Hedging Against the Machine

Restarting my finance series post-GameStop, and introducing Two Bulls in a China Shop.

My first appearance on 2 Bulls in a China Shop!

Two Sunday mornings ago, I joined a conference call with 2 Bulls in a China Shop co-hosts Dan Leeson and Kyle Hedman. The episode can be listened to for free in this post, and you can find a bunch of ways to subscribe at their official website.

Dan is a friend from high school, one of the few that I have kept in touch with. If I was more active in high school, were I guided by my natural interests and talents in those years, we might have been in the same television broadcasting program in which students produced a morning news program that transmitted official school business. There would be many mornings in which I watched Dan deliver the news on our closed circuit television network.

Today, he is a podcaster. I am a former community media producer and podcaster as well. We are discussing collaborating more on this program, myself a repeat guest perhaps focused on cryptocurrency. Both of us have been living the odd job life of going broke and pursuing music and random ideas. Many paths one summit, they say.

Podcasting has been a new universe since the day I launched Horizon at End Times, in 2013, which was meant to be an artist-on-artist interview program, discussing topics from a creative perspective, providing commentary on the madness of our social and political times. 

If there was a way to invest in podcasting, like an ETF, the market would have quadrupled over by now. In that growth, many podcasters jumped in and drifted off into the noise of obscurity. Dan and Kyle seem to be finding a way to pop their little heads above the noise. I look forward to joining them for their continued success.

Before the pandemic, I started to write blogs aimed at capturing the lessons that I was learning in the process of investing my savings. It has been a year since my last finance post, a lot has happened, so I think I am ready to get back on that train and take it to the end of the line.

One of the major educational processes that I went through was more vicarious than personal, as I persuaded my father to move his annuity fund into a personally managed portfolio. I gave him a number of good picks and jumpstarted his path to profit. This will be the topic of my next finance post.

A Few Thoughts on GameStop and the Finance Economy

The financialization of our economy is rapidly disrupting stock markets, monetary policy, industries, technologies, and truly the whole social fabric. To hedge against the machine today is to play the game and try to beat the machine using its own tools.

The weekend that we recorded this was the one leading into a major market activism event in which GameStop (GME) grew by 222% over the week, and by 1,476% over the month, from about $19 to $312.

There is nothing about GameStop that can justify this valuation, the company was disrupted by lock downs and was shuttering locations. Like record stores, the media can be transferred more efficiently online. Its revenues were only declining.

That is why the market was broadly betting on GME to decline. There are ways to do this. One common method is options.

I don’t play options. This is the casino aspect of our markets. I’m a bad gambler.

I don’t like options. It turns stock valuation into a speculative game rather than a rational valuation based on revenue over loss, supply and demand.

These are basically just bets that you place with regards to the movement of a stock, up or down. There is more to it but that will do. You don’t actually invest in the company like when you buy a share.

Options are part of this story, but short selling caused this whole mess.

Short selling is a little hard to wrap the head around, but this is a common bet in the big investor class, the hedge fund world. One of the best of all the analyses of this short squeeze event that I have heard is, ironically enough, from Speaking of Bitcoin podcast.

Speaking of Bitcoin Podcast Explains Short Selling and GameStop

The arrogant move on the part of the investor class was that GameStop was so heavily shorted that 138% of all available shares were being shorted. That means there were 38% more shares than exist floating and would need to be called if the price went up. This means that a large contingency of small investors could call the bluff and force their hand simply by going long on GME.

It was a movement of retail investors organized on Reddit that forced this whole situation. These are regular people with brokerage accounts who jumped in as a swarm to drive the price of GameStop upward against the hedge fund bets locked and loaded to crush the company. Short sellers were forced to accept losses or hold the bet by raising their position. That is why it is called a short squeeze.

Tesla is a company that picked up massive momentum in a short squeeze. The valuation is still inflated, in my opinion. Tesla might hold because the outlook for the company is much better than GameStop. Tesla is at the frontier of something while GameStop is comparable to Blockbuster Video or Tower Records, it is simply obsolete.

The problem lies in the fact that Wall Street has the dangerous ability to crush a company and accelerate its demise. In a world where the balance of power isn’t so top-heavy, GameStop could carry on a number of years without even changing its business model, employing thousands of people, filling hundreds of retail spaces on Main Street.

Anyone that educated themselves over the weekend will realize that the only position for GameStop ultimately is down. R/Wallstreetbets continues to call for a hold.

Here is what I would have done, had I been following this Reddit forum. I would have bought GameStop around $20 and did the old halving on double strategy, so when it hit $40, I’d sell half of my shares and hold the remainder from that point until collapse. Even selling those shares at a loss would be a profit.

Retailers should have liquidity as hedge funds eat the loss. This is actually a major transfer of wealth from the elite downward, largely into RobinHood accounts, Cash App, and other tools that are free and easy to use in the hands of the masses.

This rare transfer of wealth from the rich to the poor happened on the platform named after Robin Hood, the mythic character that steals from the rich and gives to the poor. 

Even for the platform’s coordinated effort to control the losses, at the behest of its financiers, enabled the situation by innovating a platform that onboarded millions of first-time traders.

More importantly, it is a mass public education about big finance and how the dirty business works. There are now millions of people that just learned what options and short sales are.

This is a peoples’ movement in the truest sense of it, as far as it looks from my angle. The more people that own stocks, the more the people have leverage over companies.

Democracy is built into the market system. Rather than a single king own Coca-Cola, there are millions of investors that own it, and they can organize. Every stock counts for one vote and every year these votes determine major decisions.

Millennials are jumping into the markets and today it might be possible for a social media group to remove a CEO, breakup accounting monopolies, inflate a stock, even short their own stock to buy up more shares.

We are living in a world where personal finance is most likely to become more integral to people’s lives, just like social media, year over year.

As jobs are lost to automation, even as manufacturing comes back to domestic operation, which it is, automation is changing the landscape of the now passing industrial age, and factories with great productivity will not employ people en masse the way industry did a hundred years ago.

Social interactions are no longer limited by locality. Tribes form and coalesce in global ways with their own language, to make huge moves. GameStop is one example.

Or this could all be a set up. It is easy to manipulate the masses into seeming social movements. History has repeated this over and again.

Right now, silver is at an all-time high and the mainstream news is blaming the Reddit group. I look at the group myself and see flat denials that they are doing anything with silver. This seems like a tug of war, for real.

The real ending to this story will be the bankruptcy and demise of GameStop, unless it can somehow receive a wave of support in real sales. Lots of naive first-time investors jumped in at the height of this stock and they will lose money. This will be a wealth transfer upward and sideways, from the most naive and late coming players to the game.

But let the buyer beware. This is a free market, after all.

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