Financial expert offer insight on Gamestop short squeeze

There are a few trends at work with the Reddit/Gamestop short squeeze, according to Daniel McKeever, assistant professor in the School of Management at Binghamton University, State University of New York.

The first is the gamification of trading on app-based platforms for small retail investors. As is the case in any industry, technological advancement often outpaces the widespread understanding of the ramifications of using that technology. Regulation is also usually reactive, rather than proactive, when it comes to dealing with technological advancements in the financial industry. (Think of HFT and the "flash crash" of May 2010.) Strange new things will always happen in markets as long as this is the case.

The second is the collective anger and frustration of many of the retail investors who participated in the short squeeze on GME. These are people who have largely been stuck inside their houses for the last year, often cut off from friends and family, and have found an outlet in trading online. They've witnessed a year in which inequality in the US has widened dramatically. The stock market is up almost 20%, while half the country is in serious financial distress, and they've largely been left out of the spoils. The stock market is badly overpriced at a P/E ratio of 35 (highest it's been since before the dot com bubble burst; before that, the highest it's been was 1929), so there are no bargains to be had by putting your money into traditional stock portfolios. They see Wall Street winning again while they're stuck in neutral or sliding backwards, and they're furious. Don't take my word for it -- go read the posts on Reddit "WallStreetBets". There is a serious level of vitriol here towards hedge funds, Wall Street in general, and economic elites. Whether or not bidding a failing company that should be worth $20 a share to $400 a share is going to resolve that furor is irrelevant -- it feels good to them to even the score for once. The Reddit crowd has some significant demographic and ideological overlap with Trump 2020 voters, and I don't think it's a coincidence that one week after Biden was inaugurated (and none of the various QAnon type theories about Trump hanging on to power came to pass), these guys got together and found an outlet for their disillusionment.

The third point is that we always need to be willing to revise our understanding of market economics. We like to assume that markets are mostly rational and risk is mostly measurable. This week showed that those assumptions can fail. The massive short position that a few hedge funds had on GSE was, on paper, a very smart bet -- this was (and still is) a company with bad prospects whose stock will probably be worth zero in the relatively near future. The plan had a fatal flaw in it, though, much like Darth Vader's Death Star had one tiny hole in the armor that turned out to be a major strategic vulnerability. It was uniquely susceptible to a coordinated mob of capital from nihilistic investors that were motivated by a desire for revenge/shock/making a splash on the news, rather than a cold-blooded analysis of GameStop's future cash flows.