What caught my eye this week.
The sky above the port was the color of television, tuned to a dead channel.
So runs the first sentence of William Gibson’s Neuromancer, a book I first read as an 11-year-old and have judged technology against ever since.
As one of the first few thousand people in the UK to encounter the ‘World Wide Web’ in the very early 1990s, I half-saw Neuromancer becoming half-true.
Admittedly I wasn’t sliding through coloured shards of anti-viral software in a 3D manifestation of hyperspace.
But I was chatting to equally astonished kids in faraway Hyderabad. And I had an alternate life as a Dwarven catburgler in a multiplayer text-based MUD.
It was the shape of things to come.
All together now
To be honest, I’ve not re-read Neuromancer for 20 years. Which is probably why reality seems to be catching up, regardless of what Gibson actually wrote.
For example, I remember a scene in which a flash mob is summoned as some kind of tactical distraction, and the attendant street punks and ne’er-do-wells cause mass chaos both on the ground (or in ‘meatspace’, as the cyberpunks called it) and across various digital venues.
I’m not sure this scene takes place. Thinking about it now, I suspect it might have been in one of the sequels.
But it certainly should have been in an early Gibson novel, because the man was a visionary about the unintended consequences of hooking humanity up to – and together with – technology, and those consequences are running amok in the stock market today.
Now showing
How else to explain the loony activity we now routinely see in the stock market each week?
The latest was a re-run of the Gamestop drama from earlier this year, only the meme stock in the spotlight this time was US cinema chain AMC.
Shares in the hitherto struggling operator doubled in a day. At one point it was up around 30-fold for the year. A giant push by retail traders from Reddit (and piling-in professionals) took the market cap to $30 billion.
Showing a commendable nimbleness at getting with the program, AMC management first wooed its new small owners with free popcorn. It then (rightly) dumped a load of new shares on the market to raise hundreds of millions of dollars the next day.
So AMC’s future (though not its sky-high valuation) looks assured for now. All without a corporate restructuring or a tense boardroom meeting with bankers on Wall Street in sight.
In some corners of the market, this is how the game is played these days.
It’s fake it until you make it on a corporate scale.
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It makes me feel old, if I’m honest. As Ben Carlson writes on his blog:
The strange thing about this meme stock saga is we have and have not seen this movie before.
Yes, speculation is as old as the hills and that part of the markets will never go away.
But this is also very different from past excess.
This isn’t some hot new innovation people are bidding up in hopes it becomes the next big thing. This is a company people know is not worth its current value. No one is even pretending that’s true.
This is the internet bleeding into the markets in a big way. It’s a coordinated viral meme working its way through the stock market.
Ben nails it here. Like him, I believe the frictionless physics of the Internet has found its real-world proxy in the shadow theater of the financial markets, and the Internet-raised youngsters are having a field day.
And so, increasingly, are the professionals. Hedge funds struggling to gain alpha in the mostly-efficient market must see excess irrationality to be gorged upon in these recurring bouts of zania.
As Michael Batnick puts it:
Small money might have lit the match, but big money is pouring gasoline on the fire.
Indeed while it’s still tempting to dismiss the meme stock pops and flops as an short-term consequence of bored lockdown trading, we can also see the outlines of how history will remember this era in wider market trends.
For another incarnation of the zeitgeist, see the SPAC boom in the US. That’s seen hundreds of companies raise many, many billions for what are euphemistically called ‘blank cheque companies’.
You might argue there’s a legitimate case to take companies public this way, especially if you’re one of the key promoters who got unfathomably wealthy from mad fad.
But that doesn’t explain SPAC’s sudden explosion in popularity. Cheap money and this Fake It ‘Til The Market Makes It mindset does.
Then of course there’s crypto, and Elon Musk sending Bitcoin hither and thither with a Tweet. Once an outlandish outsider, Musk’s antics over the past few years are starting to seem like they were the shape of things to come, like a Shane Warne or John McEnroe of the markets.
Retire to a quiet room
Some old hands see a return to normality with crypto recently crashing, SPAC enthusiasm dying down, and the price of the frothier tech shares also falling.
Well maybe.
Short of the punchbowl suddenly getting yanked by either the markets or by Central Banks, I suspect Josh Brown may be more on the money in a brilliant essay for Fortune:
Jerry’s not on Twitter. He’s tired of hearing about all the rhetorical twists and turns on the app that are constantly pushing his stocks around.
Sports commentators and actors turned venture capitalists are causing gyrations in the value of his retirement portfolio with their online antics.
Remember when stocks traded on fundamentals? Or at least they traded based on people’s perceptions of the fundamentals. What do they trade on today? It was always a popularity contest. Now it’s a three-ring circus.
It makes no sense. Jerry is tired.
Upstairs there’s a burst of excitement, the sound of a young man cheering. It’s Jerry’s kid, Aiden.
Aiden’s been out of school for years. He’s making as much as Jerry did 30 years ago.
Josh says your father’s stock market is never coming back.
I wonder if it’s all another sign that William Gibson’s surreal sci-fi future is rushing forward.
We’ll see.
Have a great weekend everyone. Fingers crossed for 21 June, eh?
From Monevator
Managing an investment portfolio: how to keep it on track – Monevator
Learning Cantonese and learning investing – Monevator
From the archive-ator: Understanding the low interest rate era – Monevator
News
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First-time buyers in England offered homes at up to 50%-off – Guardian
UK house prices jump by 10.9%, the fastest in seven years – Reuters
Brexit-supporting Wetherspoons’ boss wants more EU migration – Sky News
G7 nations confident of reaching a global tech tax deal – BBC
US adds 559,000 jobs in May as fears of hiring slowdown fade – Guardian
Crypto mining booms on subsidised energy in Argentina – MSN
A bet on emerging market outperformance is a bet against the US dollar – Factor Research
Products and services
Employer perks you could be missing out on – ThisIsMoney
We both get £50 to invest at Seedrs if you sign-up via my link and invest £500 in 30 days – Seedrs
Clone investment scams: what are they and how to spot them – Hargreaves Lansdown
It’s time to lock into a cheap fixed-rate mortgage – ThisIsMoney
Could you get a better savings rate from a bank you’ve never heard of? – Which
Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade
By 2024 just 7% of shop payments will be in cash, predicts report – Guardian
Why advisers are moving towards retainer-based fees – Think Advisor
Homes for sale for flexible workers, in pictures – Guardian
Comment and opinion
In defence of buy-to-let landlords [Search result] – FT
Three types of enough – Calibrating Capital
Couples need £26,000 a year to be content in retirement – Which
Is $1 million still worth $1 million? – Of Dollars and Data
Too frugal for me – Humble Dollar
A bear case for future stock market returns – Banker on Fire
How inverted thinking can improve your investing – Acorns
Natural selection favours index funds – A Teachable Moment
It’s a weird time to be an investor – Abnormal Returns
Now that’s what I call financial independence: 26 – The Escape Artist
Naughty corner: Active antics
Tobacco and defense sectors offer shelter from inflation – Fortune Financial
Stocks, bonds, bills, and inflation [PDF; a feast of US data] – CFA Institute
John Lee: a dark year has been kind to my portfolio [Search result] – FT
Permanent capital: the Holy Grail of private markets – Enterprising Investor
Covid corner
Covid infections rise by two-thirds in a week in the UK – BBC
US now says the Pfizer vaccine can be stored in a standard fridge for a month – Yahoo
“I’m not too scared to reenter society. I’m just not sure I want to.” – The Atlantic
Covid long-haulers continue to baffle doctors – Bloomberg via MSN
Vaccine lotteries are sad, but also perfect – The Atlantic
Evidence of Covid lab leak would have been destroyed, says ex-MI5 boss – Sky News
We have bigger problems than Covid-19’s origins – The Verge
Kindle book bargains
(Don’t have a Kindle? Buy one – they’re great and save a ton of space!)
Liars Poker by Michael Lewis – £0.99 on Kindle
Business Adventures: Twelve Classic Tales from the World of Wall Street by John Brooks – £0.99 on Kindle
Legacy by James Kerr – £0.99 on Kindle
Think and Grow Rich by Napoleon Hill – £0.99 on Kindle
Environmental factors
President Biden to suspend Trump’s Arctic drilling leases – BBC
Socially responsible funds do not deliver excess returns – Advisor Perspectives
World at risk of hitting temperature limit within next five years – BBC
Off our beat
Answering the call – Humble Dollar
Why quirky people are attractive – BBC
Number of smokers hits an all-time high of 1.1 billion – Guardian
America has a drinking problem [Interesting history of booze] – The Atlantic
From Hartlepool to the hangman: the flag-wavers now running the Tory Party could take Britain back to the gallows – Prospect
The massacre of Tulsa’s ‘Black Wall Street’ – Vox
Cultivating the art of noticing in the age of scrolling – Literary Hub
A long lead time – Seth Godin
And finally…
“Never buy anything from someone who is out of breath.”
– Burton Malkiel, A Random Walk Down Wall Street
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This movie has been remade again and again though most recently with the dotcom bubble after the us government dropped interest rates in response to panic about the y2k bug
I agree with Neverland, the current speculative mania in the US is the same as other speculative booms. In the 1920’s boom many stocks were manipulated by the big players to their own benefit, now the role of manipulator seems to have shifted to the little players (although of course the big players are happy to join in).
On crypto, it will be interesting to see if aliens visit us in a few hundred years’ time and find a dwindling human civilisation with an economy almost solely focused on mining digital currencies and where most of the planet covered with huge solar farms connected to huge computer farms producing no obvious social benefit whatsoever!
I’m a big fan of Neal Stephenson’s novels as well, and recommend them strongly if you enjoy Gibson.
There’s ‘Snow Crash’ (1992) which features a Metaverse where people can buy virtual real estate, ‘Cryptonomicon’ (1999) where one plot element is that creation of a ‘digital gold’ currency. The Baroque Cycle of novels is also incredible.
This is a product of desperation – people who can’t afford to buy a home normally and with not much to lose. It’s a product of low interest rates – both the high house prices and the lack of conventional methods to get returns to keep up without excessive risk. Get rich quick will always have a place.
It is also of course a product of the accessibility that tinternet has given it.
It’s a good thing in a way that people are at least developing some familiarity to markets and volatility, these people just don’t know how to do it right yet.
@Andrew — I recently told a friend that I’ll never reread Snow Crash because I don’t want to diminish the impact of it when I read it the year it came out. I can’t believe it hasn’t dated horribly, even as I too think back to all it got right (including the road conquering pizza delivery man at the start with his echoes of Uber Eats and Deliveroo drivers patrolling the streets in lockdown!)
The Calibrating Capital post touched on a very important consideration I am grappling with. The idea of what-is-enough is variable. Deciding what your number to FIRE is, before one’s family’s aspirations have plateaued, can be tricky. With a young family, wonder if it is premature to activating FIRE plans that involve coming off the pedal in terms of generating employment / business income.
@TI, @Andrew
Cryptonomicon is indeed considered a seminal novel of the crypto movement, echoing a lot of real life these days (other than the Marcos gold plot thread). Neuromancer does hold up well, but the latter books (eg Mona Lisa Overdrive) are much more a product of their time (1980s, coke and Japan Inc cyberpunk). On Snow Crash – the connection between Deliveroo and Hiro Protagonist may be an internet first!
It seems we’re of a similar digital age as I too fondly remember the mid 90s Telnet and MUD days. Please tell me one of your goto servers was ArcticMUD or FiresOfHeaven…
Another (former) MUD player here. 🙂
Of course, internet notice boards for stocks have existed for decades. I guess they probably didn’t move prices of companies the size of Gamestop much. But then again people at the time worried about the impact of TV pundits on prices of specific stocks; that’s probably a thing of the past, or does anyone still watch TV…
I thought the SPAC boom had peaked, but then I just learned that some former colleagues have recently set up one. So perhaps it still has a while to run, despite the fact that investors are usually so disadvantaged.
I’m not so sure we haven’t seen this before. It seems not dissimilar to the end of the Gilded Age, where it was the industrial revolution hitting full speed that drove social inequality and instability. We saw bubbles expand and collapse at rapid intervals.
As an active manager, I feel much more optimistic about the next 10 years than the last. While much of the last ten years was a decade of falling volatility, the next ten could easily be an “decade of instability/uncertainty”. We reached a nadir for volatility in 2017 and have been trending higher since then. It could be really brutal and regularly. Everyone is basically over their skis. All good fun and games.
@Amit – The Calibrating Capital post also resonated with me. Mainly because of my wife though. I have very simple needs myself. As Einstein said once when he was served caviar and didn’t even realise what he had been eating:
“For goodness sake, it was that famous caviar? It doesn’t matter. There’s no point in serving the most exquisite delicacies to hicks; they can’t appreciate them.”
One of the happiest periods of my life was when I was a student and had much more free time. There wasn’t a lot of money to spend but the parties were free, the beer was cheap in the student union pub, and you got student discounts on almost everything. A simple life with plenty of free time, no worries, and very little responsibility.
I can easily live happily on a quarter of the income we could generate from savings if I would stop working right now. I don’t mind working just a bit longer though to make sure I can provide for her needs properly. We’re almost there, just a little bit longer and I am done.
On a slightly Distopian theme I did my usual trawl through threads on the ‘interweb’ and read a few pieces on reasoning why investment trusts maybe good long term investments over open funds / index trackers in uncertain markets. Going further down the Webby rabbit hole led me to the Money Week model investment trust portfolio: https://moneyweek.com/investments/funds/investment-trusts/investment-trust-model-portfolio
Other pieces talk about how investment trusts may be better for some areas but generally can’t compete in areas such as US large cap, etc.
I realise IT costs are more and incur stamp duty, etc. but I wondered for curiosity and educational purposes does anyone have a kind of separate diversified ‘Lifestrategy’ style portfolio which is like the money week portfolio (all investment trusts) or does anyone have a fairly simple portfolio (4 – 10ish) which uses both trackers and investment trusts which are lower in costs but complement each other in specific areas (e.g. tracker for US large cap, IT for UK small cap, etc).
Has anyone contemplated using a multi asset fund with ITs? I know it may be foolish to ask but just curious in wondering the point where ITs come into their own when costs are higher and when/if some ITs ( depending on cost) make sense. Could an IT portfolio mean less need for a bond fund as some such as Personal assets look to preserve first (but but do have higher fees). I realise some ITs pay good dividends but I’ve learnt that the dividend tail shouldn’t wag the IT dog. Any comments either way would be appreciated.
I think it’s all a bit ridiculous, but I’m not against the gamification of meme stocks as such. My fear is though that it will somehow bleed into simple trackers being affected, or gamified themselves.
i.e. let people play in the casino if they like, but I just want a quiet life.
I have a much firmer view on Crypto though. It’s becoming/become a cult IMHO, and the situation at Tether looks almost unbelievable. Google ‘Tether ponzi’ to go down that rabbithole. The FT have written about it too. I was very disappointed to read a Ritholz piece the other day that came very close to advocating such ‘stablecoins’.
Crypto has had 12/13 years to emerge, and all that’s emerged so far is an unregulated mess, it’s only true use case being to evade the law as far as I can see.
@Tom-Baker: Thanks for sharing. Sounds like the story of my life too! To add to what you say, with children under 10 – its even more difficult to be sure, where you should stop. My 5-year old often asks for a house with a swimming pool – its easy to dismiss that & stay on course.. but when he stands and waits almost every time we return from our local park – near the front garden of a house with slides and swings, and children’s play area, I do question if I am right to not want to upgrade our house although it wasn’t on our list.
@Amit – I remember when mine were 5-year olds. It’s a fine line: you can’t just say no, but at the same time it would be madness to let them take the driving seat and dictate your financial goals.
Funny what Tim Martin said… almost like being subject to ever closer Union wasn’t just about immigration…
I wonder if any other countries have, I don’t know, a permit system or something, enabling recruitment of foreign workers without paying the EU £12bn a year for the privilege ? I suspect careful examination of emigration patterns around the world will reveal they all do
> we can also see the outlines of how history will remember this era in wider market trends
You are seeing decadence and decay, the senescence of Western culture. Oswald Spengler said it all. Froth and excess is to be expected. Although catastrophic decline is a better story it’s unusual. In general the fall is slow in human cultures. As the threads that weave the common story fray the checks and balances that held excesses weaken. Gramsci said that in the interregnum between the old dying and the new being born a great variety of morbid forms appear.
We may be looking forward to ZXSpectrum’s Belle Epoque, fingers crossed the World War following on its heels is a good few decades hence if at all…
I believe the flash mob was in Count Zero, the sequel (which I preferred).
I re-read Burning Chrome, the short story collection, every so often and we are getting close.
Followed Monevator for a long time and appreciate everything you and the team do. I am generally and index investor, I read a lot of FIRE and bogleheads and would describe myself as fitting not the monevator crowd quite well.
However, you are dead wrong on meme stocks and perpetuating the mainstream narrative that we GME investors are just this millennial cohort of people talking on Reddit is baffling considering the lengths you usually go to understand financial phenomenon. This is far more nuanced than most appreciate.
Here is the Redditors argument on GME:
(paraphrased but if you’d like to do your own research, please go to https://www.reddit.com/r/DDintoGME/comments/mnss65/the_apes_guide_to_the_galaxy_a_compilation_of_dds/?utm_source=share&utm_medium=ios_app&utm_name=iossmf )
GameStop was having hard times in the last few years and hedge funds shorted the stock – they borrowed shares but these didn’t exist, fully expecting GameStop to go bankrupt because of a poorly performing business, a lot of debt and the pandemic. If they went backups the shorts would never have to cover and they can literally just short a company into oblivion (a la Toys R Us etc.,).
Last year, a few people (Michael Burry, Keith Gill, Ryan Cohen) caught on to the fact that GameStop could become a viable business because of its membership model and unique position in the market for gamers if it transitioned properly.
Burry and Cohen wrote individual letters and both bought into the company which put it on the map. Cohen himself bought 13% of the company and has a background in competing with Amazon in a customer focused typically ‘brick and mortar’ business.
Keith Gill then summarised this thesis on Reddit.
As this all began to gain attention and others started to see why these people saw what could potentially happen, they began to buy shares and in January, the price surged and hedge funds had to begin covering their borrowed shares. The only problem, most of those shares were either from ETFs or non-existent.
It’s believed that the only reason it didn’t squeeze further was because robinhood shut retail trading down (they are a main source of Payment For Order Flow for the big hedge funds who were shorting this).
The interesting thing about this period is that 150 million GameStop shares were traded per day. GameStop have confirmed that their float is only 50 million and after checking on a Bloomberg terminal (posted daily on Reddit) – we can see that institutional ownership is over 100%. So where are retail getting their shares?
Since the price has gone up (and stayed up), a few fundamental shifts have happened within the company.
Ryan Cohen as an activist investor and chairman of the board has replaced the old guard of execs who managed the company into the ground, with executives from Amazon, Chewy, Facebook and other E-Commerce sites.
They’ve paid off all their long term debt and added half a billion to their balance sheet as well as investing in a distribution warehouse.
They have started selling computer chips, TVs, sound bars and now offer same day delivery (which beats Amazon on price).
There are also murmurings of performance centres for E-Sports, a merger with the leading E-sports team, the most mind blowing NFT (I.e. every non-fungible token represents an individual copy of a video game, once you’ve finished playing, you could sell that video game second hand over the internet to another person at discount and the gaming company and GameStop would take a cut).
I have money in GameStop – in my opinion AMC is a distraction – I believe that soon hedge funds will be caught out and be forced to cover their naked shorting (Have a look at the rules the clearing companies have put in place since January -the DTCC is expecting hedge fund liquidations soon). Gamestops annual meeting is this week and it should confirmed that shareholders who have voted exceeds the share float confirming naked shorting selling at a crazy scale. I also believe that the future of the company is incredibly bright.
Posts like this encourage the narrative that as an investor I’m stupid or just FOMOing. Not at all, I’ve analysed the business, I understand the risk I’m taking and understand the market mechanics at play.
Please either stick to passive investing chat or try and look at the full story. Retail investors are not to blame for this madness in the markets – hedge funds using crazy leverage using illegal methods to make money are – we just caught them out.
@RedditGuy — Thanks for reading the blog over the years, and for your comment. 🙂
I think you’re being rather dismissive of my comment, in turn. I am saying this current climate/trend is a current feature not a bug of the markets.
Re: Gamestop raising money at the elevated price (at last, it would seem, as they hadn’t/wouldn’t when I last followed the story closely) again that is what I’m talking about as the ‘new rules’. Companies with a good/winning/catchy/lucky narrative have been able to create their own reality to *some* extent on the back of this, by raising their price first and latter capital on the back of it, whether it be Musk, a SPAC, or AMC.
I’ve mentioned several times (and possibly in my Gamestop post, I can’t recall) that the overall thesis for Reddit re: market positioning for the initial GME trade was solid.
I strongly believe though that at most roughly 0.01% of Redditors would be able to analyse market structure and the company to *independently* reach that position. They are/were following/piling-on behind a relatively few key individuals. You may be one of those key individuals, I have no knowledge of that and anyway I don’t particularly have anything against people piling into things. I am not a moralistic passive investor (as you’ll know as a long-time reader I invest entirely actively, for good or ill). But again, it is what it is.
Here is a person predicting implicitly that AMC’s market cap will reach $50 trillion:
https://twitter.com/TikTokInvestors/status/1399731697176834052
I think that’s pretty indicative of the current climate.
I sold my Gamestop shares at c. $360 — as mentioned in that first post — and judging by your post they’ve since been diluted pretty heavily, so I’m feeling pretty happy about my Gamestop take FWIW. 🙂 I wouldn’t spend $17.5billion creating today’s Gamestop if given the capital (its current market cap) but who knows, maybe it’ll transition into some rare and super-valuable future. Selling computer chips and soundbars isn’t going to cut it though.
Finally, you write:
Who cares? I mean that sincerely — you shouldn’t. 🙂
It’s a huge advantage to be underestimated as an active player in the market (unless you’re at a scale where it’s an advantage to be seen as the opposite, e.g. Warren Buffett, and so get access to particular deals etc).
If this Reddit stuff *isn’t* largely about posturing and sport and fun and signalling (which IMHO it is at least partly about) then IMHO you should be delighted if people dismiss your skills.
It will lead to more oversized / overconfident shorts, and more opportunity for future short squeezes, gamma rips, etc.
@all — Thanks for the replies! A few quick specifics…
@JohnUKVI — Well utility is plainly somewhat subjective. I don’t see much utility in much of what passes for popular music, for instance. Trillions of dollars says otherwise. 🙂 A widely-recognised and persistent digital store of value that is ‘censorship resistant’ and of finite supply potentially has quite a lot of value IMHO, which is why I hold a small percentage of my portfolio in Bitcoin. Whether it’s worth $1 trillion or whatever the true fossil fuel cost of mining is I accept is a harder question. 🙂
@mr_jetlag @WhiteSheep and others — Hmm, I thought I was still reading Stephenson by 1999 and so should have read Cryptonomicon but I can’t recall. Maybe it’d make more sense in 2021, or be more memorable… perhaps I’ll revisit. I did get some exposure to ArcticMUD but it wasn’t my main home (CircleMUD, from very faded memories?) I had two god characters, eventually, in 1992, and built my own level! Good times.
@Amit @Tom_Baker and others — I think @TA is much stronger on “enough” then I am, to be honest. And not even because I’m especially mercantile or materially orientated (I’m not 🙂 ) but more because I possibly had enough when I was 25. (See my Bohemian Investor post in the archives). There’s no doubt it’s among the thorniest problems in our space.
@Bal — Have a look at the investment trust portfolios in our archives by former contributor The Greybeard. For example:
https://monevator.com/investment-trusts-for-deaccumulating-income-investors-2016-update/
@ZXSpectrum48k @ermine — Hmm, perhaps that is the right lens to see the current climate through. After all, an era can only express itself in the technology it has to hand. Still, I feel market structure or at the least the range of potential outcomes for individual stocks (where I am focused) is changing a bit. Still, there’s no doubt real interest rates of 2%+ would dial everything back a few notches!
@The Investor – thanks for the well thought out comment – it is appreciated!
Re: Gamestop raising money – it was pretty low key, they sold 3 million shares at around $150 – very astute move as it got a lot of money into the company but also didn’t increase the float by enough of a percentage that shorts could cover (and therefore alienate their super-charged investors).
This whole craziness started like all good bubbles do – Hedge Funds started bending rules and then the small people were incentivised to try and make money based on this tomfoolery.
In 2008, they created a loophole where people didn’t have to verify assets or income to get a bigger house to flip for profit.
Right now, I think the following is happening:
Hedge funds created shares to borrow of these failing companies out of thin air to run them in the ground for profit. Retail has caught on and much like Bitcoin originally, it’s an asymmetric bet for most of retail in terms of the squeeze play but is often poo-pooed by the more serious investors…
Here’s the risk/reward of piling in at the moment from a Redditors point of view (ignoring the fundamentals of the company):
1) I put in money I would have spent on going out or recreation and if I lose it I’m just as poor.
2) If Reddit is right and there are shennigans afoot – I can profit quickly.
As for the market cap argument – they could be right or wrong but only time will tell. The market cap based off the float sounds ludicrous from a normal value investor point of view however if there are many times the shares rehypothecated, is that market cap crazy? Some say that there is 2000% of the Gamestop float outstanding because of these fraudulent shares – again, if Gamestop had gone bankrupt, this would never be found out and the hedgies could have found another half dead company to short in the ground. But this time, they may need to cover all those outstanding shares. If they need to cover the float over 20 times… in theory I can sell my shares for whatever price I want.
My frustration with the conversation (and apologies for being dismissive myself) comes from the fact that everyone is lining up to blame retail for the FOMO – not the hedge fund and banks who are partaking in fraud and over-leveraged risky craziness.
I am going to say something very controversial here but I am happy for people to disagree with me and I hope I am wrong: I believe that Gamestop (again, I think that AMC, KOSS, EXPR, BB are all distractions and don’t have the same re-hypothecation as GME) – is a hedge against the overall market crashing.
If hedge funds have been shorting companies by creating shares for years – what happens when they need to cover? In the case of Citadel (a market maker that deals with 25% of all trades in the US), potentially they have to sell other holdings to cover or be liquidated. For every share they’ve borrowed, their paying a daily fee – how much longer before they cover their short positions or start liquidating other holdings?
Is this why tech is down? Is this why spacs are down? Is this why crypto is down?
I’m absolutely not advocating that everyone pile into the meme stocks – but for anyone reading, this is far deeper and far more complicated than just froth of FOMO. None of the number make sense: current prices, market caps, short interest, institutional holdings, volumes traded per day – something really fishy is going on and after months of research – I believe I’m on the right side of the trade and hey, if I’m wrong… I’m no poorer.
@RedditGuy. “In 2008, they created a loophole where people didn’t have to verify assets or income to get a bigger house to flip for profit. ” You think hedge funds created that? Err. NO.
I love retail investors like you. Just like I love the spivvy hedge funds you think you are joined in battle with.
Why? Because you are so alike. You suffer from a delusion that your view is somehow special. That you know something that others don’t. That your analysis is superior. That you know that these naked shorts exist because you’ve seen it on Bloomberg, and obviously no one else looks at that easily available public info. No one else would also think to go long against those “illegal naked shorts”. Plus your deep company analysis is somehow being missed by everyone else.
A small few of you (both retail investors and hedge funds) will make huge sums and strut around the media. A few will also lose huge sums and achieve a different type of attention. The bulk of you will lose small sums and will be never heard of again. Overall though, the net P&L will be a loss.
The positive residual will go to people like me (not me specifically, I don’t ever trade equities). We’ll extract a little bit of value from the distortions you retail types and the spivvy hedgies create, from the silliness of your childish battles. We live at the boring hedge funds, doing the boring thing every year, making the boring but positive return every year.
We’ll never be heard about, we never get to strut around and bask in the limelight. We never get to tell people “we were right and they were wrong” because we don’t need to take a view when so many of you guys are willing to. But we still get 20% of what we make and that’s still a few million a year in the piggy bank. It’s enough for us. We just don’t have the ego you do. Please carry on being silly. Thanks.
@ZXSpectrum48k – Hedge Funds absolutely created those loopholes – creating risky mortgage backed securities, labelling them as super safe and then re-packaging them up to sell them to others on leverage is what caused 2008. Yes, people bought too many houses they couldn’t afford, but everyone was incentivised to join in the madness and the system failed.
People wanted houses and to make profit, the agents selling the houses wanted their cut, the banks wanted to make profit off mortgages and get their cut, then they were packaged into bundles for the hedge funds to sell to each other and get their cut.
My post was not about ego, I can see why you’ve taken that opinion of me and I’m sorry it came across that way – I just feel like the Reddit point of view hasn’t been put across from a Redditor and I merely wanted to provide a different perspective to the situation.
This isn’t some ‘I hate the big guy so I’ll try take them down’ – this is a either going to be a short squeeze because some hedge funds got greedy or a long-term play on a company with a strong balance sheet, new leadership and a bright future.
@RedditGuy
I can understand your position and the fact that the position is more nuanced than “it’s just some kids going crazy on memes” but there are surely a range of outcomes not least because other hedgies have likely got in on the Redditors’ side to make a buck while harming the opposition.
I haven’t a clue what to do about it as a relatively old school FIREy investor though – do I need exposure to some memes as a hedge against the world going that way or do I just fear a meme crash taking the wider market down as well?
@RedditGuy — Cheers coming back. While I certainly agree that there are distortions and mismatched transparency and whatnot in financial markets, I don’t really recognize the broad stroke picture you paint. Also I believe you misunderstand some aspects of your trade. For example, rehypothecation doesn’t create new shares. It is the practice of re-lending the *same* shares. So it’s irrelevant to market cap. The company creates/cancels new shares, not brokers re-lending shares. Market cap is calculated from the shares in issue multiplied by the share price. Hence the market cap is indeed as big as I cited (in fact it’s risen to $19.5bn on today’s 10% pop).
Who knows? The share price is up 10% today, since I typed my previously reply, and in the short-term it’s better to be in profit than ‘right’ in markets. In the long-term, fundamentals will out, but situations can go on for a very long time, and as we both agree the market reality can change the fundamental reality (i.e. the company can issue stock at this elevated price, raised hundreds of millions, and reinvest to create a viable business, whereas if it was still trading below $10 it couldn’t).
Good luck with your trade, hope you make a nice profit.
There seems to be quite a bit of misinformation and arrogance around this discussion on the subprime bubble – both from zx and redditguy.
No, hedge funds did not create the subprime mortgages (and the various derivatives associated with these mortgages), nor did they create any loopholes or appear to have taken advantage of any such loopholes.
What hedge funds did do, in particular the 2 Bear Stearns hedge funds that triggered the start of the banking crisis, was that they bought the CDOs (which are highly leveraged if the riskier tranches are bought) that the banking sector created. What this resulted in was a huge mis-pricing of risk due to the demand of this type of credit risk (along with banks such as Lehman) which certainly had a major part to play in supporting the underling sub prime mortgage market, and thus the excessive risk taking, years before the peak of the bubble. I should know – I was part of the structuring of some of these products. I can absolutely confirm that no one took risk as seriously as they should have, nor did we care about anything but our bonuses at year-end.
If there was proper due diligence and risk assessment by the potential buyers of these CDOs (hedge funds), these CDOs would never have been structured. With no CDOs, you would never have had the demand for the actual mortgages by other parties. And with no demand for these mortgages, the sub prime lenders would not have been able to expand its lending to levels of mania that resulted in a massive housing bubble.
So hedge funds did play a big role in the eventual banking crisis and the rise of moral hazard, just like we got the greenspan bailout of LTCM, another hedge fund that did not think about risk properly (or chose to ignore?).
Greed and stupidity ran rampant within certain hedge funds, investment banks, lenders, rating agencies and regulators/government. Perhaps there were some people who knew about the risk at the said banks and hedge funds (and chose to do nothing about it before it was too late, probably due to the bonus payout they would have received). So you can add corruption to that list as well.
So there you have it. Huge moral hazard, risk taking and too much power from people who really do not give a crap about society and only care for their financial security and a situation where the general public really did take it up the arse one more time.
The line between trader and active manager can be blurred, both are deviations from passive orthodoxy, to different extremes, and both rely on the concept of not accepting the market as it is. You could say though that an aspiring active manager is trying to make a career/ keep a job regardless of whether they truly believe in active management whereas a trader is more likely to be acting out of desperation.
Day trading is better than horses I suppose.
@TI – thank you for the link. Interesting article and looks like I need to do a bit more rummaging around to learn more. Noticed @Rhino’s comments on the article were in a similar vein to my general curiosity. I was just wondering how ITs and ETFs or index funds might work together using ITs to smooth the ups and downs and may be used sparingly to potentially to work better in specific areas to build a kind of passive / active diverse portfolio ( e.g. global / bond index funds with a small number of ITs as satellites). As I say it’s simply an education journey for me as I’m generally happy with my few index funds ticking away.
@Bal:
This post: https://the7circles.uk/core-and-satellite/ and the associated brief chatter, might be of some interest?
@RedditGuy. It was primarily investment banks that packaged up property loans. Many types of funds bought those loans, including hedge funds but also pension funds, insurers etc. The hedge funds got into more trouble because they operated on leverage. You need to understand the difference between the buyside and the sellside.
The roots of the 2008 crisis lie in the unwinding of Glass-Seagall and the deregulation of mortgage lending in the Clinton era. Basically, people wanted to buy houses they couldn’t afford, politicians saw a vote winner in deregulating to allow that, banks saw a opportnity to engineer a product to make a profit, and funds of all types saw a way to make excess returns. Win-win for everyone right? People were just being people. They were greedy, stupid, lazy. Nothing new here.
The other issue is your view of hedge fund managers. Most of us are far more risk constrained than you seem to understand. Far more risk constrained that people like you. I run a team at a hedge fund. One of over 200 teams. Close to 1000 portfolio managers in that fund. That fund’s 30 year track record averages returns of 15%/annum (4%/annum over S&P), 5% annual return volatility, one down year (-3% in 2008). Last year the fund made over 25% with one down month (-0.1% in March).
The stop-loss on each individual team is 5% plus a high to low drawdown of 5% (so if you are up +15% you can only go back to +10%) Most individual portfolio managers will have their capital cut in half at at 2.5% loss, and then are allowed another 2.5% drop on that 50% for a total loss of 3.75%, to keep them above the hard stop at 5%.
In what way is that taking too much risk? Up to 1000 uncorrelated portfolio managers who all can only not even 5% in a year. Try running your positions in Gamestop with a 5% high to low drawdown. You wouldn’t last an hour. So most of us are actually very conservative. That’s the only way to survive any period of time. I’ve survived 16 years in the job and never been down more that 2% and never ended down in any calender year. When I talk to clients, their biggest demand is that we take more risk, not less. That we be less conservative. That is the constant pressure. It’s never to dial down, it’s always to dial up.
You are far far more risk tolerant than 90% of hedge fund managers. The problem is you only see the tip of the iceberg. The ones that want to advertise their wares on CNBC. I’m afraid I just don’t think you really understand the reality of the hedge fund industry.
@ZX: I see now that HFs are perhaps the solution rather than the problem.
There are those who know what they’re doing, those that think that they know what they’re doing, and those who know that they don’t know what they’re doing.
Elite HFs are in the first category (I’m excluding LTCM from this group obviously).
Most of the rest of us are in the last.
But neither category is problematic.
The issue is with the second category.
Retail banks with liquidity mismatch in 2007-8 fell into this group. Many CEOs in incumbent businesses fall into it too.
It’s the unknowing ignorant that can really blow things up. As the Mark Twainism goes it ain’t what you don’t know that gets you in end, it’s what you think that you know that just ain’t so.
With their high levels of competency in risk management the next crisis isn’t going to come from HFs. The crisis will come out of category two again, as it usually does.
@TI: you witnessed the birth of the new world in 1991. The end of the so called ‘short’ twentieth century from 1914 to 1991 was marked not so much by the end of the empire that wasn’t in the USSR, but rather by the emergence of Gibson’s dystopic cyberspace.
WG is on YT narrating his own seminal masterpiece. I thoroughly recommend listening to it.