Is GameStop The beginning of the End? How Melvin Capital Got Burned

By Sikander Hayat

On the surface life is pretty boring and lifeless in corona times. All major European countries are in lockdown including Switzerland and it really is hard to keep up the motivation to work, to eat, to sleep and to do anything for that matter. One interesting thing happening right now is the global march of the markets towards a massive bubble like state and we don't actually know if this is a bubble or not. This bubble-like state is just due to the fact that all central banks are pumping massive amounts of money into the

economies inflating every asset or asset lookalike (bitcoin). The rise of the bitcoin to stratospheric levels is the most obvious example of free money available in the market. There is so much free money being pumped into the markets that people don't know what to do with it. All they can see is the stock market and the ponzi schemes like Bitcoin and putting all access cash wherever they see any opening. This is really turning into irrational exuberance but central banks don't want to spook the markets and keep pumping more and more money (mostly debt incurred by governments) into markets. 

The great rebalancing of wealth is on the march from West to East. Percentage of world’s wealth concentration in the East  is fast approaching the levels in the West. The change was already happening but the Corona crisis has supercharged the process. Eastern economies are coming out of the corona lockdown much faster than the economies in the West. Still, West has the wealth advantage and the amount of money they can unleash is still unmatched. 

The Gamestop saga is the symptom of the deluge of money looking for a home. This is not a problem itself but the sign of the problems which are coming our way. Wall Street wisdom is that in the long run, the stock market never goes down so those long term investors who invest in ETFs like VWRL or VHYL are not going to lose money. But everything is in flux and this thing can go both ways. Either the coming spring will herald the beginning of the roaring 20s or the bust will be so severe that not even the combined power of all

central banks will be able to stem the hemorrhaging. Gamestop also shows that a house always wins as inevitably the share price will drop down to normal levels and a lot of retail investors will lose a lot of money really quickly.  Hedge funds such as Melvin Capital and Citroen had short positions vis a vis Gamestop and once share price went up above a certain level these hedge funds had to close their positions by buying the stock and in the process pushing the price even higher.

By its very definition, these hedge funds will quickly sell the stakes that they have now amassed in Gamestop and will trigger a price drop to a much more normal level.  All this mania was triggered by Reddit message boards where retail investors formed groups to take on Wall Street by first concentrating on the Gamestop short selling and then taking on Silver (commodity) by investing a lot of money in silver shares and I am sure that story here will be same as the one we saw with Gamestop. 

There is so much confusion clouding the judgements of investors. There are traditional assets in the form of bonds/stocks and then there are new kids in town in the form of crypto assets which we are not sure about as in how to class these things. Are these a form of currency, an asset class or just a ponzi scheme? Regulators in the United States are letting the value of these crypto assets grow and grow while giving warnings that investors

should be ready for the day when the value of these crypto assets goes down to zero again.  Only giving warning and not actually doing anything will give cryptocurrencies the power to bring down the whole financial system and with it the world economy. Action is required now from the Federal Reserve, European Central Bank (ECB), Bank of England (BOE) and People Bank of China (PBOC) to stem further flow of assets into Bitcoin and the

like in order to stop a bigger harm from coming to the market. There is an opinion that the Federal Reserve and other major central banks are letting the Bitcoin rip because of some hidden agenda. What this agenda really means is yet to be seen.  Bitcoin may reach USD 100,000 or as many Bitcoiners believe USD 1000,000 but what is the real value of this thing is yet to be known and someone somewhere needs to take action against pure speculation before many people are burnt. 

Coronavirus is mutating into many different strains (UK, South Africa, California etc.) and putting in doubt the efficacy of current vaccines being used all over the world but the political leadership in all the major countries have reassured their public that vaccines still work and that everyone will be vaccinated soon. 

Some experts believe that the world will take control of the coronavirus pandemic by the end of March as large parts of the world have now a decreasing number of cases. This might be due to the lockdowns imposed by the governments or just the case that populations are achieving herd immunity.  This will unleash a new era of economic strength.

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