What is behind the current stock market madness?

By Ernst Wolff.

Stock markets around the world currently seem to be completely out of control. After the massive collapse in March and the subsequent race to catch up in April, they have apparently known only one direction for two months – upwards.

The rally appears to be a piece out of the lunatic asylum, as the global economy has suffered irreparable damage from the combination of recession and global lockdown and will certainly not recover any time soon. The year 2020 will undoubtedly go down in economic history as one of the worst.

Even experienced analysts are often speechless in view of the current developments on the stock markets.  An extreme example of the absurdity of events has been provided in recent weeks by the trend of the Hertz share.  After the US car rental company filed for bankruptcy on 24 May, its share price initially fell as expected from 3 dollars to 56 cents.  By the end of the week, however, the price had risen to 5.53 dollars, an increase in value of 900 percent. The share then managed to jump to sixteen times its lowest value.

There has never been anything like this in the entire history of the stock markets.  On the one hand, it shows that the financial sector has now completely detached itself from the real economy and is leading a life of its own, but on the other hand it also shows that there are obviously new forces at work that are astonishing even insiders.

So what is going on?

The solution to the mystery are trading platforms, especially for newcomers to the stock market, which are currently shooting up like mushrooms.  Some of them have already found a broad following among inexperienced young people who are chasing after fast money and falling prey to a powerful illusion because of their limited experience.

They have all experienced a 12-year artificial boom on the stock markets since the near-crash of 2007/08 and, after the collapse in March 2020, have seen an immediate countermovement, which now seems to continue endlessly. So their very concrete experience tells them that stock markets can basically only rise.

YouTube stars like Dave Portnoy, who do not even understand the monetary system at all, are taking advantage of this situation and currently giving advice to the unsuspecting like “Follow the FED!” and “Buy when prices are lowest!“

The entry into the trading world is made easier for those interested by free online brokers such as the US start-up company Robinhood, which provides an easy-to-use app for mobile phones, offers free trades and cheap loans and immediately gives users the feeling of being part of a „community”.

Robinhood promotes this sense of community through a platform called Robintrack, which shows in which area and to what extent the community has recently increased its holdings and which tempts many to join the trend without any understanding of the market and without a hint of risk awareness, while at the same time leveraging their own stakes through borrowing.

For about two months now, Robinhood has been experiencing a rapid increase in the number of newcomers.  And indeed, if the so-called Robinhooders are betting en masse on shares such as those of carmaker Ford, then the price will go through the roof even if worldwide car sales fall dramatically, i.e. if the economic fundamentals point in exactly the opposite direction.

But can something like this work in the long run? The answer is no. What we are experiencing here is a rush that has no bottom without real added value and must eventually collapse within itself. Most likely, no one but the community of Wall Street professionals will decide when this will happen.
Institutional investors are currently holding back to a large extent and in some cases have even withdrawn completely from the markets to leave them to the Robinhooders. This can be seen from the relatively low turnover on the stock exchanges, which allows beginners to move prices with less money.

These professionals in the background include, for example, the fund managers of BlackRock, by far the largest asset manager in the world. With its “Aladdin” computer system, BlackRock has a data reservoir that has grown over 32 years and gives more insight into the markets than any of its competitors.

Nobody should believe that BlackRock and Co. are helplessly exposed to these goings-on, or that they will stand by helplessly in the long run without making a profit. Probably they will wait a while longer, until more young people get even more heavily into debt in the money frenzy and push the prices even higher, in order to then bring the house of cards down with their own market power – of course not without betting billions of dollars on falling prices and being the winner in the end.

What we are currently seeing in the field of trading platforms such as Robinhood is nothing but the endgame of the current system, in which unsuspecting victims are lured en masse into a cage of predators above which the vultures are already circling.


Thanks to the author for the right to publish.


Image source: Shutterstock / jo.pix


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