GameStop - Facts, Myths, End Game, and Where We Go From Here

This is going to be a bit of a braindump, but I wanted to share my thoughts as I truly believe we are witnessing a cultural watershed moment that is going to have ramifications across multiple facets of our lives.

Quick Recap: Recently, GameStop stock (GME) exploded in price. This is in part driven by the fact that GME was shorted 140% of the total stock and in part by the increased awareness among retail investors across Reddit's WallStreetBet (WSB) and beyond. As the price was increasing, a couple of things happened that really slowed things down. First, there were the "short ladder attacks" by hedge funds that artificially drove down the price. Then, major stockbrokers, including Robinhood, significantly restricted the purchase of the stock while allowing people to sell, artificially decreasing the demand. Due to the association between Citadel, who held significant short positions and was poised to lose billions of dollars if the price kept going up, and these brokerage firms, people are now up in arms about what appears to be a significant market manipulation by Citadel and other hedge funds.

There are tons of myths and misinformation surrounding this story and I want to address a few that are especially egregious.

1. This is a David v. Goliath story. This framing of the story is not entirely true because while the shorters were definitely a couple of hedge funds, the people betting against them also include a few heavy hitters also. You see, the first people to spot the discrepancy between GameStop's valuation and GameStop's and set the trends were Michael Burry (the same guy from Big Short. He's definitely a prophet at this point) and Keith Gill, aka Roaring Kitty on Youtube, aka DeepFuckingValue or DFV on Reddit. Both of these guys have a finance background and knew that GME could explode based on publicly available info since last year. DFV called it 12 months ago on Reddit after people laughed at him. One of his replies was literary, "January 2021". And if these guys saw GME from a year ago, you bet a few other Wallstreet firms saw this since then as well, well before the recent price explosion. Without social media, this may have been like the VW short squeeze in 08, where the price skyrocketed anyway but the conversation was relatively contained within the finance sector. David v. Goliath is a feel-good framing of the story and it also allows people negatively affected by this situation to blame the little guys, which is simply disingenuous.

2. A bunch of "unsophisticated" investors got really lucky and recklessly dumped their life savings (YOLOed). This framing of the story is also false and really cast the retail investors in a negative light. The fact of the matter is the people who YOLOed, for the most part, YOLOed responsibly with their play money after doing their research. As mentioned above, DFV and others did their due diligence (DD) and shared their findings with the world on reddit and YouTube. Others read them, did their own research, and followed suit. Not that many people are actually dumping serious $$ because someone posted a bunch of rocket emojis. And about YOLO, DFV did YOLO 50k into GME, but that 50k was like 7% of his overall portfolio at the time. He pretty much YOLOed his play money, much like how others may YOLO a couple of G for a crazy night at a club or something. People on WSB will also tell you to not BET with money you cannot afford to lose. In otherwise, YOLO responsibly.

3. GME's price increase is not based on fundamentals. This one comes from a lot of technical outlets, but it's a silly statement. What is more fundamental than supply and demand? It's econ 101. The Shorters shorted more stocks than available and are pressured to buy them back due to a large amount of interest payment associated with those shorts, and people with stocks decided to hold the stock until the price is "high". Low supply and high demand = high prices. As for GameStop's business itself, is it worth $22B? Probably not yet. But who is to say that with a significantly increased demand for digital entertainment due to COVID, a new CEO, a new business strategy focused on the digital marketplace, gaming peripherals, and the emerging market of E-Sports, is not worth $22B? With an increased market cap, they can also acquire other companies to grow their business too. Remember that avg "gamer" is like a 35yr old female with a non-insignificant amount of disposable income and the gaming industry in the US alone is ~$60B. GameStop operates worldwide, btw. If Slack is worth $28B and Tesla can worth $900B, Gamestop can worth $22B (or $100B, who knows)

End Game - With a focus on $$$.

There are a few scenarios that could pan out at this point.

1. the big but reasonable squeeze. Basically, the price goes through the roof, everyone sells their stock at some insanely high, but still a somewhat reasonable price, a few hedge fund shorters go bankrupt, a bunch of ppl with GME stocks get paid, while some people who got in late are left "holding the bag". It would be interesting to see who's left holding the bag in this situation, because... well, if you got in at $40, didn't cash out when the price hits $1000, and the price came down to $40, you are probably not too worried. If you got in at $500, you may lose some money. That's why we hear people say, sell when you can, you don't want to be the ones holding the bag at the end, etc. The thing is, for a lot of the ppl who got in at $200, $300, $400, etc, they understand that this is for lulz and not really in it for the money. A bit more on the lulz later.

2. the infinite squeeze. the price could literally be infinite because no one wants to sell and no one can buy, resulting in a systemic implosion of the financial system. This is especially possible if a bunch of call options is exercised together and there are no shares available to cover. Some finance ppl think we were almost here last week. The main reason, and this is a bit technical and I'm not entirely sure if I'm getting this entirely correct, this will lead to some sort of financial armageddon is that the market/bank/clearinghouses need to have some level of cash/buffer to support the trades, and if they don't have the cash to cover, like what we saw with Robinhood, the whole exchange could go down. Robinhood may or may not have been colluding with Citadel, but they did need additional cash (and slow down GME trades/price) to keep them operational because GME price and volume was too high. We are probably no very likely to end up here but the very real possibility of having this outcome is quite exciting for a lot of people because it clearly exposed a flaw in our financial system that allowed billionaires to exploit shorts and destroy companies.

3. The big stimulus check. With 2 as a real possibility, some people think that the government may need to force some sort of a settlement between GME stockholders and the shorters to save the financial system from collapsing. the government bailed out banks in '08 with $700B or whatever to save the financial system from collapsing. now, they can bail out the shorters and settle with GME stockholders using some sort of eminent domain process. Not sure how much the government will cover for the shorters in this situation but people think if this happened, there's some $$ to be made as well. ($700B bailouts for GME stocks would translate to like $10k per share)

4. The slow bleed. Right now, the hedge funds are buying up more shorts and covering old shorts to basically wait out the price increase. After all, the price will have to come down at some point, right? If the hedge fund can bore the GME shareholders to death and/or find other distractions, such as AMC, bitcoin, dogecoin, etc, then the demand for GME will come down, the price will come down and shorts will win. That’s why we see WSB ppl say “HOLD” or “We can stay r*tarded longer than they can stay solvent”. The internet can be a pretty stubborn place and given the prospect of 1/2/3, I don’t know if there’s going to be a distraction that’s going to potentially be more lucrative to shake the shares lose from the holders.

5. Gamestop is the king! Well, if the bears keep buying up available shares and the price of GME continues to hold or increase over the next few weeks, Gamestop can officially become one of the S&P 500 companies, which forces the indexes to buy more GME shares, which will make GME shares even harder to come down in price… At that point, Gamestop may actually decide that their financial position is solid enough to make some interesting long-term plans, i.e. acquisition, new business expansion, which makes them actually worth that much in stock prices. Can you imagine if Gamestop, now worth $50B, acquire/merging with Ubisoft (Assassin's Creed franchise) or EPIC Games (Fortnite) or Valve and expanding E-sports or digital game distribution?

Personally, I'm guessing we'll end up with 1, probably.

End Game - Non $$ related. My sense is that these coalesced recently because the conversation expanded beyond the finance circle.

1. Make Billionaires Cry. Yes, this is a real endgame for a lot of people. There's a lot of anger among the general populace against the billionaire class, especially for "those in Wallstreet" who are deemed responsible for the '08 recession and the rise in income inequality. I don't think anyone wants to actually "eat the rich" but watching billionaires cry on TV/Twitter is worth the money spent on GME stocks for a lot of ppl. It's petty, but it's cathartic and personal for a lot of ppl who feel screwed by the system. For them, it's definitely worth $20 or $50 or whatever for an opportunity to contribute to making a few billionaires cry.

2. Send a Message to the Shorters. This is tied to the first one a bit, but there's a pretty strong hate/contempt for the hedge funds who engage in aggressive shorts. For many years, it's not uncommon for hedge funds to take a short position on a company and then publicizing their "reason" through various news/mouthpiece organizations, thus shaking general confidence in that company, creating a self-fulfilling prophecy that's extremely profitable for the hedge fund. Basically, a hedge fund can trash talk a perfectly functional business into bankruptcy (and thus loss of livelihood) while greatly benefiting from said bankruptcy. That's exactly what happened with GME, and the shorters were so aggressive in their tactics and got overly greedy that they doubled down their position and eventually shorted over 100% of the available stocks (which is called "naked shorting" and is illegal but can still happen due to some loopholes). Before this incident, the sentiment was that a shorted company is going to have a hard time finding someone that will contradict the shorter's "research" because there aren't that many entities that wanted to be in that position. After this incident, companies actually realized that if they are in a decent position, they can crowdsource a powerful counter to the shorters in the form of a whole lot of everyday investors. The message now is that if a hedge fund is going to short a company, they better do their research well instead of using bully tactics to get their way.

Implications for Financial Sector and Beyond Going Forward.

1. Financial Reform. There's a growing sense that the financial system is a playground for the rich to screw the poor. Before last week, people could somewhat argue that the market is fair and efficient. With the blatant market manipulation by the hedge funds last week, no one can say that the market is fair or efficient again. The confidence in the financial system itself has been shaken to its core, even among the people in finance. A lot of people with a non-insignificant amount of financial power are going to be demanding the government to step in and actually keep the market (somewhat) fair and transparent for all market participants instead of just the largest institutions. Looks like this is a bi-partisan issue that'll have broad support from most politicians if this situation continues.

2. Rise of decentralized capitalization. Now that it’s clear that a large group of retail investors can effectively turn around a large company despite hedgefund’s smear campaign, we are going to see more companies capitalize on this opportunity by working with financial influencers to raise capital. We already see this in the crypto world and platforms like Kickstarter, but we are going to see more of that across large, mainstream industries now. Anyone who has a “reputation” for writing good DD can have a company come knocking on their door and ask them to write a DD based on publicly available data, and investors may even find these public DDs more trustworthy because they are scrutinized by other internet financial influencers who are clearly just as sophisticated as some of the hedge funds out there.

3. Socialized investing. Because a whole lot of everyday people got a taste of that sweet, sweet financial return, we are going to see a lot of social influencers start to talk about investing. This is great because people are realizing that they have access to a new form of power, and it’s also terrible because some people will use it or be used for pump-and-dump schemes. It’s like the MMM schemes taken to a whole new level.

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Alrighty, this is my thought based on the recent events surrounding GameStop. Regardless of what happens to GME holders at this point, this is potentially a really exciting moment in history that can affect how companies are formed and financed in the future and will help regular people realize their newfound financial power. Thanks for coming to my TED talk.

Obligatory, this is not a financial adviser, I'm not a financial advisor, and you should do your own DD.