Generational Dis(ruption)
(Note: this article was originally published on LinkedIn, March 3, 2021)
Nasdaq’s astonishing rise and fall between 1995 and March 2000, followed by the market meltdown in 2008, helped to tame animal spirits. It is no wonder that ETFs worldwide have grown in number from 276 in 2003 to more than 7,600 last year, with assets managed amounting to nearly 8 trillion U.S. dollars. And of the $3 trillion invested by individuals since 2008, just 6% went into stocks.
Today’s 45- to 65-year-olds were 25 to 45 at the dot.com bubble’s peak. This is roughly the age of the current Millennial generation, which grew up and entered the workforce facing the height of an economic recession. We are told they worry about meeting investment goals, buying a house, paying off student loan debt, or saving for retirement. This generation also wants to own world-changing companies.
A convergence of forces triggered by the COVID pandemic, most prominently the acceleration of digital transformation, amplified economic and social inequalities in 2020. An already complex investment environment grew more challenging even as easy money policy and self-reinforcing price gains emboldened speculative behavior.
A year ago, Bitcoin was perched at $9,300, GameStop treaded at $3.50, and shares of Tesla crossed at $167. By early 2021, prices had soared as high as $58,000, $483 and $900 respectively. Different as they are, each is representative of a movement or cause.
Supporters of Bitcoin-style peer-to-peer currency aim to diminish reliance on central banks and their complex schemes.
GameStop and other meme stocks are promoted by Reddit traders to rattle high-paid Wall Street investors who profit on short-selling.
Tesla embodies bold vision, technological progress, and cutting-edge risk. Bloomberg’s Matt Levine quipped that the way finance works today is that things are valued on their proximity to Elon Musk rather than their cash flows. Well, almost.
Musk’s SpaceX is busy with rockets, so he has not yet launched a SPAC. These ‘blank check’ companies take off with no operations or business plan, allowing money to be raised before any tangible disclosures are made. Such investments recall New York Lotto commercials: ‘All you need is a dollar and a dream’.
Retail investors account for about 40% of SPAC trading on BofA Securities’ trading platforms. This year, SPACs on average are rising more than 6% on their first day of trading, up from last year’s 1.6%, a sign of heavy retail participation.
Lured by dreamy narratives of cannabis, electric vehicles, space travel, or online gambling, investors seem destined for mostly underwhelming returns. Of the 107 SPACs that have gone public since 2015 and executed deals, the average total return has been a loss of 1.4%, according to Renaissance Capital.
One Wall Street sage considers all these hot trends insane. Charlie Munger, the 97-year-old vice chairman of Berkshire Hathaway and Warren Buffett’s longtime business partner, outright dismisses the rocketing share price of Tesla and the recent bitcoin frenzy. As to which one is crazier, Munger evokes Samuel Johnson’s response to a similar question:
“I can’t decide the order of precedency between a flea and a louse, and I feel the same way about those choices. I don’t know which is worse.”
Munger also criticized Robinhood, the brokerage firm that attracted big numbers of first-time investors to its platform. He points out the Robinhood zero commission trades nonetheless have a cost. Mungers says it is dishonorable for Robinhood to pay for order flow and pretend that customers aren’t getting charged.
Market makers such as Citadel Securities pay e-brokers like Robinhood for the right to execute customer trades. The firm received more than $221 million in payment for order flow in the fourth quarter of 2020. Robinhood routes more than half of its customer orders to Citadel, which is the largest market maker that executes retail trades. The operation raked in $6.9 billion in net trading revenues last year.
After Munger compared Robinhood customers (median age: 31) to bettors at a horse track, CEO Vlad Tenev fired back:
“In one fell swoop an entire new generation of investors has been criticized and this commentary overlooks the cultural shift that is taking place in our nation today. Robinhood was created to allow people who don’t have access to generational wealth or the resources that come with it to begin investing in the U.S. stock market… It should be celebrated that we are seeing market investors begin to diversify and that education and awareness about the values of investing are diffusing further into previously untapped generations.”
Remember that prior to last spring, young investors were non-factors in the stock market, with Wall Street fearing that a whole generation would remain sidelined for the long term. The number of Americans who own stocks was at a generational low. So, it’s tough to ignore how the pandemic has the affected behavior of Millennial investors. A New York Times article titled “The Boredom Economy” points out:
“…the House Financial Services Committee held a contentious hearing on the GameStop saga. The focus was on market volatility and stock trading, but some witnesses acknowledged that they may have found themselves in this situation because people had a lot of time on their hands.”
If it wasn’t boredom, some catalyst would have spurred Millennials to follow their passion. Ultimately every market observer is motivated by the promise of positive returns and drawn into the game. When asked about the Reddit stock explosion, a 27-year-old tech consultant who participated in the outburst explained:
“…at the end of the day, everyone is really just there to make money on their trades. I don't think that sticking it to hedge funds is anyone’s serious, long-term concern. People would rather make money.”
It’s useful to step back from the headlines to take a broader view of Millennials. This group was the largest generational segment in the U.S. in 2019, with an estimated population of 72 million. Born between 1981 and 1996, Millennials recently surpassed Baby Boomers in size, and they will continue to be a major part of the population for many years.
Yet their impact is negligible, owning just 5% of all wealth in America, far below the 26% share baby boomers amassed at a similar age. But things will dramatically change in the coming years: Fundstrat estimates $6 trillion could flood into stocks over the next decade.
Apex Clearing analyzed more than 1.8 million investment accounts owned by U.S.-based investors with an average age of 32 years and using Apex partner applications as of December 31, 2020. It reports a 119% surge in year-over-year trading volume last year.
Notably, Millennial’s infatuation with Tesla over the past year continued in Q4 2020. At year-end, Tesla made up more than 20% of Millennials’ Top 100 holdings, nearly twice the roughly 11% millennials have in number two Apple.
Macro strategist and octogenarian Jeremy Grantham, founder and chief investment strategist of asset managers GMO, doesn’t subscribe to the bullish view that technology is transforming the financial world at the expense of old equity valuation models. He believes the final phase of a historic bubble is underway:
“This bubble is more impressive even than 2000, which was the champion…. When the financial headlines migrate to the front page, when the evening news mentions the market or some crazy behavior of GameStop, Tesla, you know you're getting very warm.”
Grantham’s value-oriented approach has credibility because of his accurate call on Japanese stocks in the 1990s, and warnings about the dot-com implosion and housing euphoria that led to the 2008 financial crisis. He sounded the alarm on the U.S. market more than two years ago, but recently doubled down because of the pending trillion-dollar stimulus package.
Grantham told Bloomberg he has “no doubt” some of that money, if Congress passes the Biden plan, will end up in the stock market. This will lead to what he describes as a “more spectacular bust” once those last chips are put into the game.
A stock market correction of 10% to 20% this year would shock few investors. A worse selloff, though, could be potentially damaging at a time when the US economy is transitioning beyond the pandemic, with inflation threatening and inequality still inadequately addressed. Still, whatever happens, we have only just begun to experience the full force of the Millennial generation.