We Have Never Seen Anything Like "We Have Never Seen Anything Like GME (Well, Since the Last Time It Happened)" (Well, Since the Last Time It Happened)
“…we came in?”
Back in high school, I worked a fairly thankless part-time job at a Chick-fil-A in Westdale Mall in my hometown of Cedar Rapids, Iowa. On my breaks I’d wander halfway down the mall to the mall’s videogame store, Software Etc. Eventually, after hanging out there enough on slow weeknights, I ended up weaseling my way into a job at Software Etc., though in true irresponsible high schooler fashion I didn’t quit my previous job so much as stop signing up for hours. Software Etc. had been tilting away from software and PC components and more toward video games with the acquisition of Game Informer magazine and EB Games, culminating in the local store eventually switching over to GameStop my senior year. It was mostly shelf stocking and some minor customer service, a far cry from the semi-pushy upselling the the brand would become associated with. In fact…
Wait a minute. Haven’t we already done this?
In case you hadn’t noticed the financial news of the day, GameStop is back, baybayyyyyy. GME was up over 100% today, ending the day at 91.71 and seeing two separate freezes of the stock during trading hours. WallStreetBets is back with their diamond hands and rocket ships, seeking to either pillage the coffers of the hedge funds or to earn a glorious death and find themselves in the halls of investing Valhalla. What’s causing this bounce-back? Is another hedge fund shorting a larger position than is possible? Were extremely positive financials released in their quarterly report?
<looks at notes>
<looks at notes again>
<pinches bridge of nose with thumb and forefinger>
We are now officially in the “exuberance” portion of the market cycle. Think of it like the standard action movie sequels trope: the original has a great idea behind it and thrives on its own merit. The sequel attempts to go bigger and broader to capitalize on all the goodwill raised by the original, but typically falls flat. The third tries to circle back around to what made the original great but is too Flanderized to pull off the magic again (and anything past the third film is…probably not worth watching, unless your franchise lives a quarter-mile at a time). You could apply it to GME: the original had some merit and narrative drive to it due to an over-shorted position by some monumentally numbskulled hedge funds, even if there was never a true path for the retail investor, given the absurdly large percentage of shares already owned by massive funds. When the GME bubble burst, people ventured out to try to replicate the success of GME with other stocks (AMC, BBBY, etc.) or with other investments (silver, BTC bubble…#4 I think?). Finally, when all of those narrative petered out, we find ourselves back at GME yet again, this time with even less of the underlying justification for pumping up the stock price and just…another pump and dump.
Hell, look at BTC: We called it out last time for dropping from a peak of $40k down to $32k. What has happened in the subsequent four weeks? It went down to $30k, then shot up to $50k on the back of some pumping by our very own real-life Hugo Drax, nearly hit $60k, and has since deflated back down to around $50k. I’m absolutely positive that by this time next month BTC will either be worth $80k or negative eleventy.
And so here we are, once again seeing more ink spilled on the investissement du jour, much too late for anyone just hearing about it now to obtain anything but a highly-risky scrap of what’s left. The markets are always a push-and-pull between valuation based on financials and valuation on narrative-driven best-case scenarios. The irrationality of a market can build and build, because contrary to the “buy low, sell high” adage, the fear of missing out will cause individual investors to buy in near the top because they believe they’re actually at the bottom. However, those that attempt to ride the tide at its crest are doomed to be dashed upon the rocks eventually. Warren Buffet was once quoted as saying “be fearful when others are greedy, and greedy when others are fearful.” Like all quotable quotations it’s more simplistic than reality allows for (I’m not planning on grabbing a jar of honey from a grizzly bear if others are currently hightailing it out of there), but it does hold merit when regarding market exuberance. If you’re deep into the mania before you’re tossing your chips in, chances are one of the earlier adopters is using you to get out.
The top 5 stocks in the S&P 500 make up a higher percentage of the index than the peak of the dot-com bubble. The US Cyclically-Adjusted Price-to-Earnings (CAPE) Ratio is higher than at any point ever outside the dot-com bubble. US debt is expected to eclipse the size of the US economy this year for the first time since WWII. I’ve said it before, as well as many others much more well-versed than me. Today’s market looks very bubbly, and while none of us can say exactly when the pop will occur, it is more and more evident that it is very much a “when” and not an “if”. Is there any way to break through to those who are riding the waves of irrationality and show them what so many past generations have had to live through to fully comprehend? If one in a hundred or a thousand or even just one person stops and truly considers what they are doing, that will be a victory in the face of the screaming entropy of market exuberance. Unfortunately, no. It seems we are destined to repeat this pattern, again and again, the music changing but the numbers of seats always one too few. Unless.
"Isn't this where ..."