[The Soup Nazi]

Paul Krugman's newsletter, June 17:

Giving irrational exuberance a bad name

The public’s broad approval of the Black Lives Matter protests has been a revelation. It seems that America has made more moral progress than anyone realized. And one of the side benefits of this remarkable upwelling of tolerance has been watching the palpable frustration of the Trump administration and other purveyors of hate. They’re trying the usual tricks — making baseless claims about violence, falsely asserting that a vast left-wing conspiracy is orchestrating the demonstrations — but to their consternation, the tricks aren’t working. What has happened to this country?

We are, in this respect, a far better nation than we used to be, and better than we knew.

On the other hand, we’re still blowing bubbles. And the bubbles keep getting stupider.

I began writing for The Times at the beginning of 2000, right in the middle of a huge run-up in tech stocks that has joined the ranks of legendary bubbles, up there with tulips in the 1630s and Japanese real estate in the 1980s.

That bubble, by the way, didn’t pop all at once. Somewhat like Bitcoin investors now, tech investors in 2000 were true believers, with a faith based on a combination of technobabble and free-market derp, and they didn’t give up easily. As this chart shows, the Nasdaq made several partial recoveries as die-hard bulls rushed in to buy what they insisted was a temporary dip:

 

In the end, however, things went very badly indeed.

Still, foolish as the tech bubble was, at least investors had the excuse that something was truly new in the economy. Information technology really was changing the game; while many favorites of the time ended up worthless, tech giants did eventually come to dominate market valuations.

The next bubble, however, was much less excusable. The internet was something new; the housing market has been around for centuries. It was truly remarkable to see investors buy into the notion that a few financial innovations had made risk disappear and justified values far out of line with historical experience. And the bursting of the housing bubble did far more harm than the bursting of the tech bubble a few years earlier.

But even the housing bubble seemed sensible compared with what has been going on the past few weeks.

Today’s column was devoted to the stock run-up that began in May, which appears to have been driven by individual investors who pay little or no attention to fundamental valuations. The pile-on into Hertz — which has already declared bankruptcy — is only the most striking example.

What are these investors thinking? I don’t think they are thinking — not really. The conventions of financial reporting more or less require that articles about market action ascribe rationality to investors, so stock movements are attributed to optimism about economic recovery, or something. But the reality is that we’re largely talking about young men, many with a background in sports betting, who have started buying stocks and are bullish because they’ve made money so far.

It’s possible, of course, that more conventional investors were too pessimistic, and that the “retail bros” will end up being vindicated. But history is not on their side.

Still, we shouldn’t be surprised that they haven’t given up despite steadily worsening news on the coronavirus. At this point it’s not just money that’s on the line; it’s egos too. That’s why we’ll probably see a series of temporary recoveries before the awful truth finally sinks in. But sink in it eventually will.


Quick Hits

How’s reopening the economy going? Not well.

The economics of irrational exuberance.

If sports bettors are driving the stock market, they’re probably Trump supporters.

A “flight to crap.”


Facing the Music

Mandolin Orange makes tragedy into beautiful music.