Not too long ago, before digital camera phones made photos all too commonplace, we used to savor “Kodak moments”, which TechCrunch calls “a rare, one-time moment that is captured by a picture, or should have been captured by a picture”.
Well, pine no more, because the Kodak moment is back. And this time it comes with the subject, Eastman Kodak, as also being the object. The stock has skyrocketed from just a little over $2 a share last week, to a more than 20-fold gain, currently trading at over $40 a share. Move over TSLA, there is a new popularity contest in town, but for a company most millennials have barely heard of. Not unlike the dotcom mania of the early 2000s, block-chain mania of last year, or electric car mania of earlier this year, we see companies like Kodak who can create market value out of thin air by doing something, anything, related to COVID. Last week, once-bankrupt Kodak had a market cap of $100 million. Today it is reaching $2 Billion. One George Karfunkel, identified as an independent director, has seen his stake reach hundreds of millions of dollars in a few days (Source for all data: Bloomberg). Such overnight riches encourage speculation via imitation.
The proximate cause of this rally in the stock is Kodak obtaining, via the Defense Production Act, a loan of $765 million to pivot into pharmaceuticals. I am no expert at passing judgment on whether or not Kodak can actually manufacture the ingredients necessary for the US to fight COVID-19 within its own shores, but certainly legions of Robinhood traders think the stock is worth buying even after a 1,000% surge. Based on the recent popularity surge, there has been an almost 500% spike in holders of KODK (Source: Robintrack.net). If you are tempted to take the other side, fight these swarms at your own risk.
To understand this, let me discuss what we know about locust swarms.
Typically the desert locust, which is found in the poorest regions of the world, spends a largely lonely life. But occasionally conditions are such that there is a massive explosion in the population. During this “gregarious” period, typically correlated with heavy rainfalls, swarms of locusts appear as dark clouds and descend to devour everything in their tracks (see here). These swarms can consist of tens of billions of bugs and envelope hundreds of square miles.
Though there is a lot of academic research on the origin of swarms, it is almost impossible to forecast when such swarms develop. Scientists who model such swarms resort to a technique called “agent based modeling”. In this approach, it is assumed that each individual locust is driven by some force that is identical across all the locusts, and there is some degree of repulsion and attraction between the individual locusts. This simple recipe is put into a mathematical blender called a simulation, and voila, swarms can develop under certain scenarios, out of nowhere without warning. These types of systems are generally labelled “self-organized” systems.
There are at least three conditions that are important in order to have locust swarms, or what we are interested in; i.e. stock market swarms to originate and grow.
First, the external environmental conditions have to be right – in Africa a long period of drought followed by lots of rain this year is conducive to the swarm population exploding. In the speculative stock markets, a massive liquidity drought followed by money raining down from the Fed and the Federal government in the form of helicopter cash and loans has created very similar environmental conditions.
Second, there have to be forces so that each locust replicates across a large population, and at the same time interaction with other locusts via forces of attraction and repulsion through some sort of automatic and implicit communication. We have the exact same situation in tech stocks, with each small day-trader trying to take some money out of the stock market, quickly, using cash that has rained upon him or her, by cooperating with other traders implicitly. Free trading on Robinhood with real time data on who is buying might be thought of as this implicit signaling mechanism. With the aforesaid liquidity from the government, ease of trading, and a promise of bailouts if there are losses, no wonder day traders are following the locust model.
Finally, for locust swarms to survive and grow, the situation has to be such that competing priorities, politics and lack of government coordination can allow the situation to get out of hand. In Africa, unfortunately, the decades of military and political conflict has left any hope of fighting the swarms in disarray. But things are not very different when we look at monetary, fiscal and regulatory policy in the US. There is little, if any, control over day trading speculation in a COVID-19 hobbled economy. In a news cycle buffeted by inconsistent messaging, there is very little chance, yet, that anyone would put a stop to this speculative activity.
Thus, both locust swarms and the swarms of Robinhood day traders are doing exactly what is in their individual best interest in the short term given the external conditions and the lack of constraints that restore equilibrium. Locust swarms have been known since ancient times, just as speculative bubbles and busts have.
Pesticides are the only effective way to deal with locust swarms. High rates and tight credit are the only way to deal with speculative swarms. It is not likely that any central bank today will spray its version of pesticides — i.e. higher rates — any time soon. Which means the swarms will likely get bigger before they cannibalize themselves.
The risk is that before it is all over, the swarms devour any remaining signs of value in the markets. Like locusts that respect no boundaries, speculative swarms can spill over from one region to another region, from one market to another market, and indeed from the market to the economy.
Until that happens, be prepared to be amazed at increasingly frequent market melt-ups and Kodak moments. Like negative interest rates and negative oil prices, we are living in a world that few market participants have imagined, let alone experienced. In such an environment, the possible becomes probable. It is possible that collectively the market reverts to normalcy by itself, but to quote Aristotle, “probable impossibilities are to be preferred to improbable possibilities”.