Why A Rise In Retail Trading May Signal Another Mania

FEDERAL RESERVE BALANCE SHEET – TOTAL ASSETS: DECEMBER 2006 TO OCTOBER 2020 (CHART 1)

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Why a Rise in Retail Trading May Signal Another Mania

And so, with professional sports leagues closed and that unique capital flow sidelined combined with stay at home orders during The Great Lockdown bolstered with fresh capital, many people – including some reading this note – turned to financial markets. Surveys show that among individuals who received unemployment benefits during the pandemic, some 20% of those funds have been recirculated back into American financial markets.

ANIMAL SPIRITS: SAVINGS VS INVESTMENT

In pursuit of warding off an economic crisis, a perhaps unintended speculative appetite has taken root. Through stimulus, a large-scale sociopsychological shift is occurring in Americans’ behaviors. The Fed and government’s support has altered how Americans think of saving versus investing. This is acting to kindle ‘animal spirits,’ in every sense of the Keynesian fashion.

By flooding the market with capital, interest rates have plummeted and the ‘cost of capital’ is extremely cheap. In other words, it doesn’t pay to save with interest rates so low. Further, the massive scale of support is meant to further encourage consumers and investors to turn their capital back into the system.

This is the point! The Fed is trying to incentivize people to spend their money now, either through consumption or investing, rather than saving to the further detriment to a recovery. Many market participants, including those reading this note, have heeded this call even if on a subconscious level. Investing now seems a more productive use of capital rather than holding onto it.

FED’S OPEN SPIGOT IS A SALES EXECUTIVE’S DREAM

Such circumstances have drawn in a wave of new retail traders into the financial markets. A popular outlet for this interest, Robinhood, which is a commission-free brokerage trading app popular among millennials and younger investors, has seen its total accounts balloon from 10 million to 13 million during the coronavirus pandemic. Those customers are often new to financial markets, with the company reporting that over half of the new customers have opened a brokerage account for the first time, with the median customer age of 31 years old.

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