So What Blows Up Next: Investor Psychology Shifts To The Dark Side

Authored by John Rubino via,

Facebook is an epic growth story. It now has an astounding 2 billion active users and a stock that – from an already richly-valued level – rose by 53% in the previous year. In February its market cap peaked at $560 billion, a number that exceeds the GDP of many countries. Over 90 percent of Wall Street analysts covering it rated it a “buy.”

Everyone knew that it had data privacy issues but no one cared in the face of that massive subscriber growth.

Then, like flicking a light switch, everyone began to care after all. A data scandal that was simple enough for investors and politicians to understand broke out, and now high-profile users like Elon Musk (who deleted his Tesla and SpaceX Facebook accounts), big investors, and of course spotlight-seeking politicians around the world are all reacting.

Facebook’s market cap is down by $100 billion in the past week.

Before this month, investors were looking for the next Facebook. They still are, but with a completely different set of criteria. Where previously they were seeking companies with soaring popularity and addictive products, now they’re looking for malfeasance and other potential landmines. Does Google have data privacy issues that will come back to bite it? Has Amazon antagonized the president enough to be slapped with a national sales tax? Did Apple over-price its latest phone to the point that customers don’t want it?

Virtually no one outside of a tiny, long-suffering group of short sellers had been asking these questions. Now everyone is.

And that, in a nutshell, is how markets morph from bull to bear. It’s not about fundamentals, but about which fundamentals are seen to matter. And generally it takes a high-profile object lesson to shift investor psychology from one extreme to the other. During the 2000s housing bubble, for instance, stock prices held up even as mortgage defaults were surging. Then Lehman Brothers collapsed and all anyone wanted to know was “which bank is next.” From CNN in 2008:

Lehman Brothers collapse stuns global markets

NEW YORK — Global markets were reeling Monday after a historic day on Wall Street that saw two famous names become the latest victims of the credit crunch.

The leading U.S. investment bank Lehman Brothers filed for bankruptcy and brokerage Merrill Lynch was the subject of a $50 billion buyout by Bank of America.

The fate of other big name financial institutions remained in doubt and stock prices plunged in Asia, Europe and the United States. In New York, the Dow Jones Industrial Average closed 504 points down, or about 4.4 percent. The Nasdaq composite lost 3.6 percent, its worst single-session percentage decline since March 24, 2003. It left the tech-fueled average at its lowest point since March 17 of this year.

In Europe, FTSE index in London declined 3.92 percent while the Paris CAC 40 was down 3.78 percent. It was the worst day for the index since the 9/11 terror attacks in 2001. Major Asian indexes were closed but India’s Sensex fell 5.4 percent, Taiwan’s benchmark dropped 4.1, Australia’s key index dropped 2 percent and Singapore fell 2.9. Check markets

The turmoil at Merrill Lynch and Lehman is bound to mean job losses in the already hard-hit financial services industry, but so far neither company has indicated how many will be cut. “This crisis is clearly deeper than anybody had imagined only a short time ago,” Peter Stein, an associate editor at the Wall Street Journal in Asia, told CNN.

Of course the only way the markets could have been “stunned” in September 2008 is if they were willfully blind in August 2008.

Now fast forward to the current bull market, in which FANG companies put up massive growth numbers that convinced the world that growth would overcome all obstacles. But those companies (as big, fast-growing companies tend to do) have apparently cut some serious corners, and suddenly the consequences of those mistakes are what matter.

Now the question is whether a “Lehman moment” is coming that pushes the market’s mood from “anxiously watching” to full-on panic. That’s unknowable before-hand, but the potential candidates are numerous. Tesla, for instance, is an easy target, since it’s running out of cash just as its bonds are tanking, which means its next financing is going to be brutal (full disclosure: Members of the DollarCollapse staff are short this and several other Big Tech stocks).

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