt and goes to zero, you eventually have to buy that stock back. So an Internet group led by one “Roaring Kitty” cleverly induced thousands of small speculators and gamblers to load up on the stocks. They created what’s known as a “short squeeze”.
Even though the hedge funds were fundamentally right, enough buying would potentially bankrupt them—because there’s no limit on the amount of money a short can lose if the stock keeps going up. The new buyers jammed the stock prices sky high, forcing the shorts to cover, thereby taking the price higher yet.
Many of these meme gamblers also liked the idea of sticking it to the man, i.e., rich hedge funds. I’m not entirely unsympathetic to that attitude.
The odd thing is that as they drove the price of these stocks to the moon, it became possible for these companies, which previously could not raise money because they’re such crappy businesses, to issue more stock at high prices. The shorts had to buy the new stock; it was the only way to get out of the losing trade.
The short squeeze certainly had a silver lining for Gamestop and AMC. It allowed them to raise capital and stay in business… at least for a while longer.
It’s all a function of what happens when way too much money is pumped into society. It distracts people from producing real goods and services while encouraging them to gamble in the hope of getting rich.
International Man: Given everything we’ve discussed today, what are the investment implications in this increasingly volatile environment?
Doug Casey: The things we discussed are tipoffs to the state of the market. These things and many others force me to conclude that the stock market is grossly overpriced. All the fiat money that’s being created by Washington has to wind up somewhere. Since it’s mostly funneled through favored corporations, they’re making artificial profits. Then, as it spreads into the economy, it takes the price of stocks artificially higher.
So, what should you do about it?
Rich Man Poor Bank: Wh...
Best Price: $10.75
Buy New $16.92
(as of 01:17 UTC - Details)
Normally, now would be a great time to get short, since so many stocks have artificially inflated earnings, on top of extravagantly high price/earnings ratios. But I’m cautious because being short is very dangerous in a world where the government is pumping out trillions of new dollars a year.
Most of that money, or at least a lot of it, will go into the stock market. As a result, the stock market could go from just being grossly overpriced to being spectacularly, unbelievably grossly overpriced.
In an environment like this, you can go bust if you’re prematurely short the stock market, although, at some point, it will have a gigantic crash.
Therefore, I’m not involved in the stock market in general. I’m only involved in some quiet backwaters, namely resource stocks, which have been left out of the bubble, are very cheap, and will eventually benefit from all the money printing. At some point soon, they’ll explode upwards.
Reprinted with permission from International Man.
