Requiem for a Plunge
There is nothing new in Wall Street. — Jesse Livermore, 1877–1940
As we approach the one-year mark of the US coronavirus panic (which I’d say more or less began in late February 2020), the armwrestling match that is the global pandemic has finally begun to inflect in humankind’s favor, but the viral pandemic in the stock market has only just begun to hit critical mass. I’m not saying the market is about to crash — that isn’t what I do. What I’m saying is that the market is not healthy. Modern markets are built with three things: capital, computers, and confidence. After January 2021, we have enough of only the first two.
Over the past two weeks short sellers were squeezed, some to the point of total capitulation on their business model (i.e. Citron Research), primarily by a group of day traders whose supposedly unifying motivation is not the pursuit of profit, but the destruction of the financial ruling class. While I fully support these “small” traders’ freedom to take risk with their own money and speak publicly about it however they see fit within the boundaries of the law, it’s hard to know where to begin on the list of contradictions and danger signs with this groundswell of organized bull raids.
Firstly, let’s point out the obvious: The Reddit/WSB crowd cannot honestly claim to be assaulting the rich by making millions for themselves. A quick scan of the message boards behind the GameStop/AMC/etc. short squeezes reveals two goals that are very much at cross-purposes: People showing screenshots of how rich they’ve become and imploring others to do the same, and people celebrating what they believe to be the scalping of rich hedge fund managers who are short these squeeze targets.
Back in 1921, when “plungers” like Jesse Livermore (known also by his nickname, “Boy Plunger,” because he was a young phenom stock jobber) conspired to squeeze or destroy stocks with overwhelming market action, there was no pretense that they were doing it for populist or progressive reasons. They wanted to make money, and they were making it by taking it. So it goes for too many of the WSB Redditors in the GameStop crusade, or at least for all but the most sadly naïve ones — but in 2021, these crusaders sail under a flag bearing the phrase, “stick it to the rich!” And as the successful plungers become holders of more capital than they ever dreamed, they instantly become that which they claim to wish to destroy…notwithstanding some token investments of tiny amounts to charities along the way, as some Redditors have done and publicized. Maimonides’ ladder of giving placed this type of action — giving cheerfully, but too little — second from the bottom. There is charity, and then there are indulgences.
Show me the WSBer who gives most of his GME winnings away, and I will show you someone trading in multiple accounts and showing you only one. It just isn’t happening.
Secondly, I refuse to believe that the field officers in the WSB army are ignorant enough not to know how this saga is going to end for their enlisted. The book “Devil Take the Hindmost,” written by Edward Chancellor at the twilight of the last American stock mania, is named for the phenomenon I am describing: an orchestrated short squeeze is a glorified pyramid scheme. In other words: The last guy in really gets it in the pants.
The more successfully the leaders of the Reddit crusade can whip up an army of frenzied followers, the more they can inflate the target stocks; the more money they can make by selling, sometimes to their own soldiers; and the more capital will be lost, and possibly lives ruined, by the most loyal berserkers in the charge. This capital will be lost to the early bull raiders, of course, who climbed to newfound wealth by scaling the bodies of those they inspired to action.
Someone — probably thousands of small investors who are the least-informed by these early Reddit squeezers trying to claim the moral high ground — is going to be left holding the bag. It will be tremendously unfortunate when the end result of these shenanigans — and that’s what they mostly are, neither evil nor noble, but impish tricks played by jokers — is the simple reshuffling of wealth in a sickeningly regressive way: A handful of highly celebrated Redditors will have pocketed millions, being knighted as heroes for becoming rich by taking from the even richer, while the far larger number of people who followed them into this scheme too late will have lost most or all of their investments. I don’t look forward to the memes created to make fun of the bottom 90% on this one. I am sorry to report that Melvin Capital cannot possibly lose all the money that is required to be lost here for market psychology to regain its balance.
Thirdly, and most relevantly for short sellers studying the outlook from here: Nobody rings a bell at the top, but if you listen hard enough, once in a while you can hear the ugly grinding of gears. As the stock market has (in aggregate) gone up and up, confidence in the market’s fundamentals has followed it, along with the very plumbing that undergirds the market. I believe that we have climbed far and fast enough that we are now witnessing, in real-time, confidence in the market hitting stall speed.
Think about it: The talk of the market a month ago was about how stocks go up. The talk of the market a week ago was how some stocks have no limits. But the talk of the market 48 hours ago (as of this writing) was how brokerages work and what they can and can’t ethically do, because Robinhood and other account custodians have begun taking actions to get this beast back under control. The grunts are starting to see the system fraying at the edges, and the finger-pointing has already begun.
Nothing of what these brokerages have done is especially unusual — trading curbs during periods of high volatility, OMG! — but because it interferes with unsophisticated investors making gobs of money, it has drawn the attention of pikers, politicians, and plungers alike. Everybody is looking for a scalp — and GameStop hasn’t even actually blown up, yet.
The hangover from this bubbly episode is going to be a lot worse than any other in recent memory because it has been so widely followed, all the way up to the White House in fact, and it’s going to take far too many people down with it. After this — whatever happens with GME stock, in which I have never had a short position — it’s going to be ugly, divisive, a Mexican standoff of the kind that has infected America’s politics and entertainment culture. Only this time, the market mechanics — and I mean the actual operators themselves — are going to be castigated, questioned, and evaluated in the process. It’s hard to see how this would not lead to a loss of confidence in market functioning amongst retail investors. Retail investors are not necessarily stupid people, but the basement-level plumbing of the markets is hard even for veteran investors to understand. How is the average Redditor going to lose his shirt being long GME, see his favorite left- or right-wing politician Tweeting blame at entities he’d never heard of before last week (the National Securities Clearing Corporation, Citadel, etc.), and not feel like he got robbed? Let alone when he ended up in that situation by following a bunch of faceless meme-ing merrymakers on Reddit? I mean, how do you not get pissed off by that and want to stick what’s left of your money under the mattress for the rest of your life?
People like AOC and Elizabeth Warren like to say the market is rigged. But when people are making money, they’re not inclined to believe in such claims; and by and large the only people losing money in the GameStop chaos thus far have been short sellers at hedge funds. The WSB army is on top right now, and it’s easy for armies to look disciplined when they are winning. Disorganization in an undisciplined army rears its head when the bullets start flying in the wrong direction. Cries of “hold!” tend to fall flat against the din of outright panic, and that’s when members of the ragtag army start to realize, collectively, that they’ve been standing shoulder to shoulder not with family, not with countrymen, and oftentimes not even with fellow revolutionaries, but with cannibals just like them. (Have you ever seen the ending to Daybreakers?) Rallied-up troops need a target.
When the GameStop feeding frenzy turns inevitably into a GameStop bloodbath, claims like “the sharks did this to you” will ring far truer to many ears. The most bloodthirsty of the mob may yet find new stock targets, but the revulsion period will send most back to the sidelines, and possibly for years. This hurts market confidence, and as anyone with a straight face will tell you, confidence is all that keeps the toilet that is the stock market from backing up and spilling shit all over your feet.
