GameStop Saga: Game Over for Short Sellers?
Abraham George Macro View
When I started in the trading business there were lots of arbitrage opportunities. Arbitrage is the simultaneous buying and selling of an instrument in two different markets taking advantage of the price discrepancy without taking any undue risk.
Those days information didn’t flow as smoothly, fast and equally to all participants as it is now. So arbitrages existed. Some traders purely made their careers taking advantage of this. It is very hard to find any arbitrage now. Then arbitrage is a generic term. There are very different forms of it.
What happened recently is mind boggling. In a dog eats dog world anything can happen. About two weeks ago GameStop was a $20 stock. Yesterday it traded as high as $380.
This was a heavily shorted stock. In a world where governments and central banks have explicitly trashed the value of money which is repricing everything (in nominal terms), you don’t want to own debt, and you don’t want to be betting against the nominal price of something , meaning you don’t want to be a short seller.
The stock buyers are strengthened by this backdrop. That is exactly what we are seeing in GameStop. With the unlimited power of social media and its obsequiousness, a group of people can take on a big hedge fund. The buyers have been squeezing the shorts out of their positions. And this is also leading to a hunt for all highly shorted stocks. There will be short squeezes across the stock market. I have been praying for the Tesla short sellers for a long time now.
What we are seeing may be a short term phenomenon. It’s a revaluation of stocks that have that have been mispriced and controlled by short sellers. It also could be a sign of things to come. No doubt we are seeing a rise in all asset prices. How long will it be when we start seeing a ballooning of prices in every day products and services in the real economy?
It is the Fed’s job to maintain price stability. Currently the Fed is very sanguine about it. In yesterday’s press conference from Jay Powell we didn’t hear any warnings or concerns.
In fact he reiterated that they would “wait and see and not react” to any spike in inflation. In fact he went further to remind us that the disinflationary dynamics that have held for the past decade don’t easily change.
We think the Fed is very complacent. To be honest they are caught between a rock and a hard place. They could be caught off guard and will be chasing inflation soon. This is not the time to hold cash. You should owning assets!
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.