Thoughts on GME (GameStop)

I did not expect I would be writing another GameStop (GME) post, but this is the biggest story in the news now, by far. It has enthralled the internet and punditry, especially social media, with an intensity that rivals even the Capitol Hill protests, the 2020 election, the inauguration of Biden, Covid, or any other major news story. It has even brought political foes together, such as Cruz and AOC, in mutual condemnation of ‘Robbinghood.’ I have never seen anything like this.. I thought the Capitol Hill protests was the closest thing yet to the ‘news singularity’ but this even possibly exceeds that. Many on the dissident/alt-right thought the 2020 election or Covid would be the breaking point, but GameStop and Robinhood? It is total bedlam and pandemonium on twitter now for the past 2 days. I am seeing tweets about Robinhood and GameStop get 10-30k likes within minutes by accounts that normally get maybe 1k likes per tweet, at most. A lot of people underestimated just how big of of a deal this is (or at least how important this is to so many people, that the intensity and backlash exceeds even that of the Covid lockdowns back in 2020).

The media consensus, and also by a lot of people online, is that GME is going to crash , yet it keeps going up, up 70% on Friday to a new record close above $300. The fact that GME keeps going up in spite of Robinhood restricting buys, goes to show how over and over the ‘media concusses’ tends to be wrong.

When everyone is convinced ‘X’ is going to happen, it tends to not happen, or at least not in the way it is expected by the consensus. Wall Street has a tendency of defying the ‘expert consensus.’

The media was certain Tesla would crash when after it doubled a year ago from $200 to $400, and then to $900, and then it did a 5-1 split, etc. Yes, it did crash 20% in August, but from a price that was so high that it was still considerably higher than it was last year when the pundits were warning of a bubble. So had you heeded those pundits warnings and sold, you would have still been way worse off.

Few foresaw the S&P 500 would surge 70% off the lows from Covid and make new highs by Fall. The pundit consensus what that that it would be a bad, drawn-out bear market, or a so-called “L-shaped” recovery. Moreover, few predicted that GDP and consumer spending and other metrics would recover so quickly in spite of so many virus deaths and so many people unemployed and businesses closed. This came as surprise to many, but not to me, and by applying my knowledge of HBD and economics, I was able to profit from this. Conversely, few foresaw the Covid crash in Feb-March.

Same for the post-Covid tech boom, which few foresaw too.

In 2018, the consensus by pundits, on either side of the spectrum, was that the Trump tariffs would severely hurt the US economy and or cause high inflation and a bunch of other problems. I correctly predicted nothing bad would happen. The stock market would go on to make new highs a year later, and in retrospect the much feared and hyped ‘trade war’ was more of a media-generated war than any actual relation on China’s part, and none of the bad stuff everyone was certain would happen, such as surging inflation or decreased consumer spending, actually happened.

The consensus in 2016-2017 was that Trump would be like a watered-down version of Hitler, but now we have gender fluidity and customizable personal pronouns, just as Hitler would have wanted. Same for all those failed predictions and fears of mass deportations under Trump.

The consensus was that the Covid stimulus would cause inflation, yet in spite of trillions in spending (and trillions more to come for the foreseeable future), CPI just refuses to budge above 2%. The bond market in mid-2020, by not falling, correctly foresaw that all this trillions in spending would not be inflationary. We can try to come up with an explanation for why this is or debate how sustainable this is, but the point is, the pundits were wrong.

I think GME has a lot more to run. Shorts will get squeezed and have to cover at higher and higher prices, as new shorts replace the dead ones and the graveyard piles up. Shorts should not expect a miracle or lifeline from the SEC or the Fed. The only way the SEC will intervene is if there is fraud on the part of GME management and halts trading of GME, which when it resumes trading falls 80% or more, but the odds of such fraud are very slim. There is nothing that the SEC can do but warn people about the risks of GME, but they cannot just halt trading because the stock went up too much and a lot of short sellers are taking dirt baths.

Everyone is blaming Robinhood for GME falling 30% yesterday. But the halt was in the premarket, yet GME surged at the open to new highs, until falling in half after peaking at $480 in mid-morning. So this further weakens the narrative and causality that Robinhood’s actions caused Robinhood customers to lose money. GME tanked maybe because it was just simply overbought after going up 700% in a week, regardless of Robinhood’s doing. Additionally, GME surged 70% on Friday in spite of presumably thousands of Robinhood traders closing out their accounts yesterday in protest, but GME keeps going up, and also in spite of severe GME trading restrictions by Robinhood and other brokers. This calls into doubt the widespread belief and narrative by the media that /r/WallStreetBets (WSB) traders are to blame for this rally and squeezing out shorts.

I think there is a non-zero possibly of collusion between Robinhood and Citadel to curb GME trading, and that both parties mutually stood to benefit by halting or limiting GME trading: smaller losses for Ken Griffin, founder of Citadel and a short-seller of GME, and Robinhood benefits by having some of its solvency issues mitigated…although all of this is still speculation. Robinhood customers and the WSB community are right to be irate, but such actions are not unprecedented though: to mitigate risks, brokers have discretion to change margin requirements for certain stocks, although the actions of Robinhood seem especially drastic. Also, many brokers put such restrictions, such as Schwab and Ameritrade.

Like Tesla, GME may not end badly at all and just keep going up and up. I am of the opinion that this will not implode spectacularly as so many are predicting. Markets can be irrational, but not so irrational that a company that is presumably in dire straits instantly becomes worth $40 billion like this has. There is stuff going on behind the scenes that we are not privy to but will manifest themselves later and make this huge rally in hindsight at least seem justified to some extent it not fully. The default ‘GME is a struggling game store’ argument fails to take into account developments that have transpired over the past few months, such as the backing of several high-profile billionaires.

I own some GME and not worried. Yeah, it is not that much of my total net worth, but I have found that heeding warnings of bubbles usually just means selling too soon.

If GME does crash, there will be no systemic risk or anything like that. It will be an isolated event.