The GameStop Takeaway – We’re Already In A Post-Factual World, But We’re Just Entering A “Post-Fundamentals” Economy

GameStop is a retailer which was facing a lot of hurdles because of the Covid-19 pandemic. It was planning to close 450 stores this year. Why would this matter to you? Well, even if you’re not in their target market, and even if you’re not interested in stocks, you should pay attention to this little story, if only because it sets a very interesting precedent in our economy.

Here we go. Bear with me, the story will be short and sweet.

About a month ago, GameStop share was trading for roughly $20. At the moment of writing, it trades for $328 and the trend looks still very bullish.

How did this happen?

Well, it looks like corporate investors “smelled blood” a couple months ago, and decided to short this stock. If you’re not familiar with stock markets, shorting is a relatively dangerous, but highly profitable maneuver, in which a trader borrows shares and then resell them, hoping to buy them back at a lower price. Well, if the price never gets lower, the losses of those who borrowed can be huge.

Now, back to our story: some corporate funds decided to short the GameStock shares.

But, surprise, a significant amount of retail investors (read: individual folks, trading on their mobile phones) decided they don’t agree and, in a very open and public way, created a strategy to raise the price, basically buying every bit of the stock that was made available. They colluded in a subreddit called /r/wallstreetbets, in which they are sharing how much they bought, how much they intended to, and so on, and so forth. By raising the price, they also aim at triggering what’s called a “short squeeze”, in which short positions were called off, pushing the price even higher.

Two things emerged from here: the price rose dramatically, almost 10x in a month, and those who bet against the stock, the short betters, lost incredible amounts of money. At the moment of writing, according to this story in The Guardian, the total losses are $6.12 billions. Billions. I will write this again: billions.

Entering The “Post-Fundamentals” Economy

What’s happening here is known in the cryptocurrency world as “pump and dump”, and it’s a strategy in which a group of investors are colluding together to drive the price of an asset higher, by aggressively buying it, until the market “bites”, and other people, driven by FOMO (Fear Of Missing Out) are chipping in. When that happens, they liquidate their positions, driving the price lower, and making a nice profit in the process. These are highly coordinated activities, some of them lasting just dozens of minutes.

To be correct until the end, what we’re seeing in the GameStop saga is just the first part, the “pump” one. We don’t know yet if there will be a selling at some point, but the odds are in favor of it: even retail investors would want to take profits at some point.

But what’s important here is something else, namely the fact that this market price has almost nothing to do with the fundamentals of the asset. It’s the result of plain market manipulation. Only this time it happens by an impromptu group of individuals, and not by a bunch of corporate funds. Which, ironically, are soliciting now to stop the trading (obviously, to stop their losses).

If you’re wondering why is this happening, there are two reasons, in my humble opinion:

First: because it’s possible. The shorting mechanisms built in the market are allowing for this kind of behavior. It has happened before. It’s just that now it happens outside the walled gardens of corporate funds. And this is big.

Second: because it was about time. There is a certain threshold over which certain events are possible. Events like Cambridge Analytica, for instance. There were just the right causes and conditions for it to happen: enough data gathered, enough exposure for the manipulative messages, etc. Similarly, this time, there were just enough people willing to take this on, having the funds, the platform, the opportunity.

I’m not advocating market manipulation. I’m just observing it, it was already there, like I said. I just see how market manipulation happens now if enough ordinary people believe in it, organize together and do it.

That’s huge.

That means that trust is now migrating way easier from one constituent of the reality to the other. It means there’s way more fluidity in how reality follows intentions of organized groups. It means that, theoretically, the price of everything is not based on the fundamentals (or market analysis, which is based on history and comparable stocks) but on how much a big enough group of people is willing to be.

After a “post-factual” world, in which facts aren’t relevant, but only opinions about them, we’re entering an age in which every tradeable thing can be worth anything, if enough ordinary people are colluding to that goal.

It’s at the same time great and scary, I know.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.