$GME = Goodbye Market Efficiency?

Reddit Rules?

My last two notes have been about bitcoin and the stock market, both of which have become perceptibly more volatile. This week continues the theme, betraying the fact that markets are the fulcrum of the intersection of social, technological and economic forces, and that two of the trends mentioned in my December 4th year ahead note – ‘empire builders’ (the creation of new wealth) and the ‘rise of new financial market ecosystems’ are now coming into focus.

The latest market dislocation is centred around a video game retailer called GameStop. GameStop’s share price traded at a level of $3 last April but hit $370 on Wednesday. During that period, GameStop’s underlying business has not changed much, possibly gotten worse. The new development lies in the dynamics of its share price.

Some hedge funds had sold its shares short (selling them now on the hope that they would buy them back at a lower price), however a cohort of retail investors who apparently managed to ‘synchronise’ their trading views on the social media platform Reddit, aggressively bought shares and options on GameStop, creating not only a short squeeze (the hedge funds were forced to buy back the shares at a higher price) but also a mania that has spread to other stocks.

GameStop’s rise from a pedestrian retailer to a company that is at the time of writing worth $24 bn, continues a market theme of the past year where assets (Tesla, bitcoin etc) diverge wildly from their intrinsic value (e.g. Merrill Lynch has a price target of $10 for GameStop), and where for the first time in a very long period, retail investors (or at least stocks held by retail investors) outperform the market and the institutional community.

As one might expect, Wall Street is not happy. The financial press is full of stories about how the ‘little guys’ are beating the billionaires, and of how the triumph of the Reddit crowd is redolent of the political climate in the US. The decision of some trading platforms to stop trading in names favoured by the Reddit crowd has only increased the sense of ire.

To a very large extent, this has been coming. The arrival of zero fee trading, the development of new trading platforms like Robinhood (who by the way sell order flow data to large hedge funds), financial ammunition (free stocks from trading platforms, plus stimulus checks) and the harnessing of crowds through social media have ‘democratisied’ finance, to put it provocatively. In particular retail trading of options has exploded. Notably, Europe doesn’t enjoy many of these factors, including an ‘equity culture’, so it hasn’t seen the same trading boom (a European stock, Nokia, was picked up US traders).

Without repeating arguments made here previously, the financial climate that central banks have created is also a major factor (market liquidity conditions are the most plentiful in decades), both in terms of their portfolio effect, and impact on risk taking. There is also a sense that central banks are on the side of institutional investors, something that private briefings by the ECB’s chief economist to investment banks last year only reinforces.

For the moment I am less concerned with the way the GameStop phenomenon is being portrayed as a struggle between financial insiders and outsiders, but rather more taken by its implications for finance and for regulators.

This kind of development, together with many others (i.e., ETF’s and cryptocurrencies) should begin to erode the primacy of asset and wealth management firms, a vast number of whom use technology platforms, investment processes and business models that have changed little in the last ten years. There should be greater, downward fee pressure on fund managers who underperform, investment processes should be more centered around liquidity and risk appetite (as well as better encompassing data from options markets and order flow) and in time we should see a wider range of assets introduced into portfolios.  

Two other trends may take off. The first is that the banking/asset management industry should give up on trying to run its own technology projects and instead partner with technology firms. Equally, fintech companies increasingly need the help of banking specialists in order to better understand banking processes, regulation and governance.

The second is that ideally, the notion of the ‘democratization of finance’ takes off so that financial institutions become better at meeting the financial needs of specific groups – from millennials to women for instance.

GameStop’s wild run higher is also a challenge to regulators. It is fair to say that in recent years regulators in the US have done apparently little to regulate manifest oddities in the equity futures market, in the trading behaviour of congressmen and women (Nancy Pelosi trades call options on Tesla!) and the way large investors (and companies) have used the options market to drive equity and debt prices. To that end they should ask what is at stake in regulating the behaviour of retail investors.

The key question regulators must ask is ‘what harm is done’. When speculative behaviour spills over into the real world (for instance causing ‘going concern companies’ to go bankrupt) it must be checked. GameStop itself might react and issues more shares to the retail investors – some of whom in coming weeks will lose, as well as gain a lot of money.

There is likely a temptation on the part of the new Biden administration to strike a more responsible and moral chord regarding Wall Street. It may start with GameStop’s day traders but to be consistent it would have to radically reform Wall Street, which I think unlikely. Instead, we will likely see a cooling of margin trading, and adjustments to the structure of the options market.

The final thought goes to the retail traders. If they wanted to strike out at Wall Street, they might try to target the volatility market (read Robert Harris’ The Fear Index), or more ambitiously if they really wanted to take on short sellers the asset with perhaps the biggest nominal short positions is the dollar. The dollar might spike, and the rest as they say, would be history!

Have a great week ahead,


Poetry in Motion

The Hill we Climb

This time last year I wrote a note entitled ‘Peak Trump, Peak Markets’. For a while during last March, I thought I had nailed the market forecast, but in the end, I got the important part of the equation right, and on January 21 Donald Trump played a lonely game of golf as the Biden administration got underway.

At the present time I am tempted to say that we are in a ‘Peak Markets, Biden Nadir’ moment. That is not a reflection on the abilities of the new President but simply an assessment of the task ahead of him. In that respect two aspects of his inauguration ceremony struck me.

The first was a segment that the three former two-term Presidents (Clinton, Bush and Obama) recorded for NBC, as a message of support for Joe Biden. What was striking was how tired and troubled the three leaders looked, something that attests to the physicality of politics, and also betrays the ways America has been stress tested by the Trump presidency.

The second, more uplifting aspect of the inauguration was the importance of poetry, first in Amanda Gorman’s recital of ‘The Hill we Climb’, and then in Lin Manuel Miranda’s rendition of Seamus Heaney’s ‘The Cure at Troy’. Heaney is a favourite of the President’s, though for poetry that resonates with great historic events he might also try Yeats’ ‘1916’.

While poetry has featured at presidential inaugurations going back to JFK (Bill Clinton choose Maya Angelou in 1993 and Barack Obama choose Richard Blanco in 2013), and Kennedy’s own inauguration speech is acclaimed as one of the best in recent times, the prominence of poetry at last Wednesday’s ceremony marked a potentially notable shift in tone and method.

At a time when Twitter is fading as a political tool (its share price is down 15% since it suspended Donald Trump’s account) there is a temptation to think that short, nasty and brutish messaging is a thing of the past, and that contemplative clever, eloquence is on the way back. Every schoolboy/girl has learnt that Wordsworth described poetry as ‘emotion recollected in tranquility’ and should politics follow this tack, many of us would be happier.

While a change in the tone of political debate, aided by media and social media companies would be welcome, the danger for the Biden team is that they are too erudite, too polite (‘They speak French’, November 29) and to that end fail to get their message across in a very simple way.

As a reminder of what they face, return to Donald Trump’s inauguration speech. It is considered one of the poorest on record, though he did speak prophetically of ‘American carnage’. He also spoke of ‘Mothers and children trapped in poverty in our inner cities, rusted out factories scattered like tombstones across the landscape of our nation, an education system flush with cash but which leaves our young and beautiful students deprived of all knowledge’ but then did everything he could to aggravate these problems.

In that respect, the Biden administration has a clear task ahead – to reduce record inequality, indebtedness, a sharp drop in human development and ailing infrastructure (with the exception of Denver, America has built no new airports in the past twenty five years).

Biden also faces a stock market that trades at some valuation measures seen only in the 1930’s and late 1990’s, with many sentiment indicators also stretched to the upside. Unlike Trump, Joe Biden will not spend his waking hours tweeting about the stock market, and in general I suspect he will not care much for its gyrations. That should leave the road open to some very bold redistributive fiscal policies, which at the same time may not be to the liking of the stock market.

Whether, in six month’s time we are writing about ‘Peak Biden, Stock Market Bottom’ will depend on Biden’s Treasury Secretary. As Chair of the Federal Reserve she at times let market volatility cow her. At the same time, she has the intellectual background and the motivation to do to inequality what Paul Volker did for inflation. A great, and maybe poetic test of nerve awaits markets and Washington. In coming days we may see more restrictive policies on travel and mobility and the forthcoming debate on the stimulus program will reveal much.

Have a great weeks ahead,


Should I Buy Bitcoin?

A Tulip?

A friend recently asked if he should buy bitcoin. It hit the USD 42,000 level only a week ago having traded at 10,000 back in October, and last weekend, volatility in bitcoin spiked and it dropped 20% in a couple of days. These moves have drawn a lot of attention and many are now asking whether it is time ‘to buy?’, not just in the US but also in Europe.

Bitcoin was intended to serve as a means of facilitating the transfer of money in a decentralized way (beyond the influence of governments and central banks) – and that in time it would spread as a means of retail payment. In a world where trust in institutions has been challenged since the global financial crisis, bitcoin has appealed to some as an alternative system of exchange (indeed part of the coding of bitcoin contains a reference to the global financial crisis).  

Bitcoin is far away from meeting these objectives, and in my view is a ‘tulip’, a speculative, trading asset. It also seems to me that many people are increasingly happy with bitcoin being assigned this role, and much of the interest and eco-system that is developing around it underpins the role of bitcoin as a speculative asset rather than as a bona fide currency.

In particular, more banks and payment systems – notably PayPal – are allowing bitcoin onto their platforms, either in the sense that it can be used to buy other assets or that it can be traded. It is likely that in coming months regulators will permit cryptocurrency ETF’s to be launched, and other products such as derivatives will spring up around this.

At the same time, many of the highly dubious coin issues of recent years have been shut down by regulators, principally in the USA, though bitcoin remains a favourite means of transacting in the underworld.

More hedge funds that specialize in crypto currencies are on the rise, and crypto exchanges are readily attracting investment funding (Baakt the digital marketplace has recently announced a plan to go public through a special acquisition vehicle).

If the role of bitcoin (and crypto-currencies) as a trading asset eco-system is growing, its place as a currency or means of exchange is being curtailed – indeed the price moves of the past three months would make it very difficult to operate as a reliable means of payment (in addition the verifiability of payments may be harder to complete than some think according to the Bank for International Settlements).

Moreover, the entry points to the crypto currency world are under attack – either in the case of exchanges being hacked or closed down by governments (nearly 80 crypto exchanges ceased to exist through 2020), or in governments looking to identify and tax those putting capital into or taking it out of crypo currencies.

In particular central banks, many of whom are close to launching their own digital currencies (conceptually at least) have an interest in the failure of cryptocurrencies to catch on. Notably Christine Lagarde this week called for bitcoin and its associated ‘funny business’ to be more closely regulated.

As such, this points to crypto currencies being ushered into the corner of eclectic trading assets – though less of an experience than horse racing, with none of the aesthetic bonus of art and not quite the fun of collecting wine.

It’s also worth pointing out that from the point of view of ESG investing (Environmental, Social and Governance) which is arguably another ‘mania’, bitcoin is a ‘sinner’ in that the mining or manufacturing of bitcoin consumes an enormous an amount of electricity, not to mention its negative social and governance aspects.

To draw these strands together in a way that is relevant for investors – what is happening is that as the economic and social utility of bitcoin is falling (i.e. its use as a ‘money’), then its intrinsic value is eroded, and the greater the portion of its price that is made up by speculative activity.

So, if bitcoin is fast becoming a trading asset, should one buy it now? My sense is that many of the people who trade bitcoin also trade S&P futures and assets at the more speculative end of the equity market. A manifestation of this that crypto currencies are highly correlated, making diversification difficult.  

In this respect bitcoin is at the very risky end of market risk appetite and increasingly equity market investors use it as one of a number of steers for the direction of equities. In this context, for most investors, it is best to wait for a drop in risk appetite – and for a degree of panic to return to markets, or for liquidity conditions tightened. The last time we saw depressed risk appetite was in late September, when bitcoin traded below the 10,000 level.

As it stands, risk appetite is very high and due a reversal in coming weeks, so now is not the time to jump into bitcoin.

A Putsch too far

Oddly enough, the first ‘putsch’ in modern times took place at Paradeplatz (in Zurich), today home to banking putsches. In 1839, the conservative, religiously fervent rural community from beyond Zurich led the ‘Züriputsch’ against the city’s liberal elite, thereby coining the term ‘putsch’ for an excited uprising, or incitement of the people, if we can put it like that. Later, the 1923 Munich Beer Hall putsch gave the term a more deadly meaning.

The episode came to mind with the ‘storming of Capitol Hill’ on Wednesday night, an event that on one hand caused me to change the topic of my weekly missive (from bitcoin), and on the other where it is difficult to add to the sense of disgust at confederate flags and ‘Auschwitz’/‘6MWE’ t-shirts being paraded through Congress.

In the old days, putsches and coups d’états were frequent occurrences across Africa, or more sporadic events in Latin America guided by the hand of Henry Kissinger as the myth goes. What transpired on Wednesday was not a coup but the subversion of laws and the takeover of the office of state, and of a political party by the cult of an individual. The development that the Democrats gained two seats in Georgia was lost in the fog of the ‘putsch’. Leaders in other countries where individuals have subsumed institutions – Russia, China, Brazil for example – may have been thrilled by what they saw.

The political implication of Wednesday’s event is that social media companies now have an opportunity to rethink the intersection of politics and social media. Further there is a very likely formal split in the Republican Party between a Liz Cheney ‘Country Club’ faction and a Pompeo/Hailey/Hawley/Cotton raw, nationalistic cabal (half of Republicans supported the ‘putsch’ according to polls). A profoundly divided Republican Party means that like the 1912 election, a Democrat will win in 2024.

From an international point of view what is worrying is that the US, and by extension the international institutions it anchors, will lose moral authority with respect to their ability to condone human rights abuses, corruption and the degradation of democracy in other countries (note events in Hong Kong last week). In the future Turkey, China and Hungary will request to send observers to oversee elections in the US.

Washington has been the keystone or locus of the globalized world, and its violation is, like the smothering of Hong Kong’s democracy this time last year, another rupture that announces the onset of a different world order.

From a European point of view, events in Washington will spoil the prospect of a full reconciliation between European and American diplomacy granted the fear that the underbelly of American society is now isolationist and nationalist. In general, European leaders will be more wary of the US, and at home will take steps to ensure that extreme political groups are marginalized.

The daunting challenge and opportunity, for Europe is to frame itself as the cradle of modern democracy and the beacon of liberal values. The EU has already stated as much through its ‘European Values’ policy thread, but predicably failed to follow through during recent budget negotiations involving Poland and Hungary. The stakes are much higher now, and Europe’s political centre needs to take a big risk and aggressively defend liberal democracy.

Many politicians, and many of us, may hope that with the inauguration of President Biden the ugly side of American politics will subside, or that, in the long-term it can be mollified with education and progressive policies. This sadly is an illusion.

The path that Britain has followed with Brexit is the likely direction for public life in the US – derision, lack of direction and division – until an event or nadir is reached that gives a common cause (it should have been COVID, or climate damage). This common cause could be the collapse of the American economic model in that face of extreme inequality and indebtedness (with a fiscal version of Paul Volker as the catalyst in redistributing wealth) or more predictably an open strategic conflict with China. The former would excite Democrats and the latter Republicans.

This sobering scenario points toward at least five more years of political dislocation in the US. In that time other nations will ‘go it alone’, we will continue to see a ‘levelling’ of power between nations and new approaches to ‘doing things’ that are no longer tied to the Washington Consensus will spring up.

America’s credibility is in tatters. Recall that Trump withdrew the US from the World Health Organisation (WHO) amidst the worst pandemic in a century. He has now broken its society and political system. These will take a very long time to repair.

Have a good week ahead


The Case of the Missing Billionaires

Jack is troubled

Between 2016 and 2017 a number of Chinese billionaires went missing. Some never re-appeared – it is suspected that wives, lovers or business rivals had a hand in their disappearance. Others however, reappeared, stating that they were ‘helping the authorities’. This period coincided with China’s anti-corruption drive and stuck in my head when I heard that Jack Ma’s Alibaba and Ant Financial were being investigated over monopoly and overleverage concerns.

Some weeks before the investigation, ahead of a potential IPO of Ant, Ma had pronounced that China’s regulators harbour a “pawnshop mentality”, having previously held that if the ‘banks won’t change, we will change the banks’. This affront was obviously too much for the Chinese authorities, and Ma’s colleagues at Ant are now ‘helping the authorities’ with a remake of Ant.

In the US and Europe, the regulatory assault on Alibaba was greeted as proof that China is ‘communist after all’, and that it is a menace to free enterprise. This kind of reaction betrays a lack of willingness to take China seriously and to try to understand what is happening there.

It is much more likely that two interlinked factors are at work. Xi Jinping’s China is one where there is little room for high profile voices who might contradict the President. Indeed, the singularity of Xi’s position will become a much more significant issue in Beijing in coming years, especially so within the Communist Party about whose internal deliberations and rivalries we in the West know relatively little.

Secondly, politics aside, the rationale in clipping the wings of Ant is to reduce leverage in the financial system, and arguably make the Chinese economy more sustainable. This is where Xi’s future and that of China are intertwined – he needs to sustain a prosperous economy in order to fulfil his vision and safeguard his position.

Xi talked about the ‘China Dream’ long before (March 2013) Trump was elected with the help of the catchphrase, Make America Great Again. This Dream is rooted in a desire to regain the place China enjoyed centuries ago when its economy was the dominant one.

 China’s system, viewed from outside, involves a pact or contract, where people will sacrifice their liberty in return for order, prosperity and national prestige. The state is very much in control. It is not something that Europeans or Americans are used to. China’s system has worked very well so far – though the biggest risk it faces is a period of high unemployment, that breaks the contract between people and the Communist Party.

To this end, China and Xi cannot suffer the economy to be derailed by the kind of imbalances that, for example led to the euro-zone crisis. In particular they do not want a lost decade(s) akin that that suffered by Japan – note that last week the Nikkei regained the 27000 level for the first time in twenty nine years.

This interpretation of what is happening in Beijing is reinforced by the fact that it is behaving like a capitalist economy. Consider that the Chinese central bank is not engaged in quantitative easing, bankrupt companies and property vehicles are allowed to default and restructure and, competition between Chinese entrepreneurs is fierce.

Contrast this with Europe and the US, where markets and economies are held together by central bank liquidity provision, where tech monopolies thrive and where zombie companies persist.

In a recent note (Dec 5, ‘What can possibly go wrong?’) I wrote of the ‘Sisyphean economy’ where governments and central banks try to push activity upwards by injecting liquidity into economies, only to see it relapse. Of the major regions only China appears to understand the relevance of this, and is doing its utmost to pare back the risks of a costly ‘reckoning’. Given the extent of indebtedness in China, this is wise. Given the threat to President Xi’s popularity and that of the Communist Party, no-one and nothing can get in the way of the China Dream.

Happy new year