GameStop again?

0:06Pushkin. If you had the power to tweet a stupid picture and send a stock 100 % higher the next day, what would you do with it? Well, one person who seemingly does have that power is Roaring Kitty. He is back. He's that guy on the internet who sparked a meme stock craze in 2021. And he's done it again on GameStop shares. The shares are going loopy, but what does it all mean? What does it tell us about how investors are behaving at the moment and what risk appetite is like in markets. Today on the show, really? Are we doing this crap again? Have we learned nothing? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin.

0:52I'm Katie Martin, a markets columnist here in London, and I'm joined down the line from fellow weary Unhedged newsletter supremo, Rob Armstrong. I prefer to be known as Squawking Platypus, which is my internet handle. All right then, Squawking Platypus. For listeners who are deeply confused and wondering what the heck we're talking about, what the heck are we talking about? Who is this Roaring Kitty person? So Keith Gill, who is the real-life version of internet's Roaring Kitty, is a trader who worked at a rather dowdy insurance company in Massachusetts, an analyst, but also had an online identity on Reddit boards and Twitter and so forth where he presented his ideas.

1:46And somewhat mysteriously, one of those ideas, in particular GameStop, caught fire in 2021 and made Roaring Kitty into quite a famous person and drove that stock to the moon, as I believe the young people say. So in those heady days in early 2021, which just feels like a whole different age, like shares in GameStop, which is like a sort of rubbish video games, consoles retailer. Yeah. Just madness. Like shares in this thing went up like 2000 % because for some weird reason, Roaring Kitty, Keith Gill, a.k.a. deep effing value. This is a family show, Rob, so we're not allowed to swear on the internet.

2:33Yeah, just this kind of internet army on Reddit latched on to his investment thesis and sent this thing absolutely crazy. There's a kind of narrative that took hold, which is that GameStop was actually a company with a lot of potential and a lot of wicked, rich, manipulative, institutional investor types, hedge funds, whoever, were somehow keeping it down and were shorted. Those guys. And the army of individual investors was storming the castle, pitchforks and torches in hand to set GameStop free. Broadly speaking, this was not true. But the phenomenon was very interesting. The institutional investors who were short this thing did, in fact, get smoked.

3:23And it did show the power in a highly automated market. it, it showed the power of a bunch of people chatting on the internet and deciding all to buy one stock at once and then hodl. Is that how you pronounce it, Katie? Hodl. Hodl. Hold on for dear life. Yes, exactly. Yes. This comes from the crypto world. Yes. Whatever it is you buy, just hold on to it. Just hold on to it. Diamond hands. This narrative was so appealing, indeed, that they made a movie about it called Dumb Money, which was pretty good. There's literally a whole film about this. And yet, here we are doing it again. We are doing it again.

4:01This ended up being like an actually really interesting thing, even for like the proper hardcore markets nerds who obsess about like the intricacies of how trades actually happen, which, to be clear, is a very, very boring field. But fundamentally, like Robinhood, the online brokerage, very popular with young people in the States, just couldn't handle the volume of trade requests that was coming in. Because it looked like basically every man in their 20s in the United States was buying this one stock at the same time. And the thing just exploded higher. And yet Robinhood couldn't handle it. And so this has ended up because Robin Hood had to switch it off.

4:46Right. They put the plug and say, OK, no one else. And this, of course, this, of course, fit neatly with the conspiracy theory that the wicked powers of Wall Street were out to get the working man by preventing them from buying GameStop. But the interesting thing is so much of that story from 2021, which looked like a bonkers one off, has been repeated just now because of one tweet of a person leaning forward by Roan Kitty. The first element that's a repeat is, of course, a lot of people were still short GameStop. They were betting against this stock. They were betting on it going down again. something like 30 % of shares in this company were on loan for hedge funds to effectively bet against them.

5:31And they have had their asses handed to them again by a Reddit army because the stock is up like 100%. We're opened 100 % higher pretty much. And then it's ended up at the time of recording. And who knows what might have changed by the time you listen to this folks, but around the time of recording. 70 % something. Yeah, that's a lot. After what it did yesterday, It's especially a lot. So those shorts have been ironed out. Yeah. And so, of course, that drives the stock up. When you are short a stock, you have borrowed it and sold it. And to get out of your short position, you have to buy it back and return it to whoever you borrowed it from.

6:10And this is part of the reason the stock went from 17 bucks on Friday to now we are at 53, 54. But the rulebook for how to be a smart person who shorts stocks goes something like this. Don't go into a crowded short, number one. In other words, I'm writing this down. OK, if like 10 percent of the shares are short, it's like begging for a short squeeze to happen. And you're putting your head in a noose if you join the party. So that rule was violated. The second rule is don't do this on a stock that is thinly traded, meaning a stock that's not very big so that when this short squeeze does come, there's not a lot of shares lying around for you to buy back.

6:55They didn't do that this time. So then they broke rule number two. Rule number three is don't do this in a stock that is a well-known plaything of investor sentiment. Such a well-known plaything of investor sentiment that they made a movie about not shorting this stock. Yes. So that's rule number three, which I had to invent right now because it is so stupid to do that. There was no need for a rule before because everyone thought it was obvious. I've spoken to like short sellers since the GameStop event of 2021 they said look this totally changed the game it just told us you you just can't do this anymore because if the Reddit army has at you then you're toast and yet here we are so one of the funny things about what's going on this time around you know GameStop 2 electric boogaloo is it's not like so first of all we don't even really know if it was Roaring Kitty who put this tweet I'm hoping I'm hoping his account was hacked and he's like on a beach in porta viarda sipping a uh frosty beverage and like what yeah the stock market no i haven't thought about that in years so yeah it's literally a like a rubbish drawing that i could do of a person sitting in a chair and leaning forward there's no like video of him like showing his spreadsheets and saying here's my investment thesis for game stop all over again it's literally the drawing of a person but it doesn't need to be.

8:22That's the point here. What was demonstrated back in 2021 is that the fundamental case doesn't matter. And, you know, this is an old story in stock markets. If people get together to push a stock up, they can do it. And the internet makes it possible to do that without engaging in an outright illegal conspiracy. So it'd be one thing if a bunch of brokerages or hedge funds or whatever got together and said, you know, let's wind up some stock and then we can get out of it quickly. That is clearly against the law. But when it's a bunch of listeners, yeah, don't do that. Professional listeners. But, you know, if if there is a kind of Internet driven, loosely coordinated collective movement, who are the authorities going to arrest for that?

9:11So this is possible and the fundamentals don't matter. So there is a certain logic to this. In other words, we had a catalyst event in this idiotic drawing. And now, you know, if you're that kind of a trader, why not jump in and join the fun? All you have to be sure of is that you're not the last one out the door and you have a shot at making profits. And hey, you can call yourself a very clever momentum trader. Yeah, indeed. And so I think that is point number one that I think some people might not be aware of, is there is probably significant institutional participation in this weird little event.

9:49Yes. Extremely clever professional traders latching on to this as an opportunity to play the wild price changes and shifts in momentum. And hey, that's public markets, folks. Rob, we need to say something clever about this beyond, isn't this dumb? Yes. So tell me, what does Roaring Kitty mean? What is he telling us about markets and about the current market environment? Well, there is a kind of cometh the hour, cometh the kitty element to this moment. In other words, did this drawing arrive at the moment when the market was maximally ripe for it? In other words, was there burgeoning animal spirits or excitement or whatever in markets that all they needed was a catalyst to set off this kind of explosion?

10:41And we have seen we have been in a pretty bullish market. Indicators of sentiment, either on the market side or on individual investor surveys, put call ratios, what have you. They all look like it's a pretty bullish moment in markets. But like you get a vibe, don't you? And the vibe that I've been picking up is not woo woo, you know, buy everything. Everything is fantastic. You know, everyone's kind of a bit nervous about stuff that can go wrong. And I would note that the excitement here seems to be pretty contained. In other words, GameStop and AMC, another meme name, are going fully bananas.

11:22But the rest of the market doesn't, you know, there's not a bunch of other stuff that's going up. And the rest of the market is not acting wildly incoherent or strange. It's kind of flattish today, for example. And remember, AMC and GameStop are pretty thin stocks. It doesn't take that many millions of retail dollars or institutional investor dollars to move these two rather obscure little stocks a lot. So just because the prices have changed quite dramatically doesn't mean that there are billions and billions of dollars flowing around here. A rush in without a corresponding rush out by a relatively small number of traders can move these stocks.

12:08It's a bit like my favorite thing and yours, crypto. It's a thing with no underlying utility or fundamentals of any kind. Please don't bother emailing me about this. I've already had the emails. But the price of these tokens can like just jump dramatically for like no reason at all, just because some guy on the Internet says buy it. So it's a little bit unsettling when that same thing can happen in fully regulated stock markets. And yet here we are. Yeah. You can point at other stocks that you can also argue are effectively fan tokens. Right. You know, truth social. What is that if it's not a fan token?

12:44Donald Trump's thing, whatever it is. But like Tesla, to a large extent, you know, that stock doesn't behave like normal stocks. So the moral of the story is there's a thinner line between kind of really stupid stuff that happens in crypto markets and proper stuff that happens in properly regulated markets. It's just not as big a difference as sometimes we might like to think. I strongly agree. And I think it's an important reminder for all investors. Those of us especially who care about fundamentals and think about them and try to find logic in the market. Wasting your time. A lot of money. I don't know that you're wasting your time.

13:21That's a bit strong. But the fact is, the market is a bunch of human beings. No matter how smart we become and how many computers we use and how carefully we look at history, there are times of collective goofiness among human beings. They will always be there. And that is always going to be an important element in markets. And you have to be prepared for those moments and to ride them out however you mean to ride them out. But you can't expect them to go away because people have magically gotten smarter at last. That's just not the game we're playing. We would have gotten away with it if it hadn't been for those pesky kids.

14:03That's what you're saying. The younger listeners might want to Google that one if they don't know what I'm talking about. It's a thing. Trust me on this. Listeners, if you have any bright ideas about the investment thesis for GameStop or indeed for any crypto token, please feel free to email me at robert.armstrong at ft.com. I'm giving you the silent treatment for that. Okay, whether you are long or short GameStop, we're gonna be back in a second with long short.

14:40Okay, now it's time for long short, that part of the show where we go long a thing we love, short a thing we hate. It can be anything. And right now, I am very, very, very short. Exams. I have two teenagers both doing big school exams and they are driving me up the wall. So peace out to any other parents of teenage kids that are doing big exams because it is unspeakably horrible. Katie, I will go long the opposite of GameStop and AMC. I'll go long utilities here. So cool. You're so cool, Rob Armstrong. The most boring kind of company. Literally, the government decides how much money they're allowed to make.

15:24they make the most prosaic and dull thing that we need like water electricity things like that who needs that stuff but they've been through a long period of underperformance they've had a great couple of months there's massive energy demand coming from all the weird stuff we're doing with computers like artificial intelligence i'm long utilities so saith Squawking Platypus. Who needs roaring kitty when you've got Squawking Platypus? On that bombshell. We're going to be back in a few days in your stream, so listen up then. Cheerio for now. Unhedged is produced by Jake Harper and edited by Brian Erstad.

16:11Our executive producer is Jacob Goldstein. We had additional help from Topher Forhez. Cheryl Brumley is the FT's Global Head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

16:55We'll be right back.