Thursday, January 28, 2021

Gamestop. 1999 déjà vu all over again?

In case you haven't noticed, Gamestop and a few similar stocks are in a classic bubble. At least it was at 8 AM pacific when I read the print WSJ, possibly not at 9:30 AM as I write. What's going on?

It's not the only time. This sort of thing has happened over and over again through history, most recently in the late 1990s. It's too easy to just say "people are dumb," and move on. That can explain everything. Instead, we can and should as always look at a repeated phenomenon like this and try to understand how the rules of the game are producing a weird outcome, despite pretty smart players. 

The best and most prescient analysis I know are Owen Lamont's "Go Down Fighting: Short Sellers vs. Firms," (last working paper, ungated here) Owen's classic paper with Dick Thaler, Can the Market Add and Subtract? Mispricing in Tech Stock Carve‐outs and of course my "Stocks as money" which offered (I think) a different and more cohesive view of the Add and Subtract event, and extended it to other situations.

There are four essential characteristics of these events, along with a few corollaries spelled out in my paper:  

  1. Securities are overpriced. 
  2. Trading volume is enormous. There is a big demand for short-term trading. There is some fundamental news and a lot of talk about the stock.  
  3. There are constraints on short sales, limiting the ability to take a long-term bet on the downside.
  4. There are constraints on the supply of shares,  among them the same short sale constraints. 

The first is obvious. The second through fourth however sharply limit our view of what is going on. Simple irrationality, people get attached to a stock, can explain overpricing, but not mad turnover, why they would sell it a day later. 

Demand

The central feature is a high price together with a trading frenzy

This is the widespread and inevitable pattern. Palm price was high, but Palm trading  volume was astronomically higher than 3Com. And it extends to markets as a whole. One graph from Stocks as Money:

Left: Total market capitalization (price times shares). Right: dollar volume. Source: "Stocks as money"  

Stocks as money pursued an analogy. Well, money is overpriced relative to bonds. You don't get interest on money. So is it irrational to hold money? No, as nobody holds money for long periods of time. 

Nobody holds gamestop for long periods of time either. Yes, gamestop is overpriced. Yes, over the long run, which may be years, it will yield a low, almost certainly negative return. But suppose you think you read the reddit chat rooms, and you think it will go up 20% next week. That the stock is overpriced, and has a long run negative return, perhaps even -1% per week (50% a year, a huge negative return) Well, the 1% is just a small cost of doing business. High frequency traders do not care about overpricing! 

If you want to bet on gamestop, there is no substitute to buying gamestop shares. So there is a "demand for shares," independent of demand to receive a long stream of dividends. And the reason for this demand is to speculate, either on information or opinion, or information about what other people are likely to do in the future. This is a slightly negative sum game, which leads to an academic question about rationality, below. But the odds are better than in Vegas. For now, we know where demand comes from. 

Today, the price is falling due to brokerages restricting trading. That fact falls nicely in my story. If the price is just irrational valuation of a company, restricting trading should have no effect.  


Supply 

Now, a first rule of thinking like an economist is that there is always supply and demand. Even if there is a huge, irrational demand for shares, then there should be a supply of shares. For a price to surge, we need a limit on supply. 

Short selling is both a way to express a negative opinion, but it is also a way to supply shares to a market where more people want to hold gamestop than there are shares available. Here's how it works. A has gamestop shares. B, the short seller, borrows those shares from A, and sells them to C. Now both A and C can have long positions in the stock. We have doubled the supply of shares. 

Alas, this mechanism is imperfect. It only lasts a day. B must be ready to buy back the shares the next day and return them to A. If the market goes up, B loses money, and must post that cash. The market can be irrational longer than you can stay solvent. There are also all sorts of legal and regulatory restrictions on short selling. Here Lamont's go down fighting is superb. 

Now the fun can happen. A might buy the shares, and lend them again to B. It can happen that the shorts have borrowed more shares than are outstanding, and physically cannot buy enough to repay them the next day. The price skyrockets. Big railroad barons used to do this. This event has been described as democratization of short squeezes, via coordination on the internet. It all gets worse when the short sellers are hedge funds, who have borrowed money to play! 

Short selling is a crucial supply mechanism. A lot of regulation is devoted to propping up stock prices, and thus hobbling short selling. Lamont is great on this again. 

There are other supply mechanisms. One can create synthetic securities in the option market, so that mechanism must be imperfect. It was in the 3com palm case as Lamont and Thaler document and I review. 

If prices are way too high, why don't companies issue more shares? They would like to, but that takes time and faces legal barriers. 

As WSJ reports

it takes time [for companies] to prepare an equity sale, and businesses risk raising the ire of regulators if the share price crashes after a fundraising round.

Some already have tapped the opportunity. Power Plug Inc., a hydrogen fuel-cell company that saw a roughly eightfold rise in its stock price over the past six months, on Tuesday said it was planning to raise about $1.8 billion by selling stock, about $300 million more than initially planned. AMC Entertainment Holdings Inc. this week raised more than $300 million in an equity sale. On Wednesday, its share price more than tripled.

Some investors hold debt they can exchange for new equity. And the WSJ reports Silver lake converts debt to equity. Palm/3 com also fell as share supply came on line. 

In short, stocks as money put together the facts and theories in the following table. 


The larger market

Are these, as the saying goes, the tip of the iceberg? Or are they the whole iceberg? To what extent is the highly traded, growth, lots of news and speculation, tech end of the market deep into bubble, convenience yield, very low expected return, whatever you want to call it, but certainly not a great place for long-term buy-and-hold investors? Good question. 

Rationality and trading. 

So is this all based on folly? We know that speculating is a slightly negative sum game. We can't all make money betting up or down on gamestop. 

I'm not quite ready to say that all speculative trading is by se irrational. The major hole in the theory of finance is that we do not know how information makes its way to market prices. That seems to involve trading, a process where we each look at what others think and form a consensus, and shares trade hands along the way. But we can argue about that. 

It's not even obvious that gambling is irrational. You have to look hard at people's budget constraints to make that statement. Take an extreme example. Most people in the US with income under about $60,000 face a roughly 100% marginal tax rate, according to Casey Mulligan, as income and wealth limits to government programs take away a dollar or more for each one you earn. Add to that the informal marginal taxes. If you live in a poor neighborhood and make an extra $10,000, it will be hard to keep it from friends, relatives, and crime. 

Suppose you're in that situation. A marginal dollar is of no use. But if you could pay $1 for a one in 10 million chance of getting $1 million, it's worth it. 

The small chance of breaking out makes slightly negative expected value bets which give a small chance of a big payoff rational. More generally, if you really want to make the big time, $10 million say, for most people there are no regular investments, or startup opportunities to get there. Is it irrational to risk some beer money on a small chance to get there, even if the average return is slightly negative? 

That small retail investors are driving much of the frenzy seems relevant. In other cases, leveraged traders who can go bankrupt and not feel losses drive the frenzy. 

Last comments  

Readers will know I generally resist the bubble word, as an ill-defined synonym for "I wish  had sold yesterday but I'll pretend I'm smart anyway by saying how dumb everyone else is." For a fun read on this line, see my review of Peter Garber's "Famous First Bubbles." But this time there is a good limited definition of bubble and I think it fits well.  

I love to agree with people on the other side of the spectrum: 


Our regulatory system does a lot in the name of "protection" to keep people of low means away from the kinds of investments that wealthy people can access. Whether those are a good idea or not is not for us to say, if you believe as most wealthy investors do that these are good ideas, keeping people out does not seem very fair. 

Stopping the trading saves the hedge funds. AOC has a point. (Update; not so clear. I learned there are good reasons here that brokers stop people from trading in times of very high volatility. Here is a very good thread explaining the details. A lot of it has to do with securities regulations. Marginal Revolution explains as well, with good links.  I'll leave my hasty rush to opine up as penance for having done so.) 

A bottom line

These stories show a definite market pathology. The rules of the game produce what sure looks like an undesirable outcome. House prices zoom from artificial supply limits. Let us stop focusing on irrational "demand" and focus on why supply cannot fill it. We learned in 1914 the need for "elastic currency" to fill puzzling spikes in money demand. There are definitely institutional legal and regulatory roadblocks in the way of a flat supply of shares. We need ways to take long-term short positions more easily. Short sales constraints designed to prop up prices contribute to stock bubbles as zoning and construction codes contribute to house price bubbles. 

Update: Interview with Owen Lamont, who has a different perspective on many of these issues. 


39 comments:

  1. I think you meant "But the odds are better THAN in Vegas. " You can delete this comment after fixing, if that't he case. Or never post it.

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  2. In this kind of situation, do the option prices come unglued from the stock prices? I'm wondering if the Or does arbitrage work even with institutional constraints and liquidity constraints?

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    1. in 3com/palm case, Lamont and Thaler and my followup show options got unglued from the stock prices. Palm/ 3 com was an arbitrage, and palm options/palm was arbitrage. (put call parity failed) Not sure what's going on with gamestop. Also palm options/palm came unglued so you you couldn't take a high frequency bet on palm via it's options. Again, don't have numbers on gamestop.

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    2. John, haven't read Lamont and Thaler. How were option prices unglued from the underlying. October 19th, 1987,VIX went to 150 intraday, and the options were priced accordingly. Those with synthetic puts and long puts were rewarded as the BS model failed to account for heavy tails in price change distribution. Since then out of the money calls and puts are priced for heavier tails in the distribution. If put call parity was unglued, for how long as there is now an arbitrage opportunity via long and short conversions. It seems in the long run arbitrage assures "regluing" put/call parity and semi-complete markets. Thanks for the excellent post

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    3. when the underlying is halted, but the the options are still trading, put-call parity can be maintained. In this scenario (which happens fairly regularly across the market), the price of the underlying is set in the options market for the duration of the halt and it is to the options market that market makers in the underlying look to set the price for the moment the halt is removed.

      Not sure if this is what you meant by "unglued".

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    4. Compound248 has a superb very long Twitter thread on the mechanics and plumbing of short and options trading, at https://twitter.com/compound248/status/1355274739351248898 . It talks about option prices coming unglued, incidentally to its main purpose.

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    5. Eric,

      Thanks for the link. I read the whole kind of convoluted thing.
      I’m going to stay away from “unglued” because it’s an awkward and largely meaningless term to describe the events in GME. What happened in GME options results from liquidity issues in the underlying that are almost always a function of regulation. When liquidity is hampered in the underlying, as in my trading halt example upthread, price discovery moves into the derivatives.
      In the case of GME demand in the underlying outstripped available liquidity. Usually liquidity issues are first encountered by shorts because of all the regulatory restrictions on shorting. Setting aside high rebates, it’s often not possible to borrow shares of heavily shorted stock at any price. Zero liquidity. Our hypothetical short seller would effect a short position in the options market instead by either creating a synthetic short with a combo (long put, short call for the same strike and expiration) or by simply buying a put. When the liquidity in the options market outstrips liquidity in the underlying, especially by a large amount, price discovery moves to the options market and the real price of the underlying is no longer what is printed on the stock market tape, rather it is the spot price implied by the options market. The more reliable price is the one arrived at by the more liquid market.

      This is where it might appear to someone that the options in GME came “unglued” from the underlying. If the price of the underlying is persistently deviated from the price implied by its derivatives, an unexploited arbitrage opportunity is allowed to persist. However, it exists because structural market factors (regulation, in this case) are not allowing arbitrage. The way to fix liquidity issues in stocks is by allowing limitless naked shorting and to eliminate trading halts in response to price moves. However, nobody likes stocks going down, so periodic halts have been implemented, and shorts have been maligned for time immemorial, encouraging regulators to implement a myriad of restrictions. All of this sucks liquidity out of the market just when you need it most. Options market makers do NOT require a borrow to sell short to hedge and are free of some other restrictions, plus I can pass on my buy-in and high rebate risk to the options buyer. Basically, the hampered market will be less liquid than the less hampered market and it’s quite common now for the derivatives to be much more thickly traded than the underlying. It’s just that this condition comes into sharp relief in a tail event like the GME mania.

      Our stock market is over-regulated and broken. This only becomes obvious during periods of high volatility. I’ve been saying this for most of my career.

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  3. This was an excellent argument, which I have never heard an economist explain argue before, but makes sense:

    "Add to that the informal marginal taxes. If you live in a poor neighborhood and make an extra $10,000, it will be hard to keep it from friends, relatives, and crime.

    Suppose you're in that situation. A marginal dollar is of no use. But if you could pay $1 for a one in 10 million chance of getting $1 million, it's worth it.

    The small chance of breaking out makes slightly negative expected value bets which give a small chance of a big payoff rational. More generally, if you really want to make the big time, $10 million say, for most people there are no regular investments, or startup opportunities to get there. Is it irrational to risk some beer money on a small chance to get there, even if the average return is slightly negative?"

    Though I'm not sure exactly how relevant it is in this instance, because it seems likely to me most of these traders are young, middle class males, who trade mostly because they are extraordinarily overconfident in their own intelligence and insight, and want to think of themselves as big shots. "Yeah, I trade stocks...I made 700% trading stock x last year [but I don't mention how overall I'm down 10% from all my other failed trades]."

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    1. But how else does a young middle class male make it to the lives of the rich and famous, the land of trusts and tax lawyers? That too is a quantum jump requiring a moonshot bet.

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    2. It should be remembered that with a bubble, there's a lot of potential for boasting, and it's asymmetric. If you speculate and win, you get to boast about how you earned a 1000% return. If you lose, you change the subject when that stock comes up with your buddies. That's easily worth, say, a -1% annual expected return from buying, for small "hobby" investors. The big guys can be earning the 1% premium from being on the other side, and everybody ends up content with their strategies. (To be sure, the little boasting guy has to diversify by betting on 10 different stocks, so he can get one that has the 1000% return he can talk about.)

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  4. Do you have a reference for "Most people in the US with income under about $60,000 face a roughly 100% marginal tax rate, according to Casey Mulligan, as income and wealth limits to government programs take away a dollar or more for each one you earn."?

    I couldn't find that figure in his works after some searching, and I'd like to expore the $60k value as the welfare cliff, as it seems quite high.

    Thanks!

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  5. price discovery seems to be as abused a phrase as fairness

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  6. Couple of variables that were seen towards the end of the Roman Republic seem to be in America today: Wealth inequality, Gambling, and violence.
    America needs enlightened leadership to find a way forward.

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    1. These variables are seen in virtually every society at every point of their existence.

      Delete
  7. What are ways to make long-term short positions easier? I understand how limits lead to seemingly irrational behaviour, but the mechanism pay interest for borrowing shares than selling them seems to be a good equilibrium in that it limits volatility while still allowing better price discovery.

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  8. What are the good reasons brokers stop people from trading in times of high volitility?

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  9. John,

    This statement struck me:

    "Here's how it works. A has gamestop shares. B, the short seller, borrows those shares from A, and sells them to C. Now both A and C can have long positions in the stock. We have doubled the supply of shares."

    Or after B sells the shares to C, A then buys them from C at a premium, driving up the price. Then it becomes a question of the margin interest that A is receiving from B vs. the price markup that A is paying to C for the shares.

    If I am A, charging 7-10% interest on the shares that I am lending, I can pay a 3-5% markup on the shares that I am buying from C. I can then turn around and tack on an even larger markup whenever B looks to buy the shares back. As you mention, all of this assumes that the issuing company is unable to provide additional shares in a reasonable time frame.

    The share lender holds all of the cards.

    It would make more sense to do a reversible swap than a true short.

    Party A (the owner of the shares) swaps those shares with Party B (the short) for shares in the company owned by Party B.

    If the short is successful, both Party A and Party B make money - Party B makes money by buying the shares back for less than they were sold, Party A makes money from dividends received on the shares in Party B.

    If the short is unsuccessful, Party A receives no dividend, Party B loses money but get's his shares back from Party A.

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  10. "Short selling is both a way to express a negative opinion, but it is also a way to supply shares ............ We have doubled the supply of shares."

    Not quite right! The number of decision makers owning shares has indeed doubled. The actual number of shares in existence remains unchanged.

    What clearly changes is the expectations of future ownership. Original owner A expects to return to the position of 100% ownership, a condition contractually assured by short seller B. Now it is easily seen that short seller B has placed himself in a potentially very difficult position, balanced between two decision makers who own the only stock in existence.

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  11. Here's a simpler approach:

    1. There is a constant flow of new information.
    2. There is a constant flow of activity that incorporates new information into prices.
    2. The rate of incorporation of information into the market cannot be greater than the rate of the flow of new information.

    This means that although prices are always gravitating toward efficiency, given a fixed information set (ala 2) The persistent flow of new information (ala 1) is not instantaneously incorporated into prices (ala 3) meaning that at any point in time, prices are inefficient.

    The significance of news, the rate of the news, and the size of the lag will increase the expected inefficiency.

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  12. Lots of discussion of this and no discussion of speculation re bitcoin, nor transparency from what i can see.
    Pols to protect us from ourselves?
    Speculation increases when interest rates are low and markets overwhelmingly mood and momentum

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  13. My fav. from the era is

    "A Rose.com by Any Other Name"

    https://onlinelibrary.wiley.com/doi/abs/10.1111/0022-1082.00408?casa_token=VHMjSAV1ESsAAAAA%3A7sLgzrZHtZnlVXz5PBLLYRiYpTj2cQCR_YQgIsWC1D5iOQz5wV2Uk5WLZQ5lpu3ZUTT2osdO27LBnsXJ


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  14. the brokers did not simply "limit volume" and prices fell. This is incorrect. They stopped allowing purchases completely, and only allowed sales. It was this blatant a case of price manipulation.

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  15. Hi John, What's your opinion on RobinHood having a "Payment for Order Flow" (PFOF) arrangement with Citadel which they may not have disclosed to their retail clients and their clients may not be getting the best execution? What's your view in general of PFOF from a regulatory point of view and from market efficiency point of view? Thx

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  16. On gambling for big but not small stakes, Sherwin Rosen used to love this paper by Ted Bergstrom - "Soldiers of Fortune", IIRC - that rationalized a Friedman Savage utility function by noting that a small win would keep you in your "neighborhood" while a big win would let you to leap to a different "neighborhood," with decreasing marginal utility of consumption within but not necessarily across neighborhoods.

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  17. I wonder how much of the profit made from GameStop flowed to high frequency traders. Their algorithms would have detected this early in the game and they could have gotten in and out of positions multiple times a day that would mitigate against down side risks. I don't know anything about the Robin Hood trading platform and speed of trade execution other than it cannot be as fast as the ones run by the 'Flash Boys.' This is not the first time crowd source approaches have been tried as I well recall how this was tried on Yahoo Message Boards 20 or so years ago. Of course trading is much easier today.

    There are also well publicized past spats between big fund managers that tried the same thing (Icahn versus Ackman comes to mind).

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  18. Hi John,

    Thanks for the post. I always enjoy reading your blog. I think you have a typo in this sentence: "B might buy the shares, and lend them again to A"

    Shouldn't it be "A might buy the shares, and lend them again to B"?

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  19. John, you did not, as far as I noticed, include consideration of the "up yours" aspect of the GameStop event. The first time I heard of this the leading aspect of the story was collusion, via social media (Reddit), by a group of folks intent on throwing a spanner in the works to annoy corporate entities (hedge funds) they see as filtering huge amounts of money out of the economy to enrich those who are already excessively privileged. If the motivation of those folks to cause annoyance trumps their desire to accumulate money by gambling on stocks then no amount of Adam Smith is relevant to the analysis.
    --E5

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    1. E5,

      "The first time I heard of this the leading aspect of the story was collusion, via social media (Reddit), by a group of folks intent on throwing a spanner in the works to annoy corporate entities...."

      And GameStop (the company) isn't a corporate entity? I am quite sure that employees / ownership of GameStop with stock or options are quite pleased about what is going on.

      Also,

      https://slate.com/news-and-politics/2021/01/janet-yellen-paid-speeches-citadel-gamestop.html

      "OK, so—a group of individual investors collaborated via a Reddit message board to drive up the price of stock issued by the video game retailer GameStop. They did so in part because they were aware that a number of hedge funds had shorted GameStop, essentially betting that the company’s stock price would fall. Hit hard when it rose instead, one such fund, Melvin Capital, got an emergency backstop investment from another, Citadel LLC."

      "And then, on another track, there’s an app called Robinhood, which carries out trades on behalf of individual investors, including many of those who’ve been driving the surge in GameStop’s price. Robinhood carries out those trades by routing them to other firms to execute in the actual relevant market (i.e., a computer somewhere). One of the firms that does that for Robinhood, and in fact pays Robinhood for the privilege, is Citadel Securities. Citadel Securities and Citadel LLC are both owned by the same megabillionaire."

      Whenever an investment firm (like Citadel) is involved with both sides of a trade, that should throw up all kinds of red flags.

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    2. FRestly (umm Frank?),
      Thank you for that link. Reality certainly is messy.
      I think the point of the story I heard was that the people colluding were unhappy about, and seizing upon the opportunity to inconvenience, one particular kind of corporate entity (hedge fund) and not the other (GameStop in this case).
      --E5 (Mike)

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    3. E5 / Mike,

      Yes it is Frank.

      Delete
  20. The Federal Reserve has artificially depressed the rate of interest. The federal government is distributing 'free money'. The Internet has 'democratized' information and facilitated trading in listed and over-the-counter equity and derivative securities by all and sundry. The stock brokerages are happy to have the business, even at minuscule commissions--it's found money to them. What-if some go bust? That's simply Darwin's law of survival of the fittest. Don't overlook the ages-old manipulation of opinion--'pump-and-dump'. Near-zero interest rates, free money, unbridled federal spending, and 'democratization' of technology, those are your factors. The 'solution' to reign all of this in?--raise the interest rate by putting a stop to its suppression by the Fed. Simple, and effective, it would put an end to unwarranted optimism and allow the market to perform its allocative function properly. Get the Fed out of the way, and put the government on a diet, and you avoid the worst of excesses. If the Fed continues to keep its thumb on the scales, and the government continues to depend on 'helicopter money' to address what it deems to be society's inequalities then larger problems, perhaps insurmountable, will arise the future. If the fiscal theory of the price level has any validity, getting the Fed's thumb of the scales is a top priority. Anything less than that renders bonds effectively worthless, in the present tense. Tuum est.

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    1. Old Eagle Eye,

      "The federal government is distributing free money."

      The only reason the federal government is distributing "free money" is that Republicans AND Democrats refuse to cut spending (Entitlement spending on the left, Military spending on the right), they refuse to raise taxes, and they refuse to sell equity.

      "The Federal Reserve has artificially depressed the rate of interest...The solution to reign all of this in?--raise the interest rate by putting a stop to its suppression by the Fed."

      Now, trying saying all that with a straight face. Look at corporate bond yields and tell me that the Fed is somehow suppressing them. How many corporate bonds has the FOMC purchased relative to the size of the market?

      "The stock brokerages are happy to have the business, even at minuscule commissions--it's found money to them..."

      And do you think that bond traders are that much different than stock traders?

      The natural rate of interest is determined by many factors (including but not limited to) frictions in the transfer of assets. If you (the Congress, the U. S. Treasury, whoever) want to raise the natural rate of interest (and have the Fed follow suit with raising the monetary rate of interest), you either:

      1. Tax the transfer of assets (all assets) - Socialist
      2. Sell non-transferrable assets (see previous article on government equity) - Libertarian

      "If the fiscal theory of the price level has any validity, getting the Fed's thumb of the scales is a top priority...."

      And the only way you are going to get the Fed out of the business of lending to the federal government is for the federal government to sell equity instead of debt. That decision takes one / maybe two people to decide - U. S. Treasury Secretary decision and / or Presidential decision.

      "Get the Fed out of the way, and put the government on a diet, and you avoid the worst of excesses."

      Getting rid of the Fed, changing the way the Fed operates, or putting the government on a diet takes agreement from a majority of both Houses of Congress and the President. Having the U. S. Treasury sell equity takes a lot less arguing to accomplish.

      Delete
  21. From the Marginal Revolution link: "Looks to me like Robinhood i[s] the clearing broker, not Citadel.

    https://robinhood.com/us/en/support/articles/whats-clearing-by-robinhood/

    Just like in commodity futures, margin requirements can change with volatility. Sounds to me like Robinhood and Webull were having trouble posting margin. Now, that's not to say what they did was legal - I'll let the lawyers sort out whether they have an obligation to allow people to buy a security presuming the client is fully capitalized (no margin)." I wish Robinhood's CEO had provided additional information during his interview with Andrew Sorkin of CNBC on the question of impending liquidity issues.

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  22. What is GameStop worth?

    Insider Ryan Cohen bought stock at $15. Other insiders sold stock at $30.

    Michael Batnick said it had a price to sales ratio of 1.08 when the price was $76. That sounds cheap compared to Tesla at a price to sales ratio of 28.

    GameStop might go bankrupt and be worth zero. Or Ryan Cohen and Reggie Fils-Aime might find a way to make it survive. Their experience at Chewy.com and Nintendo are surely relevant. If it survives it might be worth more than $100 per share at a cheap and reasonable price to sales ratio.

    AMC movie theaters became more likely to survive when a short squeeze allowed them to sell $800 million in stock and $400 million in bonds and $600 million of convertible debt was converted to shares. AMC is worth a lot more today than it was 10 days ago because this $1.8 billion capital infusion makes it more likely to survive. Plus it added $1.8 billion to book value.

    There’s no escaping the fact that stocks will be volatile when people are betting on bankruptcy versus survival.

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  23. What is GameStop worth?

    Insider Ryan Cohen bought stock at $15. Other insiders sold stock at $30.

    Michael Batnick said it had a price to sales ratio of 1.08 when the price was $76. That sounds cheap compared to Tesla at a price to sales ratio of 28.

    GameStop might go bankrupt and be worth zero. Or Ryan Cohen and Reggie Fils-Aime might find a way to make it survive. Their experience at Chewy.com and Nintendo are surely relevant. If it survives it might be worth more than $100 per share at a cheap and reasonable price to sales ratio.

    AMC movie theaters became more likely to survive when a short squeeze allowed them to sell $800 million in stock and $400 million in bonds and $600 million of convertible debt was converted to shares. AMC is worth a lot more today than it was 10 days ago because this $1.8 billion capital infusion makes it more likely to survive. Plus it added $1.8 billion to book value.

    There’s no escaping the fact that stocks will be volatile when people are betting on bankruptcy versus survival.

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