General Roaring Kitty And The Road Back To Reality

I’m already laughing. It’s hard not to. Each and every time I set about writing an introductory sentence (or two or three) that mentions GameStop, the chuckling starts before my fingers even touch the keys.

To let some folks tell it, the story of a short squeeze in shares of a beaten down, left-for-dead chain of pseudo-pawnshops belongs in the history books right next to Waterloo and the Battle of Normandy.

One day, apparently, we’ll have wreath-laying ceremonies. Markets across the US will be closed on the final week of January. Traders will be obliged to make pilgrimages to former GameStop locations, where they’ll stand in silent prayer, not just to honor the fallen chain, but to remember the week it made one last valiant attempt to rage against the dying of the light, aided by a brave militia of Redditors led by General “Roaring Kitty.”

Oddly enough, some analysts aren’t sure that’s the way the future will look. And neither am I. As discussed here last week, it’s time to move on, folks. It really is. The obsession is unhealthy, especially to the extent you’re inclined to take some aspect of it personally.

Note that the market (broadly construed) is most assuredly over this, even if some individual market participants aren’t. The reflation narrative shoved the GameStop story off stage around halfway through last week.

It’s (probably) true that Reddit and Robinhood will continue to be topical, and the media will certainly do anything and everything to keep the story alive. It’s a click generator, after all. But it seems likely that WallStreetBets will be overrun by algos parsing the forum in a bid to give somebody, somewhere an informational edge. In addition, one imagines it’s already full of surrogates for funds of various sorts, looking to spot the same kind of fervor that may presage another “offensive” by the retail hordes (And please, journalists, learn the difference between “hordes” and “hoards.” They aren’t the same word.)

As for Robinhood, recent events have forced the platform’s users to come to terms with their place in the world. That likely wasn’t a comfortable realization. I’m not suggesting it’ll curb activity or discourage Robinhood’s users. But at the very least, it means they now have a more nuanced understanding of how the “free”-to-play casino works.

In any event, barring some kind of new manifestation of the GameStop phenomenon that morphs into something systemic by way of how ridiculously self-referential and fragile modern market structure is, this story will fade, although congressional hearings and regulatory scrutiny will make for some good headlines over the next few weeks.

That doesn’t mean retail investors don’t matter. They do. And nobody writing daily for public consumption has been more vocal about that than me. It’s not so much GameStop (itself) that matters, as much as it is the realization among the retail crowd that, in fact, they can shape reality by working in concert and exploiting some of the dynamics that drive market swings (e.g., dealer hedging flows).

Read more on retail’s rise: Candy Crush

So what does matter now? Well, the usual “stuff,” of course.

“January won’t mark the end of retail investors’ short-term influence on markets, and now is only the start of the regulatory response to those events,” JPMorgan’s John Normand said, before gently reminding everyone that “participation dynamics aren’t the big story for asset allocation this year.”

Instead, he wrote, “the meta narrative involves [three] components: A global growth pace that will probably accelerate to about twice its trend rate (6% forecast versus 3% trend); an earnings recovery that could beat even high expectations; and a continued drawdown of still-high cash positions into markets that still offer some (although not very high) risk premia.”

There’s nothing particularly profound about any of that, and indeed he likely wasn’t aiming at profundity. The whole point is that it’s time to get back to reality. The figures (below, from JPMorgan) illustrate the earnings backdrop and also the “dry powder” dynamic as it stands today versus what it looked like coming out of past economic downturns.

Note that depending on how Joe Biden ends up accommodating requests from some lawmakers that the parameters around additional direct stimulus payments be tweaked, the pile of deployable cash could rise.

That’s not to suggest that the majority of stimulus recipients are inclined to funnel their checks into equities. I’ve been adamant about steering clear of that suggestion given that I doubt its veracity, especially as it relates to the poorest Americans and demographics without access to many of the services widely available to the middle class. If you’re underbanked and lack reliable high-speed internet access, the process for converting a paper check from Treasury into shares of GameStop is cumbersome, to say the least.

That said, it’s almost by definition true that people higher up the income ladder, who have recovered their jobs, might well be inclined to invest a stimulus check they don’t need. Indeed, assuming you don’t have any high-interest debt that needs paying off, there’s an argument to be made that not depositing a stimulus check in an index fund is a poor use of free money. And that speaks directly to Normand’s other point, which is simply a reiteration of the “TINA” argument.

“In equities, the risk premia isn’t in absolute valuations, because forward P/Es are above their long-term average for every large DM and EM market but Japan and South Africa,” he wrote. “It’s in relative valuations given that the earnings yield is still some 100bp above its long-run average relative to real bond yields.”

So, those are your dynamics to watch going forward. Or at least, those are the dynamics you should be watching going forward.

Unfortunately, it seems likely that too many market participants will spend an inordinate amount of their days staring at a GameStop chart. Oh well. At least it’s better than “finance Twitter” where, if you believe the bios, everyone is either a millionaire, a portfolio manager, a hedge fund analyst, a STIR trader or, more unlikely, some combination of all those things.