While there’s a calm, rational case to be made for ignoring the raging “bubble” cacophony across markets, the shrill tenor is becoming difficult to tune out.
As much as it pains me to say it, this week’s wholly outlandish action catalyzed by armies (don’t call them “hordes,” that’s pejorative) of retail traders congregating on Reddit feels like evidence in support of warnings from folks like Jeremy Grantham, whose bombastic missives cautioning of imminent danger I’ve lampooned recently, in part because the folksy cadence belies the ostensible seriousness of the message.
Now, Grantham’s warnings (and those from others of his ilk) sound more plausible, even as Goldman and JPMorgan understandably think it might be foolhardy to shun stocks just because a motley crew of gamers decided to leverage their collective capacity to shape their own financial destiny.
Lest anyone should forget, I have argued both sides of this issue in an effort to provide a fair and balanced take. For example, in “They,” I essentially (albeit diplomatically) said that the general investing public is oblivious to signs of froth and that the Fed has created a potentially unstable situation.
In any case, SocGen’s Albert Edwards thinks policymakers should be ashamed of themselves.
“The madness has now taken a novel twist with a new warrior class of retail investor roaming the equity savannah,” he wrote Thursday, calling the Reddit crowd a “loosely organized retail mob” which is “gaining strength feasting off each hedge fund kill.”
Albert doubts it’s going to stop. “Intoxicated with success, they will seek out bigger and more powerful prey,” he added. “This farce is of the Fed’s creation – which should hang its head in shame.”
Jerome Powell didn’t exactly “hang his head in shame” on Wednesday. He didn’t want to talk about GameStop, mostly because he was busy claiming the Fed can move quickly to contain any prospective spike in inflation and arguing (ludicrously) that the effort at tightening he presided over in 2018 was a success. (It wasn’t. It was an abject failure, and a clear indication that normalization isn’t possible.)
Read more: ‘Troubling Inflation Seems Far Away, Unlikely,’ Powell Says
Albert went on to cite a number of visuals depicting the madness, many of which are all too familiar by now.
Goldman’s most-shorted basket is having its best month ever, for example.
Edwards doesn’t think this is sustainable, and neither do I. He called it a “frenzy.”
On Wednesday, I wrote that “in my opinion, this is one of the most out-of-hand situations witnessed in decades.” Edwards, writing less than 24 hours later, said that,
In my 39-year career in the financial markets I have rarely seen anything as grotesque as the current market conjuncture.
He also cited call-buying and a chart from Sentiment Trader, a ubiquitous source of visuals and quotes for folks. “We didn’t think traders could get any more speculative than they were at the end of August,” the caption on the chart (below) reads. “We were wrong. For the first time, small trader call buying (adjusted for equivalent shares) exceeded 9% of total NYSE volume last week.”
Naturally, Edwards places the blame solely with the Fed. And I can’t say he’s wrong.
But my message is simple: Whoever you want to blame, the inescapable conclusion one comes to is that the farce seen in the shares of names targeted by the Reddit crowd isn’t sustainable. The bottom will likely fall out for some (if not all) of those names eventually. I haven’t been more sure of anything (or anything related to markets, anyway) in quite some time.
The question is what happens next.
“One of the surest signs that a bubble is close to bursting is when the retail investor piles in with leverage, and if the retail warrior millennial mob are angry now, wait until they lose their shirts in any market collapse,” Edwards said Thursday.
I suppose I’d just say one last thing. Life ain’t fair, folks. So, it’s possible that the Fed will eventually be compelled to say something about what are now clearly pockets of speculative excess. If that were to end up pulling the rug from beneath the broader market, the same Fed would doubtlessly move to assuage everyone in order to prevent financial conditions from tightening. But what they won’t do is make anyone whole for catastrophic losses in GameStop or Express or [fill the blank].
This is a rigged system. And the Reddit crowd would do well to remember that all successful “coups” notwithstanding, it’s not rigged for them.
So, for those who are truly up big (and not just saying so or posting doctored account statements to “prove” it), one strategy may be to take the money and run.
Corporate raiders do it all the time.
With so much information available through the internet regarding investment research, trading, SEC filings, etc.- the trend toward self management of personal investments and away from money managers will continue and this has to be threatening to the “old school” money managers.
I don’t see r/wsb as the Fed’s doing. The Fed didn’t create social media, Robinhood, zero commissions, delta hedging, gamma, gamer-bros, sports bettors, pandemic stay at home, stimulus checks, mob psychology, profit motive, etc. Short squeezes are as old as shorts. What difference does the Fed’s balance sheet or Fed funds make to the r/wsb crowd?
One could argue that the Fed has contributed to wealth inequality which has contributed to populism and that r/wsb is populist, but that’s pretty thin causation.
Any system that can be gamed, will be gamed. Online communities are an effective way to have massive multiplayer games in imaginary space worlds, so why not with stocks? A stock is much like an imaginary space ship – pixels on a screen, just with better in-game rewards.
Too bad for the hedge funds who were caught short – use better risk control next time. Too bad for the retail traders who will be a day late/dollar short – think of it as a trip to Vegas that didn’t work out.
When/if the stability of the financial “system” is threatened, the game will be shut down. Which can be done pretty easily, brokers are already restricting options on GME AMC to closing transactions only. Exchanges can halt the stocks through option expiry, dealers can jack premia to the moon, new option issue creation can be frozen – the retail traders can’t do anything about it, any more than hedge funds had any recourse when short selling was halted back in 2008 (or was it 09?).
Mobs in markets and mobs in Washington. Not good.
Yeah apparently these apps are now banning all buy orders for any of these stocks. The reddit thread is closed. Message is pretty clear. This is OUR casino and we win, not you. Those are the rules.
Of course that begs the question… is this perhaps too brazen an announcement that there two distinct classes and the transition from one to another is not generally allowed. What exactly do people do when the illusions that provide the cohesion civil society requires are shot in the street in broad daylight? I am guessing the answer is unpleasant.
So you can short up to 140% of the outstanding shares but not allowed to buy the stock?
I cannot claim to know the law. However, depending upon the exact messaging on WSB, it could be a case of conspiracy to manipulate markets. Conspiracies are not protected by freedom of speech. Conspiring in a public forum does not make it legal. It does make it easier to prove.
Could not be any more egregious than some of the stuff that Citron has published.
Egregiousness and populist outrage is beside the point. This is a question of legality. Forming a conspiracy to manipulate a market I believe is illegal. Publishing reports saying I think this company is doomed is not.
Perhaps someone with greater direct knowledge can offer a more knowledge can provide a better understanding, but that is my understanding.
The question of a conspiracy is why the exact language / phrasing used by the WSB folks is key.
pretty much.
I think calh0025s comment is right on target.
Personally I did not expect this move to be that brazen.
This is what, one or two hedge funds which are deep in the red, because they chose (!) to short a small cap stock at 4 or 5 $ ?
Talk about about bad business decisions and non-existent risk control.
It’s not like the financial system at large is at risk, because daytraders on Reddit make some money (or even a lot in some cases) from GME.
Actually, as H and Nomura’s McElligott pointed out, these retail investors, by being coordinated, became a risk to the broader market.
We can debate the extent and we can debate the reaction but, IMO, it wasn’t “we are powerful and so we stamp on those ants”. Unless someone shows me Citron and Malvin calling the SEC for action and Citadel leaning on RH, and the SEC reacting, I am not convinced we need conspiracies to explain what we would probably have done, had we been the authority.
Do you want to be the guy who allowed half a million young men to blow themselves up on penny stocks? And threaten the wider market and the FED and Treasury efforts to stabilize the economy in the meantime?
Well regulation is a form of monetary policy- one which has been forgotten too many times. As far as a mob driving up a stock against shorts- brokerage firms are not completely out of bounds placing some restrictions on small retail traders. You know that some retail longs are already getting burned on these. Hedge funds are going to be a lot more careful shorting in any kind of size illiquid stocks at low prices. And it would not surprise me if they shorted some of them just before reporting time, closed out the position shortly after, watch the REDDIT crowd pile in and then short in their face. Interest rate and balance sheet policy of central banks should not be driven by market speculators although they should be congnizant of what is going on as an indicator of too much or too little liquidity and the tradeoffs involved. What is happening given the fullness of time and more proactive financial regulation is a better solution than monetary policy.
Central Bankers keep adding to their endless list of unexpected consquences.
So unexpected.
Perhaps it’s just coincidence, but the timing of these speculative excess periods line up pretty well with the Treasury issuance of stimulus checks. Perhaps the extra money is fueling the YOLO (You Only Live Once) trading speculation
The system is looking down the barrel of a populist revulsion (Word choice here).. That fact in itself does not bother me after all the system has been in literally constant abuse over decades using the same methodology that now makes it cry Wolf. Naked shorts in Gold , the Hunt bros. and their Silver debacles , any number of Hedge Fund coups over the years.. Not to mention the general attitude on Wall Street and Government of Privatizing profits and Socializing losses has yielded to what we see here today with WSB.. The Fed are throwing Hail Mary passes and will continue .. If the Trump saga told us one thing it was that the populace is tired of double standards and now the Tree (Empire ) shakes as it loses a few branches .Will the sap run out the wounds to defend the system or to heal the damage and that is the question?
Well, the shirts are lost, but in a bad way. If the reddit bubbles simply collapsed on their own, valuable lessons would have been learned by the kids. But because robinhood and IB effectively destroyed the kids’ positions out of the blue, without warning, without recourse, presumably with the SEC and who knows who else behind it, the lesson instead is a hard reinforcement that government and establishment conspire to screw the little guy while protecting large market players.
How badly judged was this move? Robinhood is looking at basically their entire customer base shifting accounts en masse. They apparently had IPO plans (you can forget that), and the political reaction against this move is so one-sided that ACO tweeted her revulsion and Ted Cruz responded that he agreed completely.
They could have let the peasants tire themselves out (or win!). Instead the peasant rebellion was crushed in a way that will simply reinforce that the ancien regime in Wall Street/DC is the true enemy no matter which party is in charge. No good will come of that.
The SEC will likely say all this was done to protect the kids; the post-truth world is clearly still with us.
And I bet Reg SHO will live on unmodified.
@uptownguy. You are exactly correct. They should have let the fire burn out naturally. With the external actions the brokers have taken this is going to be spun into another episode of the elites crushing average Joe. Not a good thing to have done with faith in institutions at low point. Somebody would have had to eventually hold the GME bag but IB and others now forced them to hold it.
Episodes like this can also teach the quants a valuable lesson. As much as they want to believe that markets are wholly mathematical equations this forces them to remember that there is a human and human psychology element also. I think they will remember this now that they have been gamestonked.
Gamestonked, I like that!
Follow the money and get better acuity of truth. Populism my ass.