If you were to pick a financial word of the year, “meme” in my opinion might qualify. Remember the mania around GameStop, when frenzied retail buying and social media pushed the stock price up 2.700 per cent between January 8 and 28-and caused 900,00 people to trade it on a single day? Or frenzy around AMC, the film group, or Peloton, the fitness equipment maker? Or how the trading platform Robinhood was briefly forced to pause some trading amid the deluge, prompting a congressional inquiry? Now, however, the former US president Donald Trump-a Master of Social Media frenzies-opened his newest pandora box and is at the centre of another twist on the meme theme followed by another investigation-this time from the Securities and Exchange Commission (SEC).
In October a special purpose acquisition company (Spac) called Digital World Acquisition Group (DWAG) acquired the Trump Media and Technology Group (TMTG). Since Spacs have become popular in the US over the last two years, the SEC has previously called for action to ensure that investors in Spacs should receive the same protections as they would receive in a traditional listing through an initial public offering (IPO). The SEC has already requested further information on the dealings between DWAG and TMTG. Critics including myself of Spacs have long questioned the tendency of young companies such as TMTG seeking Spac merger to present rosy projections to investors, which carry a lower legal risk than a traditional IPO. And that to be honest seems to be “the art of the deal” between DWAG and TMTG in my opinion. DWAG has this month announced that Congressman Devin Nunes will run the company next year.
Devin WHO…?
Devin Nunes is a former dairy farmer with-of course no prior experience in a C-suite, and DWAG confirmed the information this month that it was being investigated by regulators. Nonetheless the shares have surged 48 per cent this month, leaving them up six-fold from October, amid a frenzy of chatter on social media-forums. Never mind that the company has no projected revenue of business strategy yet unlike for example GameStop, say, which at least has a recognizable, existing product. So, what should the wider investment community conclude from Trump’s “Art of the Deal”?
One lesson in my opinion is that the DWAG saga shows the Trump brand’s continuing sway over some American market segments, not least the political ones. Another in my opinion is the degree to which trillions of dollars of central bank liquidity support is creating market froth around all manner of assets, as some seasoned observers keep warning as well.
However, a third crucial point in my opinion is that it reveals how our collective task into cyber space is reshaping financial markets. For just as political discourse today is being defined by digital tribalism and tunnel vision, the market meme mania highlights the power of social networks and attention patterns. That Trump Spac saga in my opinion is, just one sign of a bigger structural shift. To understand why, it is worth pondering research from some American-based economists like David Hinsklufer among others. They crunched through a vat digital database about stock trading flows and social media networks to study the phenomena of so-called “lottery stocks”- or assets that occasionally produce outsized trading gains, albeit usually followed by losses, due to retail investors activity. Meme stocks might be viewed as a modern subset of this. The nature of lottery stocks has long been a topic of debate in the behavioural finance community. Economist have generally passed it through the lens of two key concepts: investors bias-or the idea that some investors love lottery stocks, since they view markets as a term of gambling-and information asymmetries-or the fact that retail investors lack the data that would let them make sensible decisions about pay-offs, making a mockery of the concept of rational economic acters.
However, the new research argues that a third factor may be even more crucial in analyzing lottery stocks: “attention”, or the question of where and how investors choose to focus in an ecosystem drowning in data plagued with echo chambers. Unsurprisingly, perhaps, the US economists contend that the stocks which exhibits the wildest price swings are those associated with explosive increases in google searches, news coverage and internet debates.
They also demonstrate a correlation between the density of social media networks-that is, cyber tribalism-and mania for lottery stocks. Less obviously, they highlight another finding: lottery stock mania almost always erupts around assets that feel proximate to investors, either because they are well-known brands, such as GameStop or Trump, and/or because they are geographically close to investors such as companies in urban centres.
The lottery anomaly in my opinion is therefore amplified by high investor attention proxied by high coverage, salient earnings, surprises, or recency of extreme positive returns and intense social interactions proxied by for example Facebook social connectedness or other population density near firm headquarters.
Now, how should policymakers respond to these findings?
There are in my opinion no easy answers. A couple of months ago the SEC issued a report on the Robinhood debacle that called for better market monitoring, investor education and tweaks to market structures to make these more robust when trading surges. That is all sensible.
However, the SEC in my opinion seems unlikely to do anything particularly radical. Instead, regulators seem to hope that taking the stance of cautious caveat emptor will eventually cause the meme mania to self-correct, if enough retail investors get their fingers burnt.
Maybe it will cool the frenzy in the coming year: many meme stocks that surged earlier this year have recently underperformed. But the trend in my opinion seems unlikely to disappear. After all, the digital genie known as social media networks cannot be stuffed back into the bottle any time soon, in policies or finance.
The real lesson for investors in my opinion is that, in finance as in politics, they need to study attention patterns in cyberspace as much as economic fundamentals to grasp where markets are moving in the future, at least in short term. Trump is now a market meme, in every sense.