National Post (National Edition)
Broader fears of market bubbles
In broad terms, the surreal GameStop saga of the past week-and-a-half did pit a mischievous and populist day-trading mob against some of Wall Street's biggest players. Many of the early contributors to /r/wallstreetbets shared personal stories of the hardship they endured after the Great Recession in 2008 as motivation for their drive to push up GameStop's shares.
Hedge funds, notably Citron Research and Melvin Capital, had indeed taken massive bets against GameStop, which reported net losses of nearly US$300 million during the first three quarters of fiscal 2020. As of mid-January, a staggering 88.6 per cent of GameStop's shares were sold short, according to MarketBeat. com, meaning hedge funds were betting that the company's shares would fall. If the shares instead climbed in price, on the other hand, those funds could theoretically be on the hook for unlimited losses.
It's now clear, however, that not everyone riding the GameStop wave was a smalltime investor who fit tidily into the “mom-and-pop” cliché so often associated with retail investing. Several high-profile investors clambered aboard, including venture capitalist Chamath Palihapitiya, who bought in after asking his Twitter followers what he should buy. (Palihapitiya announced he'd sold his position the next day and would donate US$500,000 of his profits to charity.)
Other billionaire investors were also along for the ride. Michael Burry, the hedge fund manager whose famous bet against the U.S. housing market was portrayed in The Big Short book and movie, held 1.7 million shares when GameStop's price exploded. Two other hedge funds, Hestia Capital Partners and Permit Capital Enterprise Fund, had also built up stakes over the past year (though, in a poorly timed trade, Hestia sold nearly one million of its 3.3 million shares in mid-January just before GameStop rallied). They joined a Who's Who of Wall Street names who profited wildly from the episode.
The Fed keeps rates low to stimulate the economy, but what we have witnessed lately is one of the unintended consequences of this environment.
Even Keith Gill, the Reddit user credited with kicking off social media interest in GameStop through posts on WallStreetBets under the name DeepF***ingValue and on YouTube as Roaring Kitty, was no casual trader. He is a chartered financial analyst who worked in marketing in Massachusetts for insurer MassMutual from 2019 until recently, and before that at two other firms, dating back to 2012, according to his registration history.
Whatever the case, shares in a run-down retailer that had traded as low as under US$4 last July skyrocketed since the start of the year until their peak last week. For Melvin, that staggering price appreciation erased 53 per cent of its US$12.5-billion portfolio.
“Last week's craziness revealed how the equity market has turned into a game as opposed to a vehicle for companies to fund themselves and bolster capital-expenditure programs,” says David Rosenberg, head of Rosenberg Research in Toronto. “A market that, in the past, was used as a means to improve the productive capital stock has become a market for speculators and get-richquick promoters.”
It would be wrong, however, to look at GameStop in isolation from everything else that's unfolding in the financial world at the moment. It's not just the companies that got caught up in the GameStop drama, like Canada's own BlackBerry, or the movie-theatre chain AMC or Finnish telecom Nokia, all of which saw their shares soar on the collective touting by subscribers to the WallStreetBets subreddit.
Prices across markets have reached dizzying heights, triggering warnings of bubbles and rekindling memories of the dot-com era, when tacking that suffix to the end of your company's name was enough to earn a multibillion-dollar valuation. As value investor Jeremy Grantham wrote last month, “It is highly probable that we are in a major bubble event in the U.S. market, of the type we typically have every several decades and last had in the late 1990s.”
For one thing, shares of unprofitable tech companies have skyrocketed, according to investment bank Goldman Sachs, with its index of money-losing tech firms roughly tripling since last March.
Likewise, Tesla's share price, at US$879, is up over 900 per cent since its last lowest point in March. With a market cap of US$800 billion, it's now worth more than General Motors, Ford, Volkswagen, Fiat Chrysler, Toyota, Honda, Hyundai and Mitsubishi combined, even though it produced just 500,000 vehicles last year.
Cryptocurrencies have also taken flight. Bitcoin is up nearly 600 per cent since last March, enjoying a turbo boost from Tesla CEO Elon Musk, who declared himself a “supporter” of the digital currency over the weekend and said it would soon get “broad acceptance” in the financial world.
Meanwhile, the world of special-purpose acquisition companies, or SPACs, has triggered bubble concerns. SPACs are shell companies that are sponsored by investment companies and taken public through initial public offerings. Stuffed with cash from their market debut, the shell companies seek out private companies with which to merge. Last year, SPACs raised US$83 billion through IPOs, six times greater than the year before. In the last month alone, SPACs raised more than in all of 2019 combined. “lt is hard not to describe SPAC IPOs as bubble-like,” Piper Sandler's Jeffery Harte wrote in a note to clients on Friday.
Little wonder, then, that bubble anxiety has itself soared, at least if U.S. collective Google searches for the term “stock market bubble” are any indication.
There's a common element to all these examples: the surge in asset prices more or less began with the global effort by governments to rescue their pandemic-afflicted economies last year.
The U.S. Federal Reserve quickly slashed the target for the federal funds rate to 0.25 per cent and provided up to US$2.3 trillion in lending to help households, businesses, the financial sector and governments. It also launched a mammoth asset-purchase program, snapping up government debt, mortgage-backed securities and corporate bonds, doubling the size of its balance sheet to US$7.4 trillion as of last week.
Not to be outdone, the Bank of Canada dramatically lowered its own benchmark rate to 0.25 per cent and quintupled its balance sheet to nearly $550 billion by buying up government debt and mortgage bonds to keep the gears of the economy moving.
All told, governments around the world have unleashed US$10 trillion in fiscal and monetary stimulus to fight COVID-19.
These measures have pushed down already low yields on everything from government bonds to highyield corporate debt, or socalled “junk bonds,” and driven investors to embrace riskier assets.
“Central-bank accommodation is the major driver behind owning equities,” says Allan Small, a Toronto investment adviser, who uses the acronym TINA to describe the situation right now, which stands for There Is No Alternative. “The Fed keeps rates low to stimulate the economy, but what we have witnessed lately is one of the unintended consequences of this environment.”
Investors have also taken advantage of low rates to leverage their investments by borrowing money to place bigger bets on stock movements. In the U.S., margin debt, which is money investors borrow from their brokerages, hit an all-time high of US$778 billion in December 2020, up 18 per cent in just three months — only during the dot-com bubble and before the Great Recession did margin-debt levels rise faster. That doesn't even include what investors borrowed during January, when retail investors rushed to buy GameStock and other companies caught up in the exuberance.
That's not how central bankers see things, of course. When Federal Reserve chair Jerome Powell addressed the media last week, he was peppered with questions about GameStock, but washed his hands of the affair. “I think the connection between low interest rates and asset values is probably something that's not as tight as people think because a lot of different factors are driving asset prices at any given time,” he said.
Powell and his fellow central bankers have also made it clear that low rates and other monetary stimulus measures are likely to last through until at least 2023.
“Whether it's real or perceived, there's this notion that Powell and his band of interventionists are going to be there to backstop your portfolios at all times, and that's been a critical factor behind this market rally,” says Rosenberg.
That was clearly on the minds of some hopeful GameStop investors. The text on that Times Square billboard — “$GME GO BRRR” — was an overt nod to a meme last spring that mimicked the sound of cash being printed by the Federal Reserve: “Money printer go brrr.”
As GameStop shares plunge, it's a reminder that what rockets up can also come crashing down.
REVEALED HOW THE EQUITY MARKET HAS TURNED INTO A GAME.