Thu. May 6th, 2021

A good friend who is extremely knowledgeable about financial matters writes about the GameStop/Reddit story:

I find the whole spectacle a disturbing case of unreason and run-amok passions — including, if not especially, on our side.

Some questions:

(1) What’s wrong with hedge funds? They’re just high risk investment vehicles; the lumpen-intelligentsia might consider that teachers’ pensions and those of “public servants” — to the extent that they are actually funded — benefit from hedge fund investments’ efficient scale and, if they are successful (many are not and have folded), quite favorable returns for the risks taken. Unlike mutual funds they may use leverage and take short positions, highly beneficial for pension funds as investors with large pools of capital to invest continually.

(2) And isn’t the WSB/Reddit mob actually a “ring?”..a coördinated group acting intentionally in concert to move the stock price of a company artificially against its fundamentals? And in this case, not as a byproduct of a well considered strategy but intentionally to harm another class of investors?! I thought the glorious New Deal legislation establishing the SEC and other safeguards prohibited “rings”. How is using the internet for concerted pricing action not the equivalent of the mail or wire fraud that the law established against 1920’s style “rings”? Even if, as is almost certain, most members of the “ring” are irrationally acting against their own interests?

(3) Why is GameStop so special? Why shouldn’t it be shorted? Isn’t it just a reprise of Blockbuster ca. 1998 but with no probability of even short term success? Have they ever made money? What, other than the “ring,” could possibly account for the exponential run-up in the stock price — which was the whole point of establishing the “ring”?

(4) How is it that the WSB/Reddit mob seemingly occupies the moral high ground? It’s not like they are widows and orphans, patient capital, buy-and-hold long term investors They’re day-traders! High frequency day-traders! Pure speculators! It sure looks like a classic “pump and dump” operation, and if hedge funds were doing the exact same thing — against shorts — they would be denounced!

Ironically, though, most of them will get burned, badly. After irrationally driving up the price — for spite! — how do they expect to get out? When thousands of them are left holding the bag as GameStop comes down to earth — and it will — there will be weeping and gnashing of teeth. It will be small comfort to the losers that some hedge funds lost their nerve and covered their short positions at huge losses, too. But, presumably, not all — and they’ll have the last laugh.

Aside from the irrationality of the whole affair, I think it is not a good look for conservatives to be piling on here. Since when are we the party of anti-capitalism?….of irrational mobs?…of insane expressions of populist envy and mythology?

PAUL ADDS: I think the answer to the last questions is “since Trump.”

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