Highlight / February 13, 2021

What On Earth Happened With Gamestop?

When was the last time you made twenty times your money in two weeks?

That’s what happened to some intrepid retail investors from the internet who took on Wall Street hedge funds in a brief but epic clash that sent waves throughout the financial world.

In the end (as shares drop back to sane levels) the GME short squeeze was just as much about a political mood as much as it was about a shift in the financial landscape. But make no mistake – it’s a sign of things to come.

Something had to give 

 

With the financial sector recording record profits during a time when the average person’s finances have suffered due to lockdowns and quarentines, it’s not hard to understand why retail investors might have held some negative feelings towards Wall Street. But not many expected the flash fire to begin with an ailing brick-and-mortar video game retailer.

GameStop ($GME) wasn’t expected to turn a profit until 2023. And yet, the frustrated masses sent GME soaring from under $20 per share to over $350 at its peak. It’s a meteoric rise that’s left hedge funds hurting and onlookers bewildered.

How could a group of juvenile traders with little knowledge of the markets ruffle the feathers of hedge fund billionaires? And why GameStop?

Big moves in $GME

To strike back against the disconnect between Wall Street and Main Street, a trading forum on Reddit with more than 6.2 million members called r/WallStreetBets hatched a simple yet effective plan.

The online horde found the most shorted equity positions in the market, then bought as many shares as possible. Their collective action drove up the stock’s price and devastated hedge funds that had heavy short positions. The most net-shorted stock of all happened to be GME. 

In January 2021, short interest in GME was 139.67% of the float, over double that of any stock in the Russell 3000. With that, r/WallStreetBets had locked its target.

It was a short squeeze that will go down in history, and is likely a precedent for more crowdsourced market action in the future.

And it wasn’t entirely a stick-it-to-the-man narrative, at least not early on. A look into the r/WallStreetBets subreddit reveals that many believed GME was in fact undervalued:

Not everyone invested in Gamestop just for the memes.

With GME’s price falling and profits collapsing for years, the stock had become a reliable money-maker for short positions, but speculators may have undervalued the company’s cash reserves.

Not to mention famous investor Michael Burry announced that he was long GME shares.

Either way, the after-effects of this orchestrated move on GME shorters shook the financial markets, and it became more of an ideological response than one based on sound investment analysis.

The r/wallstreetbets attack had two crucial effects on hedge funds with short positions: 

Firstly, as the stock prices continued to move up, hedge funds with short positions lost money hand over fist. That’s the opposite of what hedge funds are supposed to do. 

Second, these losses eventually forced funds to cover their shorts. Short covering entails purchasing the stock to limit further losses. By extension, hedge funds covering losses strengthened GME’s explosive move upward. 

The situation quickly devolved into a negative feedback loop for hedge funds and a very positive feedback loop for small-time retail traders who bought GME early.

A 1650% increase in a week is anything but ordinary for the stock market. Moves like this may occasionally happen in thinly traded penny stocks, but the same level of volatility is unheard of for stocks with volumes as high as GME’s. 

The last week of January seemed like a dream for many retail day traders – they were finally able to band together and beat Wall Street at their own game. 

Many heralded the move as a more coordinated and successful version of the Occupy Wall Street movement, or “Occupy Wall Street, but with teeth.”

The GME fiasco reveals more than just the true power of memes in the modern age – it exposed a systemic vulnerability in the way Wall Street works. 

Protecting the Hedge Funds

 

In their minds, the retail broker-dealers quickly curbed what they saw as unacceptable volatility levels. But trading platforms – and many in government, finance, and media – were quick to label these ambitious upstarts as dangerous, with some news stations even going so far as to associate them with the recent fiasco at the Capitol. 

Although its difficult to see how trading stocks might make someone a terrorist, it didn’t take long for trading platforms to intervene on behalf of the hedge funds. Retail trading app Robinhood was the first platform to fully restrict the trading of GME, $AMC, and other stocks targeted by Redditors. 

It would be an understatement to say these actions only upset retail traders. Small-time traders finally felt like they found a way to not only stick it to Wall Street, but make money while doing so.

Elon Musk seemed happy to add fuel to the fire by tweeting. 

A series of class-action lawsuits and account closures followed, prompting Robinhood to rethink the decision. Trading of shares was resumed but severely restricted, with GME trading throttled to a limit of two shares.

The new restrictions severely stalled the upward momentum of stocks targeted by Redditors. GME plummeted 60% on Tuesday, February 2nd, and shows no signs of stopping its retreat. It’s hard to fight back when your broker-dealer binds your hands.

Robinhood drew the ire of many by forcibly closing out the positions of traders at a lower value than the listed market price, leading many to demand legal action against the platform.

Michael Burry initially stood up for the r/WallStreetBets crowd, though he’s been a major beneficiary of the GME short squeeze. Not entirely biased, he’s called the Wall Street Bets fervor “unnatural, insane, and dangerous.” (Business Insider)

A new generation of speculators finds a new target 

 

The public was certainly incensed over the apparent favoritism of government towards Wall Street. Many retail traders turned to more accessible markets to take a jab at the establishment and rake in more risky profits. The meme-based cryptocurrency Dogecoin soared by a massive 550%, before giving up the majority of its gains.

Physical silver price per ounce, YTD. Silver could be another weak point for Redditors to target. (Monex)

Physical silver has become the new poster child for the Reddit crowd. The world’s largest silver ETF, $SLV, and physical silver prices have entirely decoupled from one another. 

And that’s despite global concerns over recession, ongoing Covid-19 issues, income inequality sparking GME-style market events, widespread  inflation, and a burgeoning commodities boom.

Physical premiums for silver are now over 60% of the price of $SLV, highlighting the voracious demand for tangible versions of the precious metal.

The GME saga may be coming to a close, but the Redditors’ risk appetite is not yet satisfied. Hard assets are emerging as the largest beneficiaries of the retail revolt, which shows no signs of slowing down any time soon. 

With the internet crowd figuring out how to speculate on options and complex new synthetic assets like cryptocurrencies, their reach will likely spread into other unexpected areas of the market.

Whichever way this chapter in modern markets may end, this internet vs. Wall Street story is only the beginning. 

You know what’s hard for hedge funds to short, and even harder for cynical Redditors to buy?

 

Disdain for Wall Street big shots is nothing new. But the Gamestop fiasco is something we haven’t seen before – a collective and deliberate action designed to inflict pain on the financial system. Markets are vulnerable enough when left to their own devices, and we’re entering uncharted territory now that people are actively trying to damage them.

With all this taken into consideration, it’s understandable that so many investors are looking seriously into more diversified asset classes. In fact, our recent investor survey listed diversification as the top investment priority of our network in 2021. If you want to park your wealth in a non-correlated, high-yielding asset class, look into farmland in emerging markets. It’s quite possibly one of the best hedges on Earth against all the madness and volatility plaguing publicly traded markets. 

Make no mistake – the goal of these cunning but cynical Reddit traders is to make the system bleed. And unless you want your wealth to bleed along with it, it might be time to look for assets that are more secure.

[ Farmland Or Gold? The Great Debate ]

 

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