Apparently, the GameStop fight (which by now includes many more names than just GameStop) has metamorphosed into a simulated, online version of the Capitol riots.
On Tuesday, I mentioned that in addition to echoing some of the popular stories from last summer (e.g., the Robinhood crowd piling into shares of bankrupt companies and Reddit engineering gamma squeezes) this soap opera has other features that make it attractive as tabloid fodder. There’s the “getting back at the nefarious shorts” angle, yes, but relatedly, it’s being framed as a manifestation of populism.
I called that “an editorial reach so ridiculous that the political scientist in me is nauseated.” Fast forward to Wednesday and it looks like we’re going further down that road, complete with billionaires stoking the populist fire — sound familiar?
In a Wednesday note, Nomura’s Charlie McElligott documented the situation, recapping some of the potential knock-on effects for the broader market in the process.
“The Reddit / WSB stop-hunt has become a populist movement, garnering support from the disruptor/influencer spectrum [with] Elon Musk piling on last night, joining with Chamath Palihapitiya and Cameron Winklevoss— unironically all billionaires themselves” he wrote.
Winklevoss just flat out asked Musk to join the fight and tweet about GameStop in order to make the stock go “hyper-parabolic and blow out the fat cat shorts for good.”
Again, it’s important not to let the irony be lost on you. Those folks are “fat cats” themselves. In fact, “cats” get no “fatter” than Musk. He’s the richest person on planet Earth, and it’s clear that to the extent he does end up getting himself even further immersed in this war of the Reddit traders versus shorts, he’ll be doing so with his own yearslong grudge against Tesla shorts in mind. As some of those Tesla shorts will doubtlessly attest, Musk was not above going to extreme lengths to ensure that the “little guy” (and in that case, the “little guys” were the shorts) were stamped out, “ants with a sledgehammer” style.
As McElligott put it, “the perception is of institutions, hedge funds [and] ‘Wall Street’ as the ‘other side’ of this zero-sum game.” On Wednesday, both Melvin Capital and Citron said they closed out their shorts in GameStop. Andrew Left said Citron covered the majority of the GameStop short “in the $90’s.”
“Wall Street” is not a monolith. This “us versus them” mentality may be more or less accurate in this particular scenario, but it’s usually misplaced in a broader sense. The last time a billionaire started parroting an “us versus them” mantra, things didn’t turn out so well, on the off chance anyone is old enough to remember January 6, 2021.
On Wednesday, McElligott noted that the cascade could begin soon, if it hasn’t already.
“The implosion of short books off the back of the Reddit/WSB stop-hunt has escalated into Vol Dealer ‘short gamma’ delta hedging flows and [could] grow into a broader universe of more liquid/larger-cap short positions,” he wrote, adding that those too could “be forcibly de-risked, in-turn putting ‘longs’ in the crosshairs of the mechanical gross-down/risk-management exercise.”
In another irony of ironies, that could end up hitting Bitcoin, by the way, because when you talk about popular longs — well, Bitcoin is in that group.
McElligott noted that the “broader universe of crowded short-interest names [is] now seeing huge buy-to-cover capitulatory price action, while yesterday we saw a notable acceleration on ‘crowded longs’ begin to leak on the other side of this VaR-event.”
Professional trader Kevin Muir, of Macro Tourist fame, wrote about this earlier this week.
“I want to bring to your attention an often overlooked byproduct of this recent market action,” he said. “This squeeze wasn’t just relegated to GME. The more heavily shorted the name, the more it was a target [by Reddit],” he added, noting that,
[The] WSB-concerted squeeze ended up being a massive increase in the volatility of the short book for many hedge funds.
When this happens, these funds are faced with two unfortunate developments – P&L losses and increases in their daily VAR (value-at-risk). These two factors combine to force a general de-risking of the fund’s portfolio.
It might seem like the stock market bulls should be cheering WSB’s squeezes. But their success might end up being the trigger that brings about the general stock market correction many have been waiting for.
Remember – increases in volatility cause general de-risking from hedgies and other quantitively-modeled funds. The greater the increase in volatility, the more they have to sell.
Kevin may or may not be irritated with me for an ill-timed tweet I fired off earlier this week, when I suggested that everyone should focus more on poverty, joblessness, and macro issues that affect everyday people, as opposed a Reddit-centric short squeeze in GameStop. I tweeted that just minutes before the latest installment of his newsletter (from which the excerpts above came) hit inboxes, but I promise there was no connection between the two.
Getting back to McElligott, he wrote Wednesday that this has seemingly “moved past the retail catalyst.”
That means that with Frankenstein now having escaped the Reddit lab (again) he’ll run out the front door of the castle and down the hill into the village. That’s the colloquial version. The technical version finds McElligott laying out next steps, so to speak, as the conflagration begins to manifest in “institutional short stop-outs / de-grossing flows across the broad leveraged fund universe; short gamma impact of those who are short optionality in these names (i.e. a Dealer being forced to buy more delta the higher the underlying names squeeze due to a deep OTM call they’re short off the back of a short seller’s hedge); and sadly, ‘shooting against’ from other funds against known ‘longs’ and ‘shorts’ of those funds perceived to be most impacted by this event.”
That latter bit will doubtlessly delight the Reddit crowd — if they can spark fund-on-fund sniping that’s just an added bonus for these “heroic” usurpers.
All eyes will turn to mega-cap tech earnings. If the titans manage to beat expectations by a wide enough margin to ensure core long positions in secular growth favorites come out unscathed from the dynamics outlined above, thus protecting the names which comprise some ~25% of the S&P from a drawdown, we might be able to put this ridiculous episode safely in the rearview of a Hertz rental.
For his part, McElligott noted a more than 12% drawdown on Nomura’s “R1500 Crowded Longs vs R1500 Crowded Shorts,” a proxy for extreme hedge fund positioning over the past 17 days.
That’s a near six standard deviation move going back 14 years. “Until now, an aggregate move of this magnitude had only occurred two prior times in recent history,” he wrote. One was post-Lehman, in September of 2008. The other was in March of 2020, during the COVID panic.
One commenter on a recent piece by Bloomberg’s John Authers sounded quite a bit like something you may have heard at a certain person’s rallies over the past four years. To wit:
Normal is the American dream and being able to make your own way. This isn’t a casino. This is a riot.