The Grand Awakening: Main Street takes on Wall Street and wins Round One
The strange world we live in got a whole lot stranger in January 2021.
Much has been written about the Robinhood phenomenon, and CEO Vlad Tenev’s plan to democratise investing. It’s being replicated all over the world, as small investors chase stocks, sometimes to unimaginably lofty heights.
(To show our true colours, we’re 100% in favour of democratising investment – but we’re betting many of today’s punters have never experienced a market crash, and don’t think about valuation fundamentals at all).
What has been driving the phenomenon?
An unusual confluence of events has spawned what we’re seeing:
· the emergence and influence of a new, tech-savvy generation;
· the COVID-19 pandemic, locking people in their homes;
· super-low interest rates, with Governments showering citizens with helicopter money;
· consumers awash with cash, with fewer outlets to spend their money on;
· money flows finding their way into new things, including stock trading;
· the rise, rise and rise of very user-friendly Internet trading and investment platforms; and
· political and social unrest in the US and around the world.
Against that backdrop, a group of young traders decided to undertake the financial markets equivalent of storming the Bastille, taking on giant hedge funds. And won Round One.
The Gamestop Saga - What happened?
WallStreetBets, apparently comprising millions of young amateur investors, observed that Gamestop, the ailing multi-channel video game retailer, was the subject of massive shorts, and teamed up to attack the hedge funds. Was the motivation to flip the bird at Wall St and extend a lifeline to Gamestop, or to attack Wall St? Or was it simply a pump and dump scheme on a grand, tech-enabled scale?
Attack they did. WallStreetBets’ small traders put GameStop into orbit, moving its stock price to around $400 a share. The theory underlying this “short squeeze” was that the hedge funds who had sold the stock short would need to buy on market to cover their short positions. And how it worked! Melvin Capital Management needed to secure a $2.75 billion emergency cash infusion to keep operating, and another, Citron Research closed out its GameStop position. (Within a few hours of writing this article, predictably - the Gamestop share price halved).
This play had a huge effect on that doyen of Main Street, Robinhood, which restricted trading in Gamestop (its customers promptly launched class actions) as it ran short of liquidity and needed to raise capital urgently. In the flash of an eye, Robinhood went from everyone’s favourite to everyone’s punching bag. Even politicians got in on the act. Click through here to Under the Hood, the company’s letter to customers, explaining what happened. (According to Reuters, Robinhood has actually raised around US$3.4bn).
The interconnectedness of all of this is quite stunning. In New Zealand - about as far from Wall St as you can get - around 10% of all trades by value on the Sharesies platform in the last two weeks of January were in GameStop shares, with around 9,000 users making $20 million of trades with a median value per trade of US$180.
Who’s behind this?
Jaime Rogozinski, the architect of WallStreetBets, has claimed ownership:
“What’s being accomplished now is what Occupy Wall Street tried and failed to do - a power shift, a shift in some control from Wall Street to Main Street.”
At least one commentator theorises that the Reddit generation came of age during a financial crisis, seeing the financial system as rigged to increase the wealth of the wealthy, and sought comeuppance.
Forbes believes the GameStop squeeze took on an almost mythic quality, a battle of David versus Goliath, with money being used as a political statement. That politicians from both sides of the divide stepped in to criticise Robinhood has added a new twist to an already colourful story.
Others like Justin Pyvis from EconByte think this was a pump and dump scheme, pure and simple, where “retail investors … pile into … cheap, high-risk stocks with the aim of turning a quick, large profit. It's basically the internet's home of pump and dumps where the more people they can convince to buy a stock, the higher the price goes, and the more money (some) people stand to make”.
Then there’s the Wall St versus Silicon Valley angle. The New York Times describes Robinhood as “a cultural phenomenon and a Silicon Valley darling” with its promise to wrest the stock market away from Wall Street’s traditional gatekeepers and “let the people trade” - making it as easy to put millions of dollars at risk as it is to summon an Uber”. To hear Elon Musk interviewing Vlad Tenev on Clubhouse, challenging Robinhood’s decision to curb trading in Gamestop as well as discussing other “meme” stocks, added a layer of bizarre onto an already heavy dose of surreal.
Whichever way you look at it, the Gamestop story has many complex parts. The bit that cannot be doubted is that a technology-fueled crowd movement mobilised huge amounts of capital to pump a stock and smash some hedge funds. With it, they nearly took down the app that enabled most of the trades. Whether the motivation was to serve up the hedge funds a dose of their own medicine, or a Jordan Belfort-style pump and dump scheme, it has now become highly politicised.
Gamestop, set and match: what happens now?
The genie is out of the bottle. That investors could strategise and mobilise on a platform like Reddit and effect such phenomenal money flows with lightning speed sends a clear message: things have changed. One financial markets commentator calls it “the Grand Awakening.”
As Brad Sital from NZS Capital tells us, the democratization of asset ownership enabled by new technologies is just getting started. We are “in a world that has increasingly split into two economies – one where people own and benefit from appreciating assets, and one where people rent assets for higher and higher fees from the people who own assets…any way we can democratize asset ownership – whether it’s stocks, collectables, real estate, or access to private company profits – will help redress inequality long term”.
Our view is there will be consequences. The regulators are already having a good look at the Gamestop saga. If the trading platforms allow it, this will by no means be the last large scale pump and dump. The mania will extend to other heavily shorted stocks, both in and beyond the USA. It’s hard to conceive there won’t be some sort of regulatory outcome.
Meanwhile, some investors have made insane profits from this trade. Those “last in” have no doubt lost money (within 12 hours of writing this article, the Gamestop share price halved). It may be unfashionable to say it aloud, but here’s the thing: irrational exuberance usually precedes some form of market correction. Especially when small investors tell you “this time it’s different”. When the downturn eventually comes, this generation’s thundering herd will retreat for a while to nurture their battle scars. We just don’t know when that will be.
For now, people power is here, and whatever happens next, market participants must take the power of the crowd into account.
Roger Sharp - Founder - North Ridge Partners
New Zealand, February 2021