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By Michael Every of Rabobank

Game Over or Game On? (and Hamsters)

This is still not an equity-focused Daily; yet it still can’t avoid talking about what just happened. Wednesday saw the forum for the ‘Redd-olution’ shut down, then belatedly reopened; a massive spike in the share-price of GameStop, as the retail horde crushed hedge fund short-sellers with another incredible spike into bubbleville; then the online broker they transact with, Robinhood, decided all trading in GameStop and a few other key stocks was to be sell only, with the broker de facto becoming a regulator; and so the price of said stocks then reversed dramatically, wider stocks rallied, US and global bond yields rose, and the USD weakened as risk went back on.

On one level this is indeed Game Over. The House wins. The Empire Strikes Back. ‘Sanity’ prevails. And, yes, we should not be encouraging retail investors to manipulate markets and pile into obvious bubbles with stimulus cheques “because markets”.

However, on another level this is Game On. The retail horde are not going anywhere, and may have no day jobs to go back to. They have been defeated here, but can pile into any stock or asset they choose, forcing brokers or regulators to shut down trading, making life hard for The Street, and a mockery of the system. Moreover, they have political support: when AOC and Ted Cruz and Donald Trump, Jr. all agree the system is rigged, you know something is happening.

The easy to grasp political meme is that the ‘sanity’ now restored is one of infinite liquidity and light touch regulation for established market players –so hedge funds can short more than 100% of a stock (which is the market ‘genius’ the Redd-olution first spotted) or buy 100-year Argentinian bonds, or go long tech that bleeds money– but means bankrupting rule-changes and a heavy regulatory hand for retail punters trying to cut out the middle men. Over 40 years we still haven’t seen any political action to reverse the collapse in US real wages that has led people to need to day-trade for a living or retirement; but it took just 48 hours to act to save hedge funds. With zero irony, Steven Cohen, who runs hedge fund Citadel that does Robinhood’s trades for it, even tweeted: “I’m just trying to make a living just like you”(!) Yet what is the real political solution?

Back in 2015, when China’s equity bubble was imploding, I used the analogy of my mum’s hamster, which was always escaping from its cage. She had responded by progressively blocking each side of the cage with 12” LPs, but the thing always found a way out from the open sides. When all four were covered, and she was considering entombing it with an LP on the top of the cage too, I told her to either accept it was going to escape, or not have a hamster at all. It’s no surprise if you understand political economy and Minsky, but the US in 2021 echoes China in 2015. Vast amounts of liquidity are being thrown at a system that does not produce the “desired” outcomes: and the response is to micromanage where the liquidity flows, rather than accepting that hamsters gonna hamster.

In China’s case, this is part of their system, which despite cycles of mini-booms and busts and increasingly inefficient capital allocation, also produce massive output gains; and as long as Minsky isn’t gonna Minsky, which means as long as external trade is never gonna deficit, this is sustainable, even if an external political backlash is inevitable. By contrast, the US is the home of individual and market freedoms, yet we see the same trend of trying to stop the hamster escaping, while feeding it purely on speed: is an internal political backlash inevitable?

At least China has central planning, with markets there to help: in the US we have central planning with no plan other than “because markets” (but not these markets; or like that; or by you).

However, moving from the micro to the meta, that can change. In the US there is a shift to national security focused on China, which gives central planners broad lines for market activity to then colour within – albeit on less of the page than they could doodle on before. Moreover, a Green New Deal is a major focus for President Biden and the same analogy holds there. The two sets of broad lines could look very similar, or very different.

On which, yesterday China’s official spokesperson stated: “China is willing to work with the US on climate change. But such cooperation cannot stand unaffected by the overall China-US relations. It is impossible to ask for China’s support in global affairs while interfering in its domestic affairs and undermining its interests.” So climate czar John Kerry may have nothing to do with Beijing after all; or lots and lots. Just don’t forget the lobbying US Big Tech executives are already doing to decouple from China.

But back to our current ‘sanity’, where Bloomberg op-eds roundly cheer the end of the first stage of the Redd-olution (after all, these kind of people don’t even pay for terminals!) and herald that “Hedge Funds’ Trades Are Working Again After Worst Day in History”. So nature is healing, and it’s time to buy 100-year bonds from repeat defaulters and/or loss-making tech companies again.

Back to your wheels, people!