Talking Points
- Discontent farmers stormed Delhi's Red Fort on Republic Day
- Hundreds were arrested in anti-curfew protests in the Netherlands
- Similar unrest in Lebanon's Tripoli claimed its first victim
- Italy's Giuseppe Conte took a step backwards to go forwards
- The European Union and Britain tussled over vaccine access
- Facing Brexit roadblocks, lorries avoided UK ports
- 11 people were rescued from deep in a Shandong mine
- The last of Daniel Pearl's alleged murderers was released
- Biden's environmental orders curiously skipped over coal
- Tesla, Apple, and Facebook all beat earnings expectations
Deep Dive
Crass message boards, video-games, multi-billion-dollar losses, weaponised derivatives trading, and pure hubris. This story has it all.
The Big Short (Squeeze)
If you are an American of a certain generation there is every chance you'll look back on trips to GameSpot with great fondness. The drab ubiquity in suburban shopping malls and arcane trade-in policies could not dent the anticipation – nay, joy – of a new video-game. The analogue for movie-lovers of that same generation was the hallowed trip to Blockbuster. Nor do the parallels end there; like Blockbuster, GameSpot is outmoded. In the era of cloud-based gaming, what use is a chain with 5,509 bricks-and-mortar stores? The retailer, sensing mortal peril, has already begun the process of crossing the disruption divide by closing physical stores – 2,000 since 2018 – and building an ecommerce platform (notably with the help of Chewy founder Ryan Cohen).
But hedge fund investors don't necessarily share Cohen's confidence in changing the fortunes of Gamestop. Indeed many have been betting that GameStop is in a death spiral, by shorting the stock – borrowing shares from other GameStop investors to sell them now so that when (or if) the stock price drops, they can buy it back at a lower price, return it to the lender, and keep the change. Such bets are the province of ostensibly sophisticated hedge funds with the know-how and capital to manage the associated risks. Rather, they were. This is where the Reddit page r/WallStreetBets and its army of retail investors come in.
This online community is there for the whole spectrum of amateur traders (derided as 'dumb money' by professionals) to share insights, demystify the markets, and spruik their own brilliance. Armed with zero-commission trading platforms like Robinhood, these retail investors can go beyond simple share-trades and invest in the same sorts of options and derivatives as hedge funds. So when the infamously anti-authoritarian Reddit community discovered that Melvin Capital – run by no less than a protege of the billionaire manager Steve Cohen – held a significant short position against GameStop, it was a red flag to a bull. Even worse (in their view) the boss of Citron Research, another short seller, said that the beloved-if-ramshackle business was "pretty much in terminal decline". And with short positions exceeding 100% of GameStop's float, it was clear that Wall Street had made its pronouncement.
So r/WallStreetBets did what a competing hedge fund would do: they squeezed the short.
"We're going to the f****** moon"
They bought GameStop shares, shared memes, and in the typically crass language of Reddit, egged each other to participate. $GME climbed and climbed. By going long on GameStop's future (betting the share-price will rise), these retail investors were betting directly against the short-sellers. Whether it was to make a quick buck, or just to flip the finger at Wall Street, thousands piled on. In mid-January $GME exploded, soaring 1,700%. On one day alone the price doubled, which is what led one Redditor to send the exclamation quoted above in this section's title. Spurred on by populist billionaires Elon Musk and Chamath Palihapitiya, the Redditors poured in even more cash. The frenzy sparked a dangerous feedback loop for Melvin and Citron: the higher $GME rose, the more of it they had to buy to cover their short positions, and that in turn pushed the share price higher still.
This week both funds surrendered, exiting their positions and losing billions. Melvin suffered a $3.5b loss, prompting a humiliating emergency cash-injection from allied funds. The Citron manager who had rung the premature death knell for GameStop grumbled about being bullied and reported a 100% loss on the position.
Having faced down Wall Street and won, whither 'dumb money'? Despite dropping sharply late in the week, $GME is still up 1,000% since the start of the year. The company is clearly overvalued by a factor of 10; its stock price is completely unmoored from the reality of the business itself. But the trading volumes remains high. So high, in fact, that some financial analysts suspect that other hedge funds are using the cover of the Reddit storm to mess with short sellers. And even as some short sellers fold, others are (quietly) stepping in to take similar positions: ironically, as $GME reaches absurd heights, it's becoming an even more attractive stock to bet against than it previously was.
For the moment, r/WallStreetBets continues to obsess over GameStop, but its members are also now hunting for other short positions to blow up. The struggling cinema-chain AMC Entertainment Holdings this week saw trading volumes climb sharply, and was the beneficiary of a 300% price rise in a single day. So too was the pioneering mobile device-maker BlackBerry, which enjoyed a similarly unexpected rally. A report from Goldman Sachs posited that all 50 of the most-frequently-shorted stocks on the S&P 500 have outperformed the index this year.
Regulation unknown
You don't need a master's degree in Finance to see that there may be something not quite kosher about weaponising securities by artificially inflating stocks - regardless of whether it's to take down funds, or to enrich yourself. It's more likely than not that at some point this eddie will dissipate and $GME will revert to a more sensible price. When that happens, a lot of people (including some who didn't really understand what was going on) are going to lose a lot of money. So now it's up to the regulators to decide whom to protect.
The ethos (if not always the practice) of financial regulation has been to protect the most vulnerable participants from losses that larger players can wear. It's clear that although these amateur investors are using hedge fund tactics, they do not have hedge fund resources to buttress their positions. At the same time, what's happening online now is not all that dissimilar from the pump-and-dump schemes (read: securities fraud) of the 1990s. So, should the Securities and Exchange Commission be intervening to protect r/WallStreetBets from themselves? Doing so would also confer protection to the shorts. Or does buying into the big league mean these retail investors are waiving their protections? This is murky territory, with sharp rocks on all sides.
And what does this mean for the trading platforms themselves? Over the past 24 hours they have shown varying degrees of willingness to try and deter further manipulation of GameStop and AMC stocks. Robinhood is clearly keen to avoid creating a speculative bubble (and the inevitable lawsuits that will follow the pop). So it has placed restrictions to prevent users from increasing their positions in the ludicrously over-valued video-game store. The NASDAQ meanwhile is mulling a 30-day trading halt on $GME to allow the frenzy to subside – this has been responded to with venom on r/WallStreetBets (in language that is not fit to be republished). As the populist fervour drains away, the more savvy, and less scrupulous, members of the anonymous message board will no doubt exit their positions, even while (or precisely by) encouraging others to get in. No one wants to be left holding the can. But someone will. And it won't be hedge funds.
One could spend all day thinking about the regulatory is/ought gaps, or the dangers of high-risk financial products being made available to people with a lot to lose. But we'd rather leave you with this though: in a well-appointed office somewhere in Manhattan, or maybe in Connecticut, a group of astronomically-remunerated hedge fund managers are disconsolate about how they came undone by Redditors with names like PeeMartini and BootySenpai. And while they may well be able to withstand the financial loss, they're almost certainly going to be greeted at the next pool party with "hey, aren't you the guy who...?"
Some things simply can't be measured in money.
Worldlywise
The Games must go on
The president of the IOC (International Olympics Committee), Thomas Bach gave a rousing speech to his troops this week. He communicated absolute confidence that the Tokyo Games would go ahead in little under six months - because there is no 'Plan B'. Some officials on the call felt reassured that they were on "solid ground". Others were even more definitive: nothing will stop the Games .
The good vibes aren't just a decree from head office; a great many athletes have expressed a desire for the opportunity to taste glory in Japan. Bach said he was "moved" by their determination to overcome the challenges. No doubt he's also moved by the threat of a multi-billion-dollar hole in IOC coffers. Athletes and officials, marching shoulder to shoulder – what could possibly hold them back?
Apropos of something, let's check in on the host city. This week a panel of experts reporting to the Tokyo Metropolitan Government rated the city's health situation as 'severe'. While on an improving trajectory, the capital is recording a seven-day rolling average of over 1,000 new cases. This is still three times higher than at the peak of Tokyo's second wave. At the peak of the third wave, barely three weeks ago, Tokyo's hospital system was at risk of collapsing . The sprawling metropolis and multiple other prefectures remain under a state of emergency. While the spread has slowed in younger populations it is accelerating among those over 65. And worryingly, Tokyo has just recorded its first community-transmission case of the UK variant.
Which is why, as an average reasonably-minded individual might surmise, the residents of Tokyo are not too hot on the prospect of having 15,000 athletes and roughly twice that number of associated staff descending on them from every country on the planet in the middle of a pandemic . The problem with Olympics (as we've written about before) is that they tend to be all-circus-no-bread for the host city: the Games are an extraordinary impost (Tokyo is well over $15b) and there is usually little to show for it afterwards. Given that Bach has intimated that these particular Olympic games will either take place with drastically reduced crowds or behind closed doors , Tokyo may in fact be no-circus and no-bread.
A dacha of such awe
Alexei Navalny's decade-long campaign to cause the maximum grief to his president continues unabated from various sites of detention. The 44-year-old Russian dissident was whisked off to jail immediately after touching down in Moscow a fortnight ago, after having made a full recovery from a previous assassination attempt. The grounds of his arrest are fanciful even by Russian standards. The courts hold that Navalny broke the terms of his parole by travelling to Germany for medical treatment after being poisoned – almost undoubtedly by his own country's intelligence service. The European Court of Human Rights has already struck off the sentence he was being paroled from, but that minor detail hasn't stopped Putin's wheels of justice from making a beeline for Navalny's neck. He's facing a 3-and-a-half-year sentence, essentially for not dying when he was meant to.
This week Navalny used the brief limelight of a pre-trial hearing to launch a broadside at the government, the "demonstrative lawlessness" of the judiciary , and the antagonist of his life story: Vladimir Putin. Given his pluckiness you'd think that Russia has expended its entire stockpile of novichok – though we fear that's not the case. Alexei was clearly buoyed by the mass protests last weekend which saw 100,000 Russians demonstrating in dozens of cities. The mass protests against the treatment of political prisoners were met with waves of arrests on the day, and targeted raids against organisers . Amidst the drama, Navalny threw more red meat to his supporters: by revealing the location of Putin's sprawling summer palace .
The shockingly grandiose $1b holiday home on the Black Sea comes replete with a vineyard, skating rink, and casino for all of one's leisurely needs. Its construction was allegedly funded by Putin's inner circle. It is currently protected by state security services, and even has its own no-fly-zone.
The best of times
Peak performance
Scientists have produced two more northern white rhino embryos — giving an boost to conservation efforts. Only two of the species exist, meaning it is classified as functionally extinct. While both of them are females, neither is able to carry a calf to term by itself. Hence, scientists are looking to IVF to produce more of the mammal. IVF has never been used to create a rhino, but the collection and storage of the (now five) embryos means scientists have time to make it viable.
Europe culls coal
In 2020, renewables generated more of the European Union’s electricity than fossil fuels did. Of course, some of the rise came from the pandemic reducing energy demand, but solar and wind power continued growing as fossil fuels plateaued. Despite this, the EU still isn’t on track to reach its 2030 and 2050 climate targets — for reducing greenhouse gasses by 55% in the former, and climate neutrality by the latter. Still, there’s clearly wind in Europe’s sails.
The worst of times
Poland's near-total abortion ban
On Wednesday, Poland enacted a draconian abortion ban, months after it was first proposed. The new legislation means only rape, incest, or a risk to the mother’s health are reasons for a legal abortion. In October, the country saw its largest protests in decades following the ban’s introduction. Previously, demonstrations have forced withdrawals of similar legislation in 2016 and 2018. This time, the ban was passed via a tribunal — meaning it cannot be appealed . And so, women must either seek abortions illegally or abroad, or wait for a new government to overturn the ban.
New heat peaks
The planet is hotter now than it has been at any point in the past 12,000 years, new research found this week. More specifically, the study solved the ‘Holocene temperature conundrum’: climate models show rising temperatures, but temperature estimates suggest a warming peak 6,000 years ago. However, the estimates in question were found to be based on summer temperatures instead of (rising) annual averages. Which means, as one of the study’s authors said, we are in " completely uncharted territory ".
Weekend Reading
The image
The quote
“It is mandatory to reach zero deforestation in all of the Amazon in less than five years”.
– Carlos Nobre of the University of São Paulo reminds us that we are a few short years away from reaching a tipping point that could turn the world’s greatest rainforest into a savannah. 18% of the entire biome gone already. Meanwhile Brazil is proposing to cut its environmental protection budget in 2021.
The numbers
100 seconds
- The 'Doomsday Clock' remained stuck at 100 seconds til midnight in its annual update. Climate change has superseded nuclear annihilation which has everything to do with our species-wide death-wish and nothing to do with anti-proliferation efforts. Not long now!
67 senatorial votes
- The number it will take to find Donald Trump guilty in his second impeachment trial. It's becoming apparent that nowhere near the required number of Republican senators are on board with the prosecution team.
The headline
"Trump team hires two ex-prosecutors with ethics experience" – The Independent . In this context 'ethics experience' is shorthand for 'experience in avoiding ethics'.
The special mention
This bird , which has the entirety of this planet to choose from and decides to build its nest next to its number one predator. Surely this validates the idiom "the closer you are to danger, the farther you are from harm".
A few choice long-reads
- When we see the sublime we stop using our rational brains. Which is why we're so often fooled. Financial Times delves into the psychology of forgeries and self-denial.
- When forming your arch-nemesis from the putty of public opinion it makes sense to ensure you keep as many people on side as possible. The Economist on why Biden needs to keep Asia on side.
- After the great pandemics and crashes of the 1920s we got jazz and the modern economy. What will we get in the Roaring 2020s? Bloomberg Businessweek ponders the question of the decade.
Tom Wharton @trwinwriting
