I’ve been bemused, bewildered and somewhat baffled by the tidal wave of over-excited, breathless and politicised hysteria surrounding GameStop and other companies sucked into the short-squeeze saga. Much of the chatter has revolved around notions of who controls market flow and the lack of visibility around that; whether control is as one-sided as many make out; and whether regulators can actually do anything to ensure markets are fair.
In Europe, the issue of who controls capital markets has been a particularly topical issue for some considerable time. Debt and equity markets are supposed to be where capital finds a clearing price that represents a reasonable proposition for those who need it and a fair return for those who supply it.
The GameStop story is partially about the dark workings both of hedge funds and social media platforms. But in many respects the bigger story in Europe is how control of the price-discovery mechanism in public debt markets has been usurped not by hedge funds or mass movements but by governments. Pricing in both primary and secondary debt markets has become so twisted and distorted by central banks as consequences of monetary policy that the market’s basic function as a forum of fair exchange has been lost.
And if government actions have rampantly driven up asset prices, undermined returns and destroyed the risk-return balance, governments are now setting out to raise massive amounts of capital through those same markets at the ultra-low to negative yields they’ve created to pay for the very monetary and fiscal policies that caused the distortion in the first place.
If that argues in favour of ditching incipient moves in Europe to better balance between securities and banking markets to fund the economy, and swinging back to having the banking sector as the predominant distributor of capital to the real economy, think again.
European banking is also dealing with official control moves. Having governments force banks to withhold dividends and halt capital distributions, telling banks to (sort of) ignore loss modelling, drowning them in cheap taxpayer money and putting taxpayers on the hook in loss-sharing lending schemes, then brow-beating banks to continue lending to targeted demographics in economies in deep recession has all but removed the sector’s room for manoeuvre. Some say the banking sector has been turned into a utility tool of state. And it’s happened without any real pushback.
By contrast, the GameStop story was driven by mass hysteria around what some claim is comeuppance for the ‘evil overlords’, a.k.a., hedge funds and Wall Street; around the supposed power of social media to force democratisation of access to investment; around millennials and the dispossessed rising up to flatten a stacked playing field; around the power of populist movements to change the world …
In the real world, I had a short conversation about GameStop with a classic millennial (i.e., working in the gig economy; fully embedded in the digital life experience). He was aware of the trading frenzy but largely indifferent to it. He told me that everyone he knew was familiar with GameStop, merely considering it a bricks-and-mortar retailer that had lost its way as the gaming experience had moved online.
No need for a research report written by a team of Ivy League PhDs there! Shorting the stock as a conviction trade is not really much of a leap for investors looking to play that narrative. Hedge funds personified may not be the cuddliest of individuals and some of the shorting tactics in this murky world can be on the dubious side. But from my neutral vantage point, there’s nothing intrinsically wrong in principle with shorting as a strategy.
If a company has a struggling business model, earnings are on a downward trajectory and people reckon the stock is over-valued, shorting can re-ignite a spark of realism and proper price discovery. That’s vital in today’s hyped-up bubble markets pumped by government actions.
At its high, GameStop’s stock price was 18,600% above its 52-week low. At its low on February 5, it was 89.5% below that high. So, what has this episode taught us exactly? Who knows? It was an unedifying spectacle with indeterminate meaning.
Joshua Mitts, an associate law professor at Columbia University, quoted in the UK press, doesn’t discount sophisticated investors having infiltrated social media platforms and engineered misinformation campaigns to dupe retail investors.
The hedge fund world does have its share of comic-book billionaires, but take a look at the asset allocation of asset owners the world over. Pension funds, insurance companies, sovereign wealth funds and endowments typically have a reasonable allocation to alternatives, including hedge fund strategies. There’s a long tail of consequence behind taking out hedge funds for sport, which is how a lot of people in those trades saw this – without even being aware of the potential consequences for ordinary people’s retirement income and wealth.
Hedge funds driving down the stock prices of targeted companies; social media mobs colluding to force hedge funds to take losses. You tell me what the difference is.
So, there you have it. A pseudo-war theatrically presented as David versus Goliath for wresting control of stock markets away from the mega-rich. Or the commandeering of capital markets by government forces with the accompanying threat that we should fight back at our peril. Take your pick.