Revenge Of The Excluded: The Biggest Short Squeeze In History

“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.”

Yes, indeed.

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.


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10 thoughts on “Revenge Of The Excluded: The Biggest Short Squeeze In History

  1. I took a look at the reddit/wsb pages.

    Plenty of account screenshots could be doctored of course but some of the starting stakes are in the 10s of thousands dollars. Now, if you can put $50K on RH, I’ve got a hard time calling you ‘poor’.

    BUT… you might be over-educated and under-employed.

    The language used is definitely reminiscent of other instances where mostly white, mostly male mostly young, mostly urbanites but nonetheless feeling deprived/excluded from The American Dream (TM) have protested. The politics of it might be less than straightforward i.e. you can have altt-right guys in there (in the original sense ie guys faking conservatism or neoreactionary belief to get a rise out of liberals as well as the newer sense ie when those guys eventually lost some of the irony and started believing in that stuff) as well as Bernie Bros – both united in the rejection of the status quo and their nihilistic approach to “politics”.

    That’s how you get to 1,800% return and scream “MORE! HODL THE LINE! WE GOT THEM BY THE SHORTS” (pun intended, i imagine)

  2. Ray Dalio is speaking out about the anger lurking just beneath the surface and the pleasure derived from inflicting pain upon “the other side”. We saw that earlier this month in reaction to the capitol riots…we are seeing it now in the markets. Ray himself has to be a little uneasy given where he resides in the strata of life.

    Go on WSB right now and see the anger directed at Steve Cohen. Andrew Left has already capitulated. This is both good and bad…change is needed.

    1. Change is so needed. It’s so needed across many different arenas of our social, economic, and political, systems.

      The different groups of elites love stasis. They love it when they are on top and things don’t change. They love a divided US Senate after rules are put in place that they benefit from. They must love this plague.

      They fear most the dirty people who never made it, because they are losers, if you believe some in at least one group of elites, organizing around the platform that the real problem is the people in charge.

      People have been purposefully divided, to fight amongst ourselves. (So duh!) This strategy is always deployed and is immensely successful, even more so now that Daniel Kahneman’s ideas escaped from the lab.

      We could be in for a few years of drama. Blue chips and dividend aristocrats seem like a good place to plop down a chunk for the show. With another chunk long volatility. Of course, gold is just a hunk of metal, with an infinite supply just below the lithosphere, with no role as insurance in one’s portfolio, so that’s out.

  3. Turchin. I’ve been thinking about Turchin’s thesis and the over production of elites. 30-somethings with a CFA and a few years of experience.

    This is a different demographic from “Deaths of Despair.” I’m thinking more like the Steve Bannon’s, cast out by the elites because there is no more room at the top, then turning on them, with the aim of undermining them and tearing the whole thing down.

    Silver is one of the exposed underbellies of the screwed up financial system that has screwed over so many people the last 40 years. The WSB strategy looks pretty good to me; but, I’m just a schmuck in the back row of the balcony who brings in my own PBR for the show.

    Go on and go forward on silver, WSB. The volatility will be amazing to watch. Can’t wait to read the Heisenberg Report articles on what is sure to be a period of high drama.

    Bring it on, WSB, use silver. So, a systematically important institution like JPM loses tens of billions. So what. Screw ’em and all the other skimmers and takers on Wall Street who do not add to the productive capacity of our nation’s economy.

    1. Was just out on WSB…they call themselves “degenerates”! hahaha ‘nuf said. 7M “degenerates” are joiners of the Reddit sub.

      Go ahead, Wall Street, speak out against America degenerates. And the SEC, just a matter of time before they clamp down on the stock trading freedoms of American degenerates.

      Can’t wait to hear elite-membership cardholder J. Dimon denounce a group of American degenerates during an invited lunch at a Midtown athletic club after his systematically important financial institution loses tens of billions.

      (meme inserted here of anonymous guy eating popcorn)

      1. Let’s not turn Heisenberg Report into a Reddit forum.

        I appreciate the enthusiasm, but please remember that I don’t, in any way, shape, or form, condone anything to do with populism as it’s manifested over the past four years across western economies.

        Steve Bannon, for example, is a cancer on society.

        This site is a place for intelligent debate around markets, politics, and socioeconomic issues.

        It is NOT a Reddit thread.

        The tone of comments should not (and will not) reflect a Reddit thread.

        Nor does this site condone any kind of rhetoric about “bringing the whole thing down.”

        I just want to make that clear so there’s no confusion — especially for new subscribers and/or new readers.

    2. LOL. Brilliant observation, hadn’t thought about this segment of the population before. Hits a bit close to home. You (or this fellow Turchin) are definitely on to something. Thanks for the chuckle… and reminder to go buy some SLV.

  4. It feels as though we live in a time when people want to test the limits of everything: finance/politics/whatever. certain that they “know” things ‘cos they read it online and they found others who “know” the same “facts” This overconfidence is what brings them to gamble money they shouldn’t, or to do mad stuff like attacking the capitol, safe in the knowledge that the mob is always wiser than everyone else. The internet never came with instructions: facts and maths and logic always ruin a good story, common sense is not that common and he who shouts the loudest is surely the wisest, and we must follow .
    Despite all I read I cannot make any predictions about the future, for I can scarcely understand the present. I have read many of the comments on wsb about gme, the gist of it is if hodor can (something about diamonds)…….something,something, something……robinhood(boo)…then they’ll all get Teslas and swimming pools…….and oh yes evil hedge funds …yes them too.And amongst all the poor grammer and unfinished logic it is hard to avoid the anger and rage they feel, and how if they could win just this once the world would be a better place…….and they might have enough time to put their winnings on that nice chestnut mare in the third and stick it to the bookies as well

  5. Hard for me to imagine there are not a lot of hedge funds that don’t now have some lurkers on WSB and Reddit. Staying ahead of this game could be fruitful if one catches the next wave w/o getting thrashed, but it seems to me the pros would be all over sucking the money out of any future moves. Am I missing something?

  6. Concur–HFs are more than likely scanning reddit, building models that scan for surges of momentum spikes in illiquid stocks that have relatively high short interest. They are co-conspirators, it is naive not to think so.

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