Why The Golden Age Of Retail Is Over
Why today's environment is stacked against the retail trader
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In late 2011, two Dutch researchers published a fascinating paper studying the impact of economic recessions on casino revenue. Leveraging over 50 years of micro & macroeconomic data in their analysis, the researchers arrived at two important conclusions. First, they found that overall gambling consumption tends to grow faster than income & inflation during economic booms. When consumers see their salaries & assets grow, they’re more likely to up discretionary spending like gambling at a casino or related activity.
Second, the paper found that during recessions, gambling consumption contracts in line with, and sometimes deeper than, economic output. Consumers lose their jobs, see market drawdowns hurt their portfolio, and cut back on non-essential expenses like gambling & entertainment. This shouldn’t be all that surprising to hear - it makes sense for people to adjust their spending in this way as their present income & future earning expectations ebb & flow. I bring this up to make a simple but important point: gambling is not a recession-proof industry.
After watching the evolution of retail trading across all asset classes in the US & abroad since it first emerged as a serious factor in 2020, I’m concerned that this research paper has more to do with today’s market structure than we realize.
Make no mistake, the free, liquid trading of financial assets always has & will always have real, legitimate economic value & that activity is by no means changing anytime soon. However, we can’t ignore the growing sense that markets have shifted from a long-term savings & investment vehicle, supported by the earnings power of reasonably valued & productive companies, to a short-term vehicle for gambling & speculation. In this kind of environment, I’m starting to incorporate an increasing amount of gambling & casino-related economic research into my understanding of the present & potential future makeup of markets.
This view of markets brings up a second concern - amid the increasingly dire economic outlook in 2022, I’m worried the same retail traders who took markets captive since COVID began are on the verge of leaving for good. In this post, I take a closer look at the important role retail plays in today’s trading landscape, the factors that made retail traders such an omnipresent part of market structure & why those same factors now spell dark times ahead for the group as a whole.