In the pre-finfluencer era, we used to have gods in the financial markets. Those gods would make an occasional public appearance and talk about their views on markets and investment strategies. The market participant would listen to these gods with rapt attention and follow them religiously. All those Buffets, Mungers, Rogers, Finks, Woods, Jhunjhunwalas, Damanis, et. al. were revered names. Then TikTok, Instagram, and X (formerly Twitter) happened. Financial experts, economists, monetary theorists, and technical gurus mushroomed at the rate of 100 per hour.
Everyone who has traded stocks or crypto for three months is now an expert. They not only try to influence other investors/traders by giving unsolicited advice and recommendations; but also get influenced by the advice/recommendations of others who may not be any better than them. Sometimes it appears that there are more experts in the market than the actual number of investors and traders. Unfortunately, this is the situation worldwide.
Misallocation of capital and unwarranted and avoidable losses are some natural consequences of this phenomenon. However, a more significant consequence is a diminution of traditional correlations.
A multitude of market influencers is driven by individual positioning as against a conceptual understanding of finance and economics. There are no dominating views in the markets. Each influencer is influencing multiple traders and also getting influenced by multiple other influencers. Since more positions are driven by intuitions rather than fundamentals, the divergence between market prices and fair values is wider, and lasting much longer.
For example, consider the following:
Gold and bonds are trading in opposite directions. Gold, traditionally considered a hedge against a drop in real rates, started firming up in 2022. However, now that 2024 rate cuts are getting dropped from foreca500sts, gold has given its best 2-month performance in decades.
This divergence of gold from real rates, against the historical trend, is being explained from a variety of angles. Some believe that a US sovereign downgrade may be imminent. Others explain this as a move away from USD in a worsening geopolitical scenario. However, the equity positioning and tech valuations do not corroborate any of these views.
Similarly, equities and rate expectations are also diverging against the historical trend. In the past six months, S&P500 has rallied 25% despite hopes of 2024 rate cuts fading fast.
Recently, Jamie Dimon, CEO of JPMorgan, was quoted as saying, “We are prepared for a very broad range of interest rates, from 2% to 8% or even more”. Larry Summers, Former Treasury Secretary, a very reputable name in financial markets also said, “You have to take seriously the possibility that the next rate move will be upwards rather than downwards”. Michelle Bowman, FED Governor, also said, “I continue to see the risk that at a future meeting, we may need to increase the policy rate further should progress on inflation stall or even reverse."
But no one appears to be listening to these experts. Professional TikTokers are getting more attention than them. I will not be surprised if the people who trade on their advice learn some basic investing lessons paying a heavy price.
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