US stock market bulls will crush the bears – again

Almost 200 years ago, a study of economic bubbles by a Scottish writer called Charles Mackay colourfully described the manias around land, shares and tulips. Since 1841, Extraordinary Popular Delusions and the Madness of Crowds has arguably lost some of its relevance as a historical document but none of its significance as one of the earliest attempts to work out why investors fail to remember history. Time after time, all the way up to the recent decade, we have experienced the swings of asset prices from peak to crash, yet each time we have convinced ourselves that this time it will be different.

To quote Mackay: “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

Today, the assets we have been speculating on – special purpose acquisition companies (Spacs), non-fungible tokens (NFTs), Bitcoin or the Dow Jones index – are all displaying signs of Mackay’s described affliction. A week ago, the S&P 500 index crossed the 4,000 mark just over a year after it hit its Covid-19 pandemic low. In fact, it doubled in that time.

In July, I wrote in these pages that it was a dangerous time for anyone with money in American stock markets. Today, it is doubly so.

There is hype everywhere you look. For example, the electric car market has everyone scrambling to get in despite fundamentals of demand and supply being far from proven. Xiaomi, the Chinese smartphone maker, said it will invest $10 billion in it over the next 10 years, driven in part by the prevailing sentiment among Chinese consumers that half of them would rather buy a non-petrol car – up from one-third in 2018.

Lower prices and better-quality choice, together with government policy, have helped make electric and hydrogen fuel cell vehicles more appealing. Would, then, the success of electric cars and their makers seem an inevitability? Perhaps, instead, it is good business now to appear as if you would agree.

To understand the extent of the hype, witness Volkswagen's April Fool's Day campaign in which it announced that it was renaming its US subsidiary "Voltswagen" in an effort to promote its electric cars "in a fun and interesting way". The joke backfired, as major media outlets were duped into believing that it was indeed true.

The news of a successful mobile phone maker such as Xiaomi switching to cars and transport is raising more questions than answers. But it may be the point to buy into the hype given that in recent months, bellwether technology company Apple has been rumoured as planning a similar move.

Perhaps, no one wants to be left behind. Otherwise, we must seriously believe that every company can make money from a nascent and, until now, fledgling market. I, for one, cannot suspend my disbelief.

None of the known disadvantages of electric vehicles have been adequately resolved yet – such as a lack of existing recharging infrastructure, low resale values and the oft-mentioned "range anxiety" of how much distance you can get on a single charge. Also, the continuing concerns over their environmental impact mean automobile companies such as BMW and Volvo have come out in support of a pause on deep seabed mining for minerals used in batteries to protect already fragile ocean ecosystems.

Add to this, the ravages of the coronavirus pandemic. A semiconductor shortage is affecting car makers around the world after a surge in orders for smartphones, TVs and computers. What else might crop up in the next year or two to slow electric vehicles' charge? There is still too much uncertainty.

Meanwhile, NFTs have already lost some shine after a digital artwork by Beeple sold for a staggering $69.3 million last month. Bitcoin is always a hair trigger away from a collapse. And Spacs – which are companies formed strictly to raise capital through initial public offerings for the purpose of acquiring existing companies – have become too ubiquitous. About 300 Spacs were launched on US exchanges this quarter, raising almost $100bn – which is more than all of last year, Bloomberg reported. That rate is already proving unsustainable.

However, analysts are talking down the chances of any kind of end to the rush to speculate, including citing a lack of concern among institutional investors. Rising long-term interest rates usually set alarm bells ringing but even they have been muted of late. Meanwhile, the collapse of the Archegos hedge fund has also been shrugged off and rationalised as an isolated incident. The fallacy of the one bad apple, being applied to founder Bill Hwang in Archegos' case, is to excuse the in-built weaknesses of the market. Yet the fact that Wall Street investment banks were blindsided by Mr Hwang's failure is more telling. What else might they be missing?

The coronavirus has also not gone away with cases surging again in Europe, India and the US.

The counter arguments to the prophecy of markets' doom include the better-than-expected success of many national Covid-19 vaccination programmes, the prospect of more than $2 trillion in spending from US President Joe Biden's administration, and the expectation of higher corporate earnings along with the economic recovery.

Those arguments are what are driving the current speculation in equities and other asset classes. Which might be the most compelling reason to be super cautious right now. Can the reality ever measure up to expectations?

In any case, the bearish are always destined to be ignored by the bullish. Mackay has tried to similarly counsel, unsuccessfully since 1841: “Let us not, in the pride of our superior knowledge, turn with contempt from the follies of our predecessors. The study of the errors into which great minds have fallen in the pursuit of truth can never be uninstructive.”

Except of course, this time it might really be different.

Mustafa Alrawi is an assistant editor-in-chief at The National