GAMESTOP Revolution

If this wasn't a revolution in the financial world, I don't now what is.

By now it must be one of the most read stories on the Internet.

Essentially it's a war between Hedge Funds that sold the stock short and an army of Internet savvy traders that effectively organized a run on the stock while communicating on Reddit Wallstreetbets.

Slowly, then suddenly

Gamestop announced 3 new board Directors on January 11th and that is when the meteoric rise actually started. Over the next few days the stock appreciated 13%, 57%, 27%, 10%, 10%, 51%, 18%, 93%, 135% yesterday and this morning at the time of this writing is up 32% in the premarket to over $460 a share. It is moving violently as we speak.

From $18 to $460 in two weeks

Look at the time stamp on these pictures. All from yesterday January 27th with the exception of the last one just taken

Elon and Chamat tweets fueled engagement

Highest total trading volume on the day

Let's now get to the point and why it is necessary to write an article about what is happening.

The System is pretty much broken. Price Discovery as a fundamental part of Investing is effectively dead.

I am not taking sides here, neither with Melvin Capital or with the Reddit movement. The only side I am taking is against what Central Banks have created. A market fueled by speculation because of easy money being poured on it on a daily basis.

The debasement of the US $ has transformed financial markets in a casino.

What in essence is happening here is that hedge funds were able to sell short more than the existing float of shares. More than 100% of all shares.

How is that even possible you may ask. Well, it's kind of like the Fractional Reserve Banking System. In essence, if you deposit $1 in your bank, the bank is only obligated to keep some as collateral, say $0.10 and can lend out the remaining $0.90. This process goes on and on until that initial $1 has now created a much larger nominal volume of obligations while being backed only by a fraction of that total amount.

Same general concept applies when selling short shares. If I borrow shares from you and sell them to person X, I have to post collateral against that short trade however now those shares are owned by person X. Person Y can now borrow those very same shares from person X to short them and so on. In this example there is now 2x the amount of Short Interest against the same shares of that company.

The above dynamics are very problematic in my opinion however in the Gamestop saga only represent 50% of the problem. The other 50% is the notion that everything goes up in the stock market. It's a casino where you cannot lose. Think of the Pandemic. The stock market registered a positive year in 2020 in the face of 22 million jobs lost to Covid-19 and an absolute annihilation of Retail. After the super fast decline in March, the indexes staged a very steep V shaped recovery and finished positive for the year. Everything happened because of what the FED did. Flushing the system with money made speculation rampant. And what is happening this week is incredible:

Retail traders have for the first time in history front runned High Frequency Traders.

The problem is that most of them will lose lots of money when the dust settles and the price of GME comes down to earth.

And by the way, as I am finishing this article, GME stock price has shot up to $496. Enjoy the show out there and stay safe.