[FRIAM] Strawman/Steelman
Marcus Daniels
marcus at snoutfarm.com
Sat Jan 30 11:36:47 EST 2021
Impulsive, uninformed people, like the capitol rioters, will find themselves further weakened while a few instigators will walk away with a story and some money in their pocket. An appropriate way the wrap-up the rule of the last administration. Hardly a company worth rescuing.
> On Jan 30, 2021, at 3:20 AM, David Eric Smith <desmith at santafe.edu> wrote:
>
> So I have been watching this, and it looks just like one more wealth-concentrator on the long term, with smaller shifts in the short term that people get caught up looking at because they involve personality conflicts.
>
> Will somebody tell me where I am wrong in the following?
>
> 1. We start with the usual state of affairs, in which hedge funds of various sizes take short positions; in what and how much depends on the capital they hold to cover the short, relative to their other options. They are “big” actors, in the sense that decisions of individual firms can involve moderately large amounts of money. They assume they are the full landscape of big actors, and although they act with cognizance of each other, since they are all using similar research, they do much the same thing.
>
> 2. A new “oligopolistic actor” comes in that changes the landscape of participants, which is a group of Reddit-coordinated little fish. They can put a short squeeze on the hedge funds. Those that took too large a position either with too little capital to cover the squeeze until it bursts, or with too little interest in this stock to be willing to take much of a loss on it, will sell off at a loss, and the various little fish will make a little money each, but it will look like a decent chunk when you take them together. The smaller or medium-sized hedge funds that can’t wait this out could be forced into low enough overall returns that their clients will want to withdraw from them, putting them in further trouble, perhaps driving some of them out of business.
>
> 3. Meanwhile: the oligopoly move is an ordinary pyramid scheme, and it only works as long as the pool of new buyers remains large enough to pay off the earlier buyers surfing the bubble. Considering that relief and unemployment checks amounted to many hundreds of billions of dollars, if even a modest amount of this is in the hands of the young men who were gamers and are now stuck at home, it can look as if that bubble can continue to inflate for a while. We might even be able to estimate, however, from the overall amount of free money spent into the system, and the part of the public that this young-male demographic accounts for, what the potential size of total gambling capital is for this thing.
>
> 4. While attention is on the oligopoly of small fish, and the unprepared mid-sized or small hedge funds that might go bankrupt, there are always larger actors who are well capitalized and can wait out bubbles. They may not have taken positions in this before, when it wasn’t all that interesting, but now seeing that there is a bubble afoot, they had a reason to get in and go short early. They can outlast the short squeeze, and have a reason to do so because of point 5 (next):
>
> 5. The pyramid will end when the new buyers are exhausted, and that will be the end of any power for the little-fish oligopoly. At that point everybody who is leveraged will be underwater. Because a lot of this money was in options, the unwinding will be very fast, much faster than if it were just driven by a sell-off of the underlying. The last wave of buyers in will lose essentially whatever they spent. Whichever little fish happened to get out of the bubble before that will collect some of the money from that last wave, and the larger hedge funds who were waiting out the short squeeze will then collect the rest.
>
>
> So, when the dust settles, the net effect? Some money will have changed hands in a quasi-random way, from many small fish who gambled the rent and couldn’t afford to lose it, to a smaller number of other small fish who will collect at varying multiples, but still not enough to meaningfully alter their life trajectories. The Reddit board-makers might collect enough to happily go on to the next scam, but they will not be breaking into any Forbes lists. However, in the net, there will have been a flow of money out of both the oligopoly of small fish and the small or mid-sized hedge funds that didn’t see it coming, and into the wealth of the large funds. In addition to the direct winnings of the large players, because their returns to their clients will go up, they will collect new clients that jumped ship from the hedge funds that bought back out of the short squeeze at a loss.
>
> So the macro-thing that will happen is the macro-thing that happens through every other mechanism: whoever has the most capital can wait out the largest spectrum of risks, and will on average gain more capital. This is the ratchet that works through everything. It is not a Fama-French efficient market mechanism, because it works through differential action of constraints, not through Arrow-Debreu “complete” price systems. It is not quite the same, but still related to, the bubble-bailout cycles that I have termed Minsky’s Ratchet, from the arguments made by Hyman Minsky in Stabilizing an Unstable Economy.
> https://www.amazon.com/Stabilizing-Unstable-Economy-Hyman-Minsky/dp/0071592997
>
>
> For AOC to be seeking media attention, when there was an early trading freeze, to criticize the hedge funds for looking for protection against the oligopoly doesn’t surprise me, because this is a culture-war thing and responding in the moment to that is what she does. But for Warren (Elizabeth, not Buffett) to allow that to be her caught-on-camera moment surprises me, and seems regrettable. Yes, EW is as motivated as AOC to criticize the use of access by the hedge funds to seek protection when they get beat at their own game, and both are right to mock them and welcome them to go under. But EW’s career has been about how the ratchet of unequal capital constraints moves capital from the small to the large, and if what I said above is correct, I would assume this would be the biggest picture in her view. In the long term, the people who will get hurt mainly are just the people she has made a profession of trying to protect. I would think she would want her on-camera moment to be about not getting distracted from that, and worrying that, yes, market regulations and taxation that encourage game-of-chicken gambling are The Urgent — and structural — Problem. Whether some gambling hedge funds get caught and go under is a sideshow. AOC, too, of course is plenty smart to understand all this (if what I have said above is not wrong), and I expect she probably does. (She was an econ major in college, right?). But her media incentives are a bit different, so for her to mostly emphasize the culture-war thing doesn’t seem strange.
>
> So is the above roughly correct? Or do I misunderstand the structure badly enough that I am drawing the wrong macro-conclusion?
>
> Eric
>
>
>> On Jan 29, 2021, at 6:45 PM, uǝlƃ ↙↙↙ <gepropella at gmail.com> wrote:
>>
>> Yep. I've logged into my TD Ameritrade account several times to see if they've limited purchases of GME. Supposedly Robinhood did limit purchases. It looked like I could always buy on TDA... but I'm not sure. I would never actually buy GME, *except* to screw The Man. 8^D
>>
>>> On 1/29/21 3:41 PM, Merle Lefkoff wrote:
>>> Has anyone been watching what's happening in the stock market with GameStop?
>>
>>
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>> ↙↙↙ uǝlƃ
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