Is the GameStop affair ”really calming down? What was it used for – and what lessons are markets (and investors) likely to learn from it?
As you know, dear reader, we are living in a time of miracles.
Jesus could turn water into wine. The Federal Reserve can do better: it can turn worthless pieces of paper into… money! Trillions of dollars in currency. Enough to “stimulate” the world’s largest economy until it reaches a stage of transcendental ecstasy.
Or at least an illusion – pleasant but momentary – of normality.
This is the great story of the 21st century: the fantasy of counterfeit money and the very real steal of green wood that Americans will take as a result – and in real time.
But we are going faster than the music. We are only in the early stages, when the illusions are still more or less pleasant.
Our biggest challenge, at the Chronic, is to avoid being distracted and misled by them. Each implausible fable has its own trail of nonsense leading to another implausible fable.
Follow one… then the other… and it doesn’t take long for you to be completely lost.
So let’s see where it all takes us today.
Last week the team Reddit seemed to open a whole new chapter in financial history. Suddenly, using the internet, a flash mob small carriers could humiliate the big and rich hedge funds.
These funds had sold some 140% ofGameStop actions In progress. Some wondered how this was possible. Others questioned the legality of it all. Still others wondered how young traders – including Reddit user Roaring Kitty – could execute a ” squeeze infinite ”against the pros.
The “infinite squeeze” itself is a matter of astonishment. These are investors driving the price so high… and leaving so little free float that the next buyer (say a short seller who needs to hedge their bet) has to pay an infinitely higher price.
We didn’t know how it was going to work out in practice, but everyone could know how it would work out in theory.
Once the shorts would all have retreated, licking their injured egos and counting their billions in losses, the buyers would remain in control.
Back to earth
But… what would happen next?
They would own the shares of a company, bought at an average cost base much higher than what they are really worth – maybe even hundreds of times what they are actually worth.
These buyers had sworn “never to sell”. Perhaps, in a spirit of solidarity or madness, they would stall before placing their order. But in war as in war … and in squeeze like at squeeze.
The smartest of them started heading for the exit last Thursday, selling a stock that was then worth over $ 400. And then, two days ago, the crowd rushed for the gates, trampling quite a few people on the way and bringing the price down to $ 90.
In a few weeks, GameStop’s price should be back to its original level, around $ 15. At the same time next year it could be closer to zero.
Because if the Fed can perform miracles of levitation on Wall Street, it leaves the real economy to the mat. It seems quite likely that GameStop, a “brick and mortar” retailer of video games now readily available online, has to go out of business.
Why all this stuff, then, we ask ourselves? All Sturm und Drang ? All those bun crêpages on the spectators’ side? Everyone seemed to be in awe of this matter.
The shorts thought they were doing God’s work – helping Mr. Marketplace find a suitable price for GameStop shares. The long they too wore white, confident they were on a crusade to keep the rich from taking over the planet.
The only thing we take away from this whole saga, for our part, is that the Fed bubble has to be ready to burst (gamer madness is peaking)… and that hatred towards “the rich” is high – and growing.
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