It seems the world and its band of newbie traders suddenly woke up in 2021 to John McClane's "yippee ki yay" mantra and have decided to go to bat against Wall Street and the entire financial establishment. After decades of preppy U.S. elite schools controlling cohorts of ultra-rich politicians and bankers and a pandemic that exacerbated just how manipulated the system really is, it appears as though it is now war against Wall Street.
This contest is coming to light with the recent surge in shares of GameStop (GME) from $20 to $350 in just a few days. GameStop is among a group of businesses starved by online marketplaces. But it is not about GameStop per se; this seems to be about the little guy standing up for himself and saying, "Enough is enough." We talk about social anarchy post the pandemic; well, it will show up in all different places. The idea is to take out the big establishments and make then pay for what they have done and achieved over the decades at the cost of the little guy.
As Wall Street banks and funds need to file their 13-Fs to show their net long and short positions, applications such as Robinhood have made tracking these positions a lot easier to see and have revealed where the most pain could be inflicted. What is worse is that these platforms are making it super easy for anyone, and I mean anyone, to be able to buy and sell options on these illiquid names.
The world of derivatives is an extremely powerful one, and one that is multiple times more levered than even the equity market. We need to look no further back than fallen hedge fund Long-Term Capital Management to know just how scary the volatility market can be, and the Federal Reserve knows this.
Most people trading these options would not be able to tell you what theta, convexity, skew, gamma, volatility and time value is, yet they trade them in size. We all know what happens when short gamma gets squeezed -- it becomes a self-fulfilling prophecy and stock can go to infinity. Imagine a tiny door held shut by a few bolts, and suddenly a fire erupts and everyone wants to rush out at the same time; that is what a short gamma squeeze can do. One of the famous, all-time historical squeezes in the trading world was Volkswagen, which back in 2008 confounded so many and was the career-making move to get it right.
It seems Reddit, wallstreetbets or whatever you want to call it have found Wall Street's weakness and are going right where it hurts. When you see a big hedge fund such as Melvin Capital come to its knees in a few days with just a few traders ramping up GameStop, you wonder how much power is behind this movement. What else are they to do?
The Fed as we saw from its latest Federal Open Market Committee (FOMC) meeting knows only one thing -- keep printing money to elevate asset prices and generate inflation, hoping for an eventual economic recovery. What it fails to see is this money printing is doing jack to create jobs and help the "disadvantaged people," as Fed Chairman Jerome Powell calls them. It just goes straight to risk assets, large-cap stocks like the top 1%. It is all financially manipulated and it has not and does not really help the economy. It gives the illusion of support, but the real economy where tens of millions of people are jobless, where the Fed admits there is wealth inequality, does not benefit at all. These people face the real inflation in food, energy, bills, but not the asset price inflation that the top 1% hold in their portfolios.
The Fed, the Securities and Exchange Commission (SEC) and various agencies need to think long and hard about these loopholes and perhaps put a stop to derivatives and options, especially by people who are not licensed to trade them. But their massive balance sheet expansion and push lower for longer rates has created an evil monster, as nothing comes without consequences.
It seems overnight the next target talked about on financial twitter is silver and the stock of silver producer First Majestic Silver Corp. (AG) . First Majestic has a short interest of 47 million shares. JPMorgan Chase (JPM) and others have been fined for distorting the bullion market for years. They lean over the paper market with their "shorts on the books" while holding actual physical longs to show "paper profits." This is great manipulation.
Wall Street is all about who has the biggest bat and can swing the hardest. It boils down to basic caveman instincts. And now, the little guy seems to have his eye on the precious metals market, gold and silver short paper positions and their relative equities.
We can all argue about the valuation of GameStop and other shorted stocks, but no one can deny the value of silver and gold futures are severely underpriced here, especially versus the physical market which is trading at a 30% premium in places. A small band of traders could get the ball rolling, and this one can have extra legs because fundamentally it is too cheap. With all the endless money printing and more to come, judging by Fed's latest statement, and real yields moving lower, it seems a no brainer to wait for this one to play out.
Coming from a league of old-school Wall Street traders myself, far from a Reddit or Gen-Z type, I am not standing on top of a 200-story building screaming "yippee-ki-yay MF" but I can appreciate the beauty of this call. It has been suppressed far too much and for far too long. Sit back, be patient, and enjoy the ride.
It is time to wake up Wall Street; its time seems to be up.
