They may not ring a bell at the market top, as the aphorism goes, but perhaps sports advertising is worth watching as an early warning signal. In 2000, the Super Bowl, pinnacle of the American football year, was nicknamed the “dotcom bowl” when internet companies bought 20 percent of all the television sports that aired during the game. Lehman Brothers, in 2006, decided it was a smart use of funds to sponsor the annual varsity rugby match between Oxford and Cambridge universities, presumably with an eye to recruiting would be investment bankers. That same year insurance company AIG signed what was at the time a record-breaking sponsorship deal with Manchester United.
It is in this context that investors in our opinion should view the news that Crypto.com, a Singapore-based trading platform, has paid 700 million dollar for the renaming rights to the staples center in Los Angeles. It joins AC Milan sponsor BitMex and Lazio’s sponsor Binance as well as Major League Baseball, official crypto exchange FTX as crypto ventures making forays into the world of sport sponsorship.
Signs of froth abound in other risk assets, not just cryptocurrencies. All three major US stock indices-the S&P 500, the Russell 1000 and the Nasdaq Composite – reached record highs this month, as did the pan – European Stoxx 600, the German Dax and the French Cac 40. Much of this stock dreading in volume, too, is occurring through options, allowing retail investors attracted by “meme stocks” and who fear missing out to bet using borrower money. Rivian, an electric car maker with no revenues and larges losses that debuted on the markets this month with a capitalization of 100 billion dollar, has in our opinion similarly spared debate about the irrationality or otherwise of current valuations.
Equities reaching such great heights sits in our opinion oddly with the increasingly hawkish noises coming out of central banks. The extraordinary rally since the 2008 financial crisis-only briefly interrupted by the pandemic-has been fuelled at the least in part by expectations that interest rates would be kept low for a long time. Rising inflation has now led central bankers to begin talking about raising interest rates and accelerating their plans to taper asset purchase. Such moves will probably still leave long-term interest rates low by historic standards, but it is remarkable in our opinion that stock markets have seemingly failed to react at all to the changing outlook.
The European Central Bank warned this month that there were signs of “exuberance” in housing and junk bonds as well as crypto currencies. The phase echoes a remark by former Federal Reserve chair Alan Greenspan, who referred to the 1990s dotcoms bubble as showing evidence of “irrational exuberance”. A small change in sentiment following a re-evaluation of central banks approach could in our opinion lead to a swift correction.
Predictions of a coming market plunge, however, have been popular and frequent since the financial crisis. In 2016, for instance, the Royal Bank of Scotland warned investors to “sell everything”. The long bull run in the market has frequently, and wrongly implied that it is impervious to such doom-mongering-one reason why it has now tempted so many retail investors to pile in. After all, in the late 20th century and early years of the 21st century, the world of macroeconomics and financial policymaking was in our opinion dominated by quantitative models; qualitative studies were largely downplayed if not divided. This changed in our opinion to some degree after, the crash, when behavioral finance became more popular. Back in 2011, Alan Greenspan, once a huge fan of economic models, asked for recommendations about introductory breaks on anthropology, explaining that he had belatedly realized that culture mattered in markets.
Greenspan’s newfound interest was primarily sparked by curiosity about other cultures, however, not his own. Indeed, in practical terms, even after the crash, there was initially scant effort by financial regulators to take a more systematic attitude to the issue. But this changing, and not just at the Fed. London in this case has been well ahead of New York in this respect; its Banking Standards Board regulatory body has focused so extensively on the issue that it recently renamed itself the Financial Services Culture Board. As this analytical shift happens, it highlights in our opinion three points:
First, it should remind us all that there is nothing like having your fingers burnt to teach you a bit of common sense. The Fed in our opinion should have embarked on all this brainstorming long before 2008. This should throw down a gauntlet to other regulators to widen their own lens before-not after- a crisis.
Second, one reason why the Fed is looking more at culture is that the rise of digitization and retail investors has made officials doubly been to avoid a replay of 2008. The worlds dash into cyber space during the pandemic is accelerating major structural shifts, on a scale arguably not seen since the wave of financial innovations two decades ago. That is sparking debate on new topics: does working from home increase the risk of fraud? Do trading apps and their retail investors exacerbate market panics? How should compliance change with hybrid work?
Third, digitization raises challenges for regulators but also, ironically, makes it easier to exchange ideas about how to deal with the “culture” issue. A couple of years ago, whenever Fed officials wanted to discuss this with counterpart around the world, they tended to organize conferences. This was laborious and pulled in a narrow group of participants. Now, turning to Zoom makes it easier to pull in participants from a much wider geographical not. Intellectual exchanges have been speeded up. Will this make the bankers, regulators, and financiers wiser in the future than they were in the past? Can they change?
In all honesty, we will not find out until the next market crash. In the meantime, the experiments are another reminder of the unexpected ways in which Covid-19 has caused a sense of cultural and intellectual flux.
From our side three cheers, in other words, for the Fed’s newfound interest in the psychology of guilt. Let us hope that bankers and financiers embrace it too.