“It was a placid week in the US stock market – provided one was a long-only mutual fund manager,” Goldman’s David Kostin joked on Friday evening,” “However, life was very different last week if one managed a hedge fund.”
On some measures, last week constituted the largest, most acute short squeeze in a quarter century. Over the past three months, for example, a basket of 50 Russell 3000 stocks with market caps above $1 billion and the largest short interest as a share of float, posted a near 100% gain (figure below). That, Kostin wrote, is better than the 77% return during the second quarter of last year, better than two similar rallies during the dot-com boom/bust, and far superior to a comparatively meager 56% surge as the bull market began to take root in 2009.
Kostin went on to note that “the basket’s trailing 5-, 10-, and 21-day returns registered as the largest on record.”
Besides being catalyzed by Reddit, this particular episode stands out for other reasons, Goldman said. For example, aggregate short interest is low. Coming into 2021, the median for S&P 500 stocks was just 1.5% of market cap. That was on par with levels seen two decades ago, during the dot-com days.
Of course, the main reason “this time was different” (so to speak) is that the squeeze was orchestrated by Reddit and a retail crowd that spent the last year learning about its capacity to engineer and shape outcomes. This latest manifestation should be viewed in the context of similarly coordinated efforts in 2020, when retail investors figured out how to effectively enlist dealers (forcibly) in their efforts to commandeer the price action. There were elements of that at play last week too.
As professional trader Kevin Muir wrote Friday, “the right-tail risk [was] greatly underestimated.” “This GameStop ‘infinity squeeze’ will be taught in finance courses for decades to come,” he added.
I’m not sure about that latter bit. When I checked in on curriculums in 2017, finance and economics courses at at least a couple of major state universities weren’t teaching students about quantitative easing, for example. A discussion with a professor in 2019 indicated that teaching students about negative policy rates was a non-starter, not because it’s counterintuitive, but because they (students) didn’t understand what policy rates were in the first place.
I think what Kevin meant is that last week’s events could make for compelling case studies — especially for, say, first-year grad students. When it comes to teaching undergrads, “success” for professors is if half the class vaguely understands CAPM by the end of the semester.
Now that I think about it, maybe that strikes at the heart of the issue.
From what I’ve observed, the Reddit crowd isn’t particularly adept at wielding the English language. That makes me suspect that at least some of those involved in this month’s dramatics might not have a college education. And that brings me to another supposition touched on by Rabobank’s Michael Every Friday: If this really was the week when populism commandeered the stock market, it could be because, “over 40 years we still haven’t seen any political action to reverse the collapse in US real wages that has led people to need to day-trade for a living.”
It doesn’t have to be day-trading. Uber-driving and other manifestations of the “gig economy” are amenable to the same analysis. Recall the following chart from “Painful Dynamics: Tragedy Of The Excluded“:
Those with no high school education own no stocks. The figure is less than 1%. Those with just a high school education (i.e., no four-year college degree) aren’t much better off in that regard. This wasn’t always the case. As the chart (above) shows, the figures for high school and no high school have fallen precipitously over the past three decades, albeit from low levels.
So, perhaps last week (and, to a certain extent, last year, when the Reddit crowd and Robinhood traders learned how to weaponize gamma, among other lessons) was “revenge of the excluded.” That is: A modification of the title I used for the linked post above, from January 3.
“One key difference between the typical short squeeze and the recent rally in heavily-shorted stocks is the degree of involvement of retail traders, who also appear to have catalyzed sharp moves in other parts of the market,” Goldman’s Kostin went on to say Friday evening, recapping the heavy outperformance of retail favorites versus both the S&P and the bank’s Hedge Fund VIP list of the most popular hedge fund long positions.
I suppose what I’d add, in closing, is that for all the talk of last week being about the “democratization” of markets and the triumph of those excluded from capitalism, I doubt seriously whether minorities were proportionally represented in this “coup” for “the people” against “Wall Street.”
Disparities in access to the internet and the fact that many young African Americans and Hispanics simply face an entirely different daily reality, which in some cases entails going to extreme lengths just to survive, probably means minority participation was low.
While the dynamics famously discussed by Anne Case and Angus Deaton in “Deaths of Despair” paint a picture of white despair, it’s most acute in middle-age. At the risk of spurious extrapolation that perhaps undercuts some of the points made above, I also doubt seriously whether the geographical composition of the Reddit day-trading crowd matches up with the areas of America hardest-hit by the dynamics often cited for the decline of the white middle-class.
Perhaps — just perhaps — what we witnessed last week was simply people “chasing [a] dopamine high,” as Bloomberg put it. Or, similarly, substituting speculation in stocks for a gambling habit or a drug addiction.
With all of those considerations in mind, the multi-sided, tragic irony for many minorities in America is that the concept of resorting to dangerous activities involving addicts in order to make a 400% return (GameStop’s weekly advance) due to a lack of viable economic opportunities is nothing new. As Shawn Carter put it,
Anywhere there’s oppression,
The drug profession flourishes like beverages, it’s refreshing,
Sweet taste of sin,
Everything I seen made me everything I am,
Bad drug dealer or a victim, I beg,
What came first? Moving chickens or the egg?,
This is why I be so fresh,
I’m trying to beat life ’cause I can’t cheat death,
Treat shame with shamelessness,
You know the game this is?
Move coke like Pepsi, doesn’t matter what the brand name is.