- Scott Galloway is a bestselling author and professor of marketing at NYU Stern.
- The following is his recent blog post and video, republished with permission. It originally ran on his blog, "No Mercy / No Malice."
- Galloway says today's financial crisis is partially due to a widespread, imperfect belief that the market always goes up.
- This optimism causes an asset bubble — when projected prices lift to impractical level — like during the Dutch tulip mania in the 1630s, when speculation briefly exploded the value of tulips before crashing in only a few months.
- The story stock of Tesla, trading more on imagination than fundamentals, is a hit among Robinhood traders.
- "If you want to know what Tesla's stock will do tomorrow, just look at how many Robinhood accounts were opened today," he writes.
- Visit Business Insider's homepage for more stories.
Every decade, there's at least one financial crisis somewhere in the world. When asked what a recession was, Jamie Dimon responded, "Something that happens every five to seven years." It's been 11. One of the many strange things about a crisis is that the country of origin (this time, China) is usually not the one that gets hit the hardest. Similar to when your kid gets his first C. Yeah, it's rough on him, but the household devolves into arguments around parenting, and an older brother who must endure new rules implemented as a function of his delinquent sibling. But I digress.
Financial crises have many causes, but generally they boil down to a few key elements:
- easy money
- poor regulation
- consensual hallucination that the market always goes up
The crisis is preceded by a cocaine-fueled party, where everything and everyone looks and is great. The party creates an asset bubble — a wave of optimism that lifts prices well above levels warranted by fundamentals — ending in a crash. The first documented asset bubble was the Dutch tulip mania in 1636, when speculation drove the value of the rarest tulips to six times the average salary at the time.
Story stocks are the new tulips, and Robinhood is the E*Trade of our age.
However, that fails to the story stock of the decade — Tesla. The stock is up almost 6x this year, and its CEO, Elon Musk, is even saying it's overvalued. Tesla sold $5 billion of its own stock at the peak to strengthen their balance sheet, as they should, and for general corporate purposes.
Just like the flurry of E*trade investors helped drive the bubble of 1999, today's fuel is Robinhood. Robinhood's usership has exploded in 2020. The firm has expanded to 13 million users parked in their parents' basements. To be fair, they're not all day traders. The trading app added 3 million users in the four months after March, at the same time when Google searches for how to buy stock surged this year, only rivaled in popularity by searches for "tech stocks." The story stock of Tesla, trading more on imagination than fundamentals, was a hit among Robinhood traders. Tesla stock started moving almost in tandem with the number of Robinhood users holding the stock.
Story stocks and Robinhood have more in common than you'd think. If you want to know what Tesla's stock will do tomorrow, just look at how many Robinhood accounts were opened today.
The dot-com bubble of the late 90s was another once-in-a-generation, tulip-type mania. I would know, as I was at ground zero. I remember thinking in 2001, after being run over by the dot-bomb crash, all I need is one more bubble… I'll be so much smarter. So, the music and drugs are different, but things are feeling eerily similar. What to do? It makes for a fascinating original scripted program on Apple TV+. (It. Could. Happen…)
Or a decent 12-minute YouTube video.
READ MORE: Popular NYU professor Scott Galloway has a new course on business strategy anyone can sign up to take — I took away MBA-like insights for way less money than going to business school
This is an opinion column. The thoughts expressed are those of the author(s).
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