The Big Squeeze

Is r/wallstreetbets really leading a financial revolution?

Nobody knows anything.

William Goldman's "Law of Hollywood"

No one knows enough, and everyone at some level knows that about herself and everyone else.

Bill Janeway's "Law of the Equity Markets," Doing Capitalism in the Innovation Economy

From time to time, however, some group of investors comes along who truly believe that they do know enough. They know, for example, that certain hedge funds are short one or other dying company—AMC Theatres, GameStop—and that if they collectively use their “free” brokerage accounts to drive up the price they will force the shorts to cover, driving up the price even further, after the shorts have lost intolerable amounts of money.

Now, one of the observables of the new Digital Economy, as with all new economies, is that the disrupters who are driving Creative Destruction also know that they are creating a new world, so why should they waste time learning how the existing one—the one that they are disrupting—actually works? Why should they waste time learning that a brokerage firm (even if it is masquerading as an online gaming platform) is subject to the same regulations as every other brokerage firm, including the requirement to maintain the amount of capital that Depository Trust and Clearing Corporation (“DTCC”) says it must have if the trades the brokerage accepts are actually going to close?

Matt Levine of Bloomberg has proposed the “Boredom Markets Hypothesis”: wild action flowing from Reddit through Robinhood to the stock market is a consequence of the Pandemic-induced lockdowns. So maybe the mega-risk to the current wave of financial fun and games—from the digital Unicorns to the GameStonks—is really an effective, comprehensive distribution of COVID-19 vaccines. Maybe a broad-based, acceleration of economic recovery, when we are finally liberated from lockdowns, drives the anticipation of some (even modest) inflation, which in turns hits the bond market and calls into question the persistence of Fed determination to hold risk-free interest rates at negative levels? And, maybe, institutional investors return to investing in companies with calculable cashflows while bored gamers on Reddit and Robinhood go back to productive work? Just saying…

"Venture Capital in the 21st Century," with Bill Janeway is a new series investigating the relationship between venture capital and technological innovation, and the interdependent roles of entrepreneurial firms, the mission-driven State and financial speculation in the overall innovation system.

Watch the series

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