Good morning. Friday is coming.
The pearl-clutching and fury of the professional stock market media and big players regarding the GameStop craze is hilarious to me. These guys and gals make a fortune on giant bets all the time, when the little players and 401(k) accounts get socked. The whole GameStop thing (if you want a good primer on what happened, read Erick Erickson’s newsletter—and I wholly endorse paying to subscribe) reminds me of the 1983 Eddie Murphy / Dan Ackroyd movie “Trading Places.”
In 1983, the average Joe couldn’t just buy and sell stock from their living room, bet on puts and calls, or organize a market upend against billionaires like Randolph and Mortimer Duke. Back then, you had to use a broker, or have access to the trading floor. Today, a group of Redditors can start a 4800% surge on a stock that traded at $40 just a week ago.
As far as I’m concerned, there’s nothing wrong with some informed market anarchists going out and making hedge fund managers actually earn their fat salaries. These funds have access to massive capital, and have operated with complete impunity for decades. As for the “Wallstreetbets” crowd: Good for them!
The pearl-clutchers say that such moves—artificially bidding up a stock beyond its intrinsic market value—harms the market, and therefore harms everyone. I call bullcrap on that.
There’s a principle in America called “fiduciary responsibility.” It means that the person who makes investment decisions on your 401(k) is personally liable for making bad decisions on your behalf. In fact, U.S. laws are among the most severe in the world, where the fiduciary responsibility actually pierces the corporate veil. That means the fund managers at CALPERS (California Public Employees’ Retirement System), one of the biggest funds in the world, should they make a big enough, and stupid enough, bet on shorting some GameStop replica, would be personally sued into oblivion and fined up the wazoo by the government for their recklessness.
Fiduciary responsibility is what keeps the little guys who put 1% to 14% into our retirement funds from being wiped out by dumb investments. However, when the entire market slides into bear territory, we can be wiped out all the same. As long as every boat is rising and falling on the same tide, the fiduciaries (and therefore, the little guys) have a safe harbor.
Not so with the hedge funds. These are the playgrounds of billionaires and billionaire wannabes, along with some Jeffrey Epstein types who build their reputations purely on association and other so-called “benefits.” Melvin Capital got tagged to the tune of $3 billion and had to get bailed out by white knights Citadel and Point72 because a group of Eddie Valentines and Louis Winthorpes caught wind of their scheme and spiked it.
GameStop was the single most traded name in the U.S. stock market on Tuesday, topping Tesla and Apple, even though they are 81 and 233 times larger in market cap terms, according to Deutsche Bank strategist Jim Reid.
Speaking of Tesla, does anyone really believe a barely-profitable electric car manufacturer is really worth $819 billion? Tesla is currently trading at a Price/Earnings ratio of 1,652.31. Compare that to Apple, easily one of the most profitable companies on the planet, worth $2.39 trillion, trading at a PE ratio of 38.53. Yet Tesla is part of the S&P 500, put there because Elon Musk knows how to be Eddie Valentine. He manipulated his way to financial freedom, and mooned the SEC as he danced past their wrist-slapping stiff-collared lawyers. (Disclosure, I once had a position in Tesla, but no longer own any of their stock.)
Here’s the takeaway. The government doesn’t care if YOU go bankrupt because you bet your own personal money on—let’s say—Boeing. Or you decided to go along with Melvin Capital and short GameStop to ride their wave. If you did, you’re wiped out, and nobody is coming to save you. But if CALPERS goes under, the government cares, deeply. That’s why we have fiduciary responsibility.
Now, if billionaires and Accredited Investors want to play fast and loose with their money on public markets, it’s not our collective problem if they lose to a group of Redditors. These funds can participate in private markets that are closed to the rest of us. They can do deals worth billions that small fry, regardless of our devotion to study and understanding of financial markets, are beyond our reach.
It doesn’t harm the market for the small fry to perceive and upend the avarice of hedge fund managers. It only makes the hedge fund managers better—or it makes the money behind the funds pick better fund managers.
Of course, all the financial media folks know this. But when it’s their own job, or their friend’s job at stake, they would rather play the role of Mortimer Duke when the bill comes due.
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