Doug Casey on the Rise of Day Trading and Why it Will Lead to Financial Disaster

Doug Casey on the Rise of Day Trading and Why it Will Lead to Financial Disaster by Doug Casey for International Man

International Man: The Fed’s unprecedented money printing, trillions of dollars in government bailouts, and artificially low interest rates have changed people’s behavior.

There’s a shift from saving to spending, borrowing, and gambling.

Many people are becoming day traders who otherwise would not. They’re treating the markets like a casino.

What are your thoughts on all this?

Doug Casey: The stock market originated as a means for raising capital for new productive ventures, a means of price discovery for what they were worth, and a means of providing liquidity when investors wanted to buy or sell. An entrepreneur provided an idea and the labor, and the public provided the capital. It was simple, and useful to everyone. But a relatively minor part of the economy.

The stock market has mutated tremendously, however. Now trillions of new politically-created dollars are inundating the system. Over the last decade especially, it’s become a vehicle for speculation more than anything else.

There’s nothing wrong with speculation, of course. But it’s very different from investing. An investor adds his capital to others’ labor, plants a seed, and hopes to reap a harvest. A speculator, however, is generally someone who attempts to profit from facts or events that aren’t well-known or understood. Often things with a political flavor. There would be few speculators in a true free market economy with sound money.

Worse, when billions and trillions of new currency units are created—like now—the public is almost forced to do things they normally wouldn’t and shouldn’t. Like make wild bets on things they don’t understand, for “fear of missing out” on a runaway bull market. At some stage they’ll gamble on anything, trying to outrace the currency’s depreciation.

We’re now at the stage where prudent investors step back, because there’s no longer much value in the market. Lots of newbies, however, are piling into the market, hoping to double their money overnight. Or sometimes desperately trying to forestall a retirement of eating cat food, by buying some investment that they were told might make them a 11,358%—or some such—return. They think they’re investors or speculators. But they’re really just unsophisticated gamblers.

They spend outrageous amounts of money on the equivalent of racetrack tout sheets, but the touts aren’t horses. Today they’re usually tech stocks. Well-chosen tech stocks can be gigantic winners over time, of course. But mainly for sophisticated investors who actually understand something about technology, science, and finance. Only rarely can a plumber, dentist, or insurance salesman hope to get lucky. Those folks usually discover—too late—the truth to the old saying “High tech—big wreck.”

Even more dangerous, and more popular, are derivatives on volatile stocks: puts and calls. These things serve a useful purpose as risk hedges for sophisticated portfolio managers. But today they’re mainly used as gambling mechanisms, by people who barely know what they are.

In fact, since online gambling is generally illegal in the US, a lot of people are using the stock market as a substitute for sports betting, online roulette, and online poker.

That’s especially true during this time of COVID hysteria, when people are locked up in their homes and are looking for something to do on their computers. That, and tens of millions are getting unemployment benefits from both the state and national government, giving them much higher incomes than they made when they were working. All kinds of clever marketing ploys convince people that stocks that will go 10-to-1 or 100-to-1 are only keystrokes away.

They hope that one of these hot stocks will guarantee their retirement, but they’re much more likely to blow up the savings that they have. This is a disaster in the making. The fact that the public is so interested in the stock market right now is a sign of a top.

International Man: The Robinhood trading platform has exceeded over 10 million active users. During the COVID hysteria, the platform has become popular with millennials and beginners. Many people used their stimulus checks to fund their day trading.

What is the significance of this?

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Doug Casey

For over a quarter of a century, legendary investor and best-selling author Doug Casey and his team at Casey Research have been helping self-directed investors to earn superior returns through innovative investment research designed to take advantage of market dislocations..