AMC and GameStop Frenzy Goes Beyond Casino Mentality
(Bloomberg Opinion) -- It has only been a few months since Reddit-enabled retail investors, or what some unflatteringly refer to as the “retail mob,” embraced GameStop Corp. and drove its valuation to the moon only to be frustrated by a sudden change against them in the rules of the game. Today, it’s all about AMC Entertainment Holdings Inc., whose skyrocketing value this week has already overcome what would normally curtail investor enthusiasm. The similarities are notable, as is the broader message about what is happening to the investment landscape.
Both phenomena involve an investment thesis, effective amplifiers and lots of cash to invest and borrow on margin.
The thesis for GameStop was to exploit a few massively offside hedge funds that, believing the business was structurally impaired for a long time, had shorted wildly, amounting to an eye-popping 140% of the outstanding shares, according to some reports. For AMC, professional investors and broker-dealers are being caught off guard by the chief executive officer’s embrace of retail investors in a manner that has allowed a solid set of believers in the company’s prospects to provide a foundation for many more speculative buyers. Their combined force has been enough to overcome a significant sale of shares to a hedge fund that, according to reports, were immediately flipped and dumped into the marketplace.
The amplifier in both cases has come through Reddit, a platform that has enabled the investment theses to be shared effectively and evolve. It’s a process that has provided comfort to subsequent waves of buyers and is a perceived staying power for the trade.
Then there is the combination of no-fee trading, ample provision of margin debt and, most important, the surplus of investable cash sloshing around the system because of higher savings during the pandemic, cash transfers from the government and readily available cheap leverage.
GameStop is a reminder that, as remunerative as the AMC trade has been — and it has been incredibly so, with a year-to-date return of more than 2,800% and doubling at one point just on Wednesday — it is also vulnerable. GameStop’s unwinding came when Robinhood, the favored trading platform, suddenly curtailed investors’ ability to buy the stock, thereby starving the continuing short squeeze of oxygen and allowing market conditions to reset in a fashion that favored the hedge funds on the ropes. It was a brutal blow to retail investors that resulted in sizable losses and raised all sorts of questions, including for regulators, and prompted congressional hearings.
It’s hard to tell what may undermine the current AMC surge. What is certain is that the further the price goes up exponentially, the tenser the tug-of-war will become between new speculative buyers and those looking to sell and monetize significant returns.
With all these dynamics in play, it has been tempting for some to dismiss this retail investor phenomenon as nothing more than a mob of young irresponsible gamblers treating the stock market like a casino. That would be a mistake, especially because it would obfuscate three critical developments that are consequential for the longer-term.
First, what we are seeing is a realignment of the investment landscape at its outer edges, at least for now. It is powered by the ability to coordinate effectively and smartly through Reddit. Indeed, its dynamics have some similarities to what surprisingly toppled political regimes in some developing countries, particularly during the Arab spring a decade ago.
Second, it is yet another illustration of how ultra-loose policies have enabled more risk-taking. The enablers include large cash handouts and the ability to lever easily that’s afforded by incredibly loose financial conditions — themselves a function of the prolonged pursuit by central banks of unconventional policies involving, first, very low policy interest rates and, second, huge and predictable injections of liquidity. And the impact is not limited to retail investors. It is the same combination that has fueled the SPAC and cryptocurrency phenomena that are causing belated indigestion for a growing number of governments and central banks.
Third, it is yet another episode of market regulators and supervisors being late to the game. The difficult questions for which there is no broad agreement on answers, let alone effective guidance from the authorities, range from investor suitability and protection and possible market manipulation to larger issues of market stability and contagion.
Dismiss the AMC whirlwind at your peril. It is part of a much wider phenomenon whose implications go well beyond the immediate and well beyond retail investors.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE, the parent company of Pimco where he served as CEO and co-CIO; and chair of Gramercy Fund Management. His books include "The Only Game in Town" and "When Markets Collide."
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