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G10 Macro Rates Blog – This isn’t a casino, this is a riot

Thursday, January 28, 2021

Latest G10 Macro Rates Blog
With Shayne Dunlap, Co-Portfolio Manager

The title above was a quote lifted directly off a chat room used by retail investors to describe the current revolution of burning down the house. In this case “the house”, ironically, is hedge funds that specialize in short selling. Short selling is where investors are willing, after careful analysis of the balance sheet and economic prospects of a company, to sell the shares of that company. If/when the share price goes down, they can cover back their short at a profit. A purchaser of a share can lose 100% of their investment, the seller can lose multiples of their investment if the share price spikes higher. This is exactly the scenario that has played out recently with GameStop stock and Melvin Capital.


The “burners”, in this case, appear to be millennial day traders coordinating their efforts via various social media sites, Facebook, Reddit etc. Their sheer numbers in this fast-growing movement gives them enough firepower to warp a share price to levels that have forced the likes of Melvin Capital to cover their shorts at great loss or else go into liquidation. A pattern is developing where the trading “masses” are seeking to buy, not companies with great value, but companies which have been shorted the most. This is the “Riot” component, as their motivation is not necessarily driven by believing in the economics of the company targeted, rather to create a Ponzi scheme successful enough to squeeze the shorts to cover.

I have experienced or been spectator of many crises and bubbles over proceeding years; Irrational Exuberance; LTCM; Asia Crisis; Russia Crisis; Y2K; Lehmans; Greece; Bernanke Taper Tantrum; Trump China trade war and finally Covid 19. I can observe that the current price action is like bubbles of the past, however with long term implications.

The power to the longevity of this cycle, is driven by access to the markets via cheap or free “Robinhood” platforms, and smartphones, resulting in what is possibly just another form of “mobile entertainment” for those getting involved. I worry that this revolution of anger against disenfranchisement, wealth divide, student debt, housing etc, many things I empathise with, could be hijacked by those people who have history in creating mayhem with western political process and voting patterns. Such people have the will and technology to infiltrate the chat rooms and “gently sway” opinion on which stocks to target. This weaponizing of social media to attack the core vehicle of capitalism, is a new vulnerability that may need inventive financial regulation to defend from.

The latest iteration of a slow burn “war” between the have and have not generations is now underway. Comments such as “hey stock jockeys keep bringing it” from Point 72 hedge fund owner Steven Cohen, can only but fan the flames. There is now a new game in town – it isn’t a casino, it’s a riot.

For further information on the Pacific G10 Macro Rates team, their experience and strategy please see below

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IMPORTANT INFORMATION: Issued and approved by Pacific Capital Partners Limited, a limited company registered in England and Wales, authorised and regulated by the Financial Conduct Authority . The information contained herein is not approved for use by the public and is only intended for recipients who would be generally classified as investment professionals. Information or opinions contained in this article do not constitute an offer to sell or a solicitation, or offer to buy, any securities or financial instruments or investment advice or any advice or recommendation in respect of such securities or other financial instruments. Where past performance is shown it refers to the past and should not be seen as an indication of future performance.

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