Bill Gross Compares GameStop Short Squeeze To “Populist Political Uprisings”

Until the past week, the only asset class that was mentioned in the same sentence as the South Sea Bubble, was bitcoin for obvious reasons. But now that the nation’s collective attention has turned to a new meme, namely the ongoing short squeeze of most shorted stocks by a bunch of millennials and GenZers, we have an excuse to expand the utility of comps with one of the best known periods of euphoria in human history. That’s what Bill Gross – fresh from litigating his neighbor – has done in his latest Investment outlook, whose title “Game(Stop), Set, Match” was inspired by Gross’ girlfriend former tennis-pro Amy Schwartz…

… and in which he writes that this week’s GameStop trading frenzy “has few parallels and is indicative of prior mania tops as far back as the South Sea Bubble of 1720,” and “this apparent budding crisis needs regulatory warnings and mainstream media alerts as to the dangers this week, both to overall markets and individual investors.”

In other words, the r/wallstreetbets frenzy has provided just the convenient cover for bitcoin to quietly grind higher (especially with the backing of Elon Musk tweets), otesnibly to its next psychological level of $100,000 and nobody will notice, as attention will continue to be glued on which hedge fund blows up next as a result. Incidentally, one can only hope that at some point gold – which is shorted not by hedge funds but the BIS itself – will also catch a bid… but we wouldn’t hold our breath.

However, in addition to mere market phenomena, Gross also compares the short squeeze to “populist political uprising characteristics of recent U.S. and other foreign elections” and says that “the will of the “common” investor has imposed significant hurt on short selling, “unpatriotic” hedge funds that have long profited at retail’s expense, not only with their 2/20 fee structure but their financial clout to drive equities up or down and to issue capital calls if only to stay alive to rule another day.”

Even so, he thinks that while perhaps justified, the recent action is too much and “during those Wednesday hours, investors buying 750% volatility options and who were rooted on by several prominent investors like Elon Musk who should know better, were the fish at the poker table, not part of an educated investment mob storming the Capitol of Capital.”

Is he right? Continue reading Bill’s latest note.

Game(Stop), Set, Match

The current GameStop short squeeze resembles the populist political uprising characteristics of recent U.S. and other foreign elections. While the Capitol of Capital has not exactly been stormed as in recent weeks, the will of the “common” investor has imposed significant hurt on short selling, “unpatriotic” hedge funds that have long profited at retail’s expense, not only with their 2/20 fee structure but their financial clout to drive equities up or down and to issue capital calls if only to stay alive to rule another day.

My heart has been with Main Street for many years and there is no doubt that billions of dollars have flowed if only temporarily to the good guys. But the government cavalry is on the march and deservedly so. The volatility has spread from GameStop to other heavily shorted stocks, to the current darlings called SPACs, and on Wednesday perhaps to the overall market. There is justification to the cries from Senator Elizabeth Warren and future SEC Chairman Gary Gensler to control this new form of social media investing which in and of itself seems democratic, legal, and a wonderful invitation for groups of “investment clubs” to innovate.

Still, a GameStop price move from 20 to 350 during one month in January based not on financial fundamentals but technical momentum has few parallels and is indicative of prior mania tops as far back as the South Sea Bubble of 1720, in which the stated offering prospectus of the day issued a purpose and use of funds for a “venture which we presently know not.” You could find the same or similar language describing a modern-day SPAC.

As proof of the price overreach during Wednesday’s trading session, annualized volatility for both put and call options with 6 and 13 day expirys were trading at 750% volatility, a level in my memory never previously exceeded. A 750% volatility for 6 and 13 day options implied a 1 standard deviation move (up or down) of 395 points for the period, implying there was a 66% chance of GameStop reaching 760 or declining quickly to near zero. Because the stock price had doubled over the past 24 hours, to some Robinhood traders that seemed reasonable but to me it resembled a mania of epic proportions. A 750% vol was indicative of a modern day Marie Antoinette, telling the masses to “eat cake” because there was no bread and potatoes on the menu, the sustenance of life.

During those Wednesday hours, investors buying 750% volatility options and who were rooted on by several prominent investors like Elon Musk who should know better, were the fish at the poker table, not part of an educated investment mob storming the Capitol of Capital.

In the short and long run, investing well depends not just on the fundamentals of quarterly earnings reports but in this case the astute calculation of value embodied in fairly accurate option models that alert investors to improbable if not outlandish expectations. This apparent budding crisis needs regulatory warnings and mainstream media alerts as to the dangers this week, both to overall markets and individual investors.