The Weirdest is Yet to Come
It’s roughly 6 AM on a Monday, February first, Pacific time [day of the original writing]. Markets are about to open. The last couple weeks we have seen a shoot show of stonk trading fueled by retail investors that came together in an online forum on Reddit. We saw hedge funds lose billions from short selling a business, Gamestop, that has become a meme of itself and sky rocketed in share price. We’ve seen AMC (movie theater) and BB (Blackberry) rise as well. Then, we saw the banning of trading of these stocks on multiple platforms.
Traditionally, the game being played in the stock market is betting on which companies will be more profitable in the future than they are today. Gamestop, a retail video game seller, seemed like it would be less profitable in the future based on businesses being closed (Coivd), games being downloadable (no need for a store), and limited availability of game consoles. Thinking they were acting rationally, a big hedge fund took out a large position against GME.
A stranger on the internet discovered that Melvin Capital had taken out a gigantic best against Gamestop (shorting it). As millions of people became aware, they invested in GME. They bought stocks and long calls, betting the stock would go up. They bid the price to over $450 at one point (from about $4 a year ago). Say what you will about all this, but take a minute to think about what happens next.
The game being played in the stock market is no longer about what companies could turn your money into more money (or even guesstimating where other rational actors would put their money). It’s a full on casino. The rules have gone out the door and everyone knows it now. Millions of people can now connect in online forums and drive the price of anything to astronomical heights. They can do it with memes, emojis, tweets and a ton of self deprecating humor. SEC filings, S-10s and Form 10Ks, are traditionally where public company financial information is shared. They’re terrible documents to read. Redditors have gone with a simpler message, “we like the stock.”
Where do we go form here? If someone changes the rules in the middle of the game (e.g. blocking trades), you can’t even hope to play a fair game. Hedge funds and trading platforms have effectively said “I’m taking my ball and I’m going home.”
There is certainly some weird stuff going on, but the weirdest is yet to come. The power of memes and massive online forums that have an “us vs them” narrative will have endless consequences for ever. The rules we think exist will all start to change.
