Dot-Com Bubble Deja-Vu: FOMO Stocks Are Deflating

Dallas Mavericks owner Mark Cuban, an early crypto adopter, also issued a warning to investors regarding digital assets.

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key takeaways

  • Retail traders have been drawn to trendy investments in recent months, and some experts believe a major correction is coming
  • Michael Burry, who’s early 2000s housing market short trade was featured in the film ‘The Big Short,’ warned in a recent series of Tweets that the “mother of all crashes” is coming

Retail traders have been drawn to trendy investments – think Tesla, SPACs, digital assets, environmental, social governance and so-called ‘meme stocks’ – in recent months, and some experts believe a major correction is coming. 

Tesla, down about 14% year-to-date, has led the decline. Bitcoin, the world’s largest digital currency, has lost more than 40% in the past three months, but remains up about 10% since the start of 2021. 

Michael Burry, who’s early 2000s housing market short trade was featured in the film ‘The Big Short,’ warned in a recent (now deleted) series of Tweets that the “mother of all crashes” is coming. “When crypto falls from trillions, or meme stocks fall from tens of billions, #MainStreet losses approaching the size of countries,” he said, citing the recent fear-of-missing out (FOMO) for unsustainable asset prices, meme stocks and cryptocurrencies. Burry has bet against Tesla. 

Robert Kiyosaki, the author of Rich Dad Poor Dad, is in agreement, according to his Tweet below.

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The FOMO, Burry fears, has been inflating the market for months, and it’s all too familiar to the late 1999 dot-com bubble burst. 

Driven by retail hunger for internet-stock exposure, the Nasdaq Composite swelled 83% from the end of September 1999 to March 2000. We’re seeing a similar situation in clean energy investment vehicles today. Invesco’s WilderHill Clean Energy exchange-traded fund is up more than 124% over the past year, ARK’s innovation ETF is up more than 67%. 

“There’s been many, many historical bubbles, and also just market events that were black swan events,” said Leah Wald, CEO Valkyrie and co-author of Hyperwave Theory: The Rogue Waves of Financial Markets. “There’s so many events throughout history that were driven by narratives, emotions, that didn’t follow typical financial market equations as they were supposed to. I think that anytime that there’s broad market behavioral economics at play and animal spirits, it’s not a particularly new phenomenon.” 

Dallas Mavericks owner Mark Cuban, an early crypto adopter, also issued a warning to investors regarding digital assets. He revealed on Twitter that he’d been hit by sell-off of the DeFi Titanium token, part of a stablecoin project called Iron Finance, and he sold. 

Even long-term crypto bulls are growing bearish when looking at the next few months, but the broader market impact is hard to predict. 

“I think it may be a rough summer, but I’m very bullish long term,” said Wald, pointing to the recent mining news from China and the impact it will likely have going forward. 

Markets are also feeling the heat from the Fed’s more hawkish stance last week — the hint that officials may raise rates in 2023. But not all economists are as worried as Burry.

Pandemic-related supply chain issues and reopening across the world is playing into prices, and the impending leveling-out will not majorly disrupt markets anytime soon, some believe. 

“Last week’s big hawkish shift from the Fed reduces one of the stock market’s biggest tailwinds — unprecedentedly easy monetary policy — but with developed markets reopening after prolonged shutdowns and consumers flush with cash, the global economy should remain strong enough to prevent a broad stock market crash any time soon,” said Matt Weller, global head of market research at Forex.com.

The market can withstand some frothier stocks selling off. Tesla’s plunge, clean energy ETF’s fall and even bitcoin’s halving will not impact the market as much as internet stocks did in 2000 because they represent a smaller portion of the market. 

“Regardless, we’re likely to see isolated mini-bubbles around so-called “meme stocks” and smaller crypto assets in the months to come,” said Weller. 

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