GameStop: of stories and storytellers

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Right off the bat, if one wished to know the story of what really happened in the last few days with the GameStop stock, it is hard to beat the article that Matt Levine wrote. It is a great lesson in writing, simplifying concepts for a non-technical audience, keeping them engrossed and conveying the story, moving it along logically and cogently, etc. Read that, if you have not.

Now, we will come to the different lens that people have chosen to view the developments. That is as fascinating as the movie itself. There are multiple ‘Rashomon’s (‘Virumaandi’ in Tamil, produced and led by Kamal Hasan) playing out.

First, there is the article by people who believe in the value and information content that short-sellers bring to the market. I am one of those people. In that sense, what Melvin Capital was doing was not exactly a typical hedge fund does: levered long positions, a 2-20 fee model and appearing smarter simply because the low interest rate policy of central banks and running with or anticipating the herd clicked for you. Policymakers and market participants have no problems with speculation with long positions. They have huge problems with speculation with short positions. They are viewed as villains. Hence, there is a certain sympathy with what Melvin Capital did. In fact, I saw and still do see the story in that light. If you catch the tweets of Jesse Felder, you can see this underlying philosophy running through the tweets he has written and the articles he has chosen to tweet on. Also, you can also sense that in Matt Levine’s article.

James Mackintosh of WSJ sees the rise in GameStop purely as a bubble and he is quite right. There is no mistaking that at all. In that sense, I have sympathies for the investment decision taken by Melvin Capital.

This observation is quite astute and correct:

Online forums like Reddit’s WallStreetBets are full of traders boasting that they are beating up the big investors who normally control the market. It is an ironic twist, or a sign of their lack of understanding, that they equate short sellers with the Wall Street establishment. [Link]

The second angle is that of concern for the retail speculators. While one is happy for them that they made money, given the circumstances most of them find themselves in, locked out of their jobs by politicians playing their political games while pretending to follow the science, they have to make money to live and good luck to them. Praise be too, for succeeding. But, there is a lingering concern that they might one day be caught out by the market because, in their own words, fundamentals don’t matter at all. It is all about momentum and the ‘wisdom of the crowds’. So, as they taste success, they will be inclined to increase the sizes of their bets and one day, they may come to grief with their pure speculative approach to investing. It happens whether one is a so-called sophisticated investor or an uninformed day trader. So, that is the medium to long-term concern for the day-trader/retail investor who is now the underdog and whose success delights many. Frankly, I would put the article by Arthur Levitt, Jr., former Chairman of the SEC in that category.

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That brings us to the third angle: the class warfare angle. Initially, I saw tweets by Alexandra Ocasio Cortez and Trump, Jr. both toasting the success of the individual traders against the greedy Wall Street speculators. Once I find the tweets, I will link them here. Some see this plainly from that angle. There are many tweets that have recalled the old Eddie Murphy movie, ‘Trading places’. But, then, the problem is that this movie may not end well for the retail speculators if they persist with such trading and investing approaches.

The fourth angle is that these day traders are the ‘Deplorables’. That the Reddit forum ‘r/wallstreetbets’ is reeking of white supremacists, nationalists, racists, etc. and hence, they need to be punished. Therefore, there are calls for bans on retail trading platforms, regulating such platforms, such trades, etc. This is a convenient ploy to support the big boys on Wall Street. I find these arguments extremely distasteful. In fact, this article in the ‘Wall Street Journal’ is an example of such needless, baseless and unsubstantiated allegations, innuendoes and dog whistles, based on anecdotal evidence.

Once thus demonised, it is easy to call for them to be shut down and regulatory action taken, etc. This is similar to what is happening with the action against the ‘invaders’ of Capitol on the 6th January whereas all the violence and rioting in the summer were extolled and encouraged. In financial market terms, your speculator is a bad guy; my speculator is a good guy.

The fifth angle is that it is not a case of the underdogs vs. the top dogs or a class warfare. They are, in fact, the sideshow. It is really the case that it is one Wall Street firm (Citadel group) that is sticking it to the hedge fund, Melvin Capital. Simply put, the story is that Citadel gets to see the order-flow from Robinhood and many other such platforms a few nano-seconds ahead. Using that information, it has squeezed the short positions and made money. The individual traders – for all their triumphal noises – were not the real reason for the distress faced by Melvin Capital.

This is the line adopted by Matt Stoller in his tweets. Sample this:

Apparently at 1:32pm, a 587k shares of GameStop traded at $327 a share, which is $187 million. That’s not coming from Robinhood. Wall Street is on both sides of this battle. Ugly stuff. [Link]

This article also does a good job of how Citadel Securities can do this and does indeed do so. But, it spoils the copybook by dragging Trump into it. Its criticism of the Federal Reserve policies too is rather naïve and too simple. The Federal Reserve has a far bigger role to play in all of these, not just in the bubble in GameStop.

It is true that Trump did not drain the (financial market & Wall Street) swamp. Trump is indeed very guilty of equating a stock market rise as a vindication of his governance. He hailed bubbles. That said, the measures she mentions as having contributed to this craze are chicken-feed. They are not even directly connected. They are relatively unimportant or irrelevant, in fact. So, there is the obligatory blame game being played. That, to me, detracts considerably from the seriousness of the analysis.

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The Fed has overheated the market in multiple ways and they have accumulated over decades. Even if she were to ignore that history, Powell himself has been at it since 2018. It is not just the impact on bond yields but the explosion of the Fed balance sheet and the enormous liquidity along with low interest rates (which brings down the cost of trading at the margin, i.e., by borrowing money from the  broker) that are major contributors to the problem.

In fact, that is the problem. The mainstream commentators’ angst and the calls for probe, etc., into the actions of the ‘mob’, as they put it, are utterly contemptible because they were not remotely moved or troubled by the speculation that has been going on for the last two years in many other stocks and the market, in general. When so-called ‘uninformed’ traders make money and create losses for the professionals, all hell breaks loose. Once again, it takes on the hue of a political and class war in America. Not very surprising.

To an extent, this is the hypocrisy that Matt Taibbi exposes in his commentary on the ‘GameStop’ episode. Short sellers were squeezed by Wall Street establishments because banks were getting hurt. Now, their heart goes out to short-sellers because the ‘mob’ is squeezing them. Neat.

Some extracts from Matt Taibbi:

In other words, it was all well and good for investment banks and executives of phoney-baloney companies to gorge themselves on funhouse profits on a funhouse economy, but when amateurs decided to funnel just a bit of this clown show into their own pockets, finance pros wailed like the grave of Adam Smith had been danced upon. The worst was Morgan Stanley CEO James Gorman, who issued a somber warning that those behind the recent market frenzy are “in for a very rude awakening,” adding, “I don’t know if it is going to happen tomorrow, next week or in a month, but it will happen.”

This is the same James Gorman whose company just saw its 2020 fourth-quarter profits go up 51% versus the year before, with total revenues up 16% to $48.2 billion, matching almost exactly the 16% rise in the stock market last year. If you’re going to rake in $33 million as Gorman did last year captaining a firm that just siphoned off billions in essentially risk-free profits underwriting a never-ending bailout, should you really be worrying about someone else getting a “rude awakening”?…

…. Short-sellers are not inherently antisocial. They can be beneficial to society, instrumental in rooting out corruption and waste in whole sectors like the subprime industry, or in single companies like Enron. Moreover, the wiping out of such funds isn’t necessarily to be cheered…..

…. However, that’s the point. The degree to which even the beneficial functions of short-sellers are cheered or not is dependent upon whose corruption they’re uncovering. Let the record show that when the S.E.C. imposed a ban on shorts of financial stocks in 2008, they routed short-sellers who were dead right about the insolubility of America’s banking sector. The state prevented their correct judgment about companies like Wachovia and Washington Mutual, whose stocks kept plunging even after the ban and went bust soon after.

The shorts were right about all the other banks, too. The Inspector General of the TARP, Neil Barofsky, eventually told the Financial Crisis Inquiry Commission that 12 of the 13 biggest banks were on the brink of failure when they got saved — by the short ban, by emergency overnight grants of commercial bank licenses to companies that weren’t commercial banks, by the bailouts, by the subsequent avalanche of underwriting fees, and most of all, by the lies about all of the above.

The home of James “rude awakening” Gorman, Morgan Stanley, got its bank holding company license (and the lifesaving Fed credit lines that came with it) late on a Sunday night in September, 2008, because the firm couldn’t have opened its doors without it the next Monday morning. They’d have been blown to bits, by “fundamentals.” Instead, they got rescued, given a forever pass to keep feeding at the neck of society while claiming, falsely, to be not-failures and not-welfare recipients, better somehow than the “dumb money” they think should be theirs alone to manage.

The rank selectivity of this makes any moral argument against the GameStop revolt moot. There’s no legitimate cause here, just an assertion of exclusive rights to plunder, which will doubtless be exercised now in the form of bans, investigations, and increased barriers to market entry. Probably also, in the political spirit of our times, there will some form of speech crackdown on platforms like Reddit, to protect us from the mob. [Link]

In short, not just the action in the market but the forces and the policy actions that have contributed to the situation and the commentary that has followed it indicates a country that needs a lot of repair and a lot of time and luck for it to happen.

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Postscript #1:

This is priceless. Ms. Janet Yellen, the Treasury Secretary cannot intervene in the matter because she is ‘conflicted’:

Unless JANET YELLEN receives a written waiver, she will be barred by her ethics agreement from participating in any matter involving CITADEL, which makes millions in fees from ROBINHOOD, until Oct. 2021 (or 1 year after her last paid speech to Citadel). [Link]

This is the full ethics declaration she had signed on the 29th December 2020. She has received speaking fees from Citadel.

Postscript #2:

The names of Abraham Lincoln, George Washington and other prominent figures including California Sen. Dianne Feinstein will be removed from 44 San Francisco public schools, a move that stirred debate Wednesday on whether the famously liberal city has taken the national reckoning on America’s racist past too far.

The decision by the San Francisco Board of Education in a 6-1 vote Tuesday night affects one-third of the city’s schools and came nearly three years after the board started considering the idea. The approved resolution calls for removing names that honored historical figures with direct or broad ties to slavery, oppression, racism or the “subjugation” of human beings. [Link]

America is hurting in more ways than one.


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