The last breath of the meme stick era

Twhere years Before that, the stock market was under the spell of speculation madness. Shares of GameStop, a struggling video game retailer, hit an all-time high of $483 on January 28, 2021, up from about $5 at the beginning of the month. Retailers coordinated on a Reddit forum and bought shares with brokerage apps like Robinhood. Empowered by technology, newcomers flocked to GameStop, ostensibly because the struggling chain was one that Wall Street had heavily shorted (ie, bet that the company’s stock would fall). Short sellers were the villains. When GameStop made Spike, they lost their shirts. what would be better

The question then was how much of it would endure. Manias are as old as the hills, but this one seemed different: made possible by new technology that went nowhere. For a while, the GameStop crew was unstoppable. They raised prices for companies that had attracted interest from short sellers, such as amc, a movie theater chain, and Bed, Bath & Beyond, a homewares retailer. Battle-hardened short sellers, including Andrew Left of Citron, a research firm, threw in the towel. Melvin Capital, a firm that had cut GameStop, which the Reddit hordes had turned into the saga’s cartoon villain, decided to close its doors in May 2022.

When interest rates are zero, the price of a dream can be infinite. Higher rates change the dynamics. So the last year has been tough for the meme portfolio, but its fans are absolutely resilient even in the face of losses. Robeco’s Matthias Hanauer, a wealth manager, tracks the most heavily discounted stocks of the year msci Developed Index, a benchmark for global equities. Since Dec. 31, 2020, a month before GameStop’s stock peaked, it has underperformed the market by around 15 percentage points.

If 2022 was a reckoning with professional investors, then 2023 will be a reckoning with reality. A slowing economy will destroy many of the companies that profess to love meme stockers. Monetary tightening slows the economy with a delay. As conditions worsen, struggling retailers like Bed, Bath and Beyond are reeling. On January 26, the shower curtain supplier received a series of reminders from its bankers. Reuters, a news agency, has reported that it may soon file for bankruptcy.

The end of more than a decade of rock-bottom interest rates is also beginning to uncover corporate misdeeds and sometimes outright fraud. “Capital was free for 12 years,” says a former Wall Street tycoon. “We have no idea where the capital went where it shouldn’t have gone.” Some initial misallocations have become apparent. The bursting of the bubble in the cryptocurrency markets has caused companies like Celsius and ftxwhose founders have been accused of defrauding their investors.

So the stage is set for the triumph of what the meme stock game supposedly hates the most: short sellers trying to track down this kind of stuff. Nathan Anderson, founder of Hindenburg Research and a famous short seller, has already made waves with an investigation into what he calls widespread fraud and market manipulation Adani groupa huge Indian conglomerate that strongly denies the claims.

So what remains of the retail age? Individual traders are more important than they used to be, even if they are far from the peak of their power. In 2019, the retail share of stock trading volume was around 15%. Then, in the first quarter of 2021, it peaked at 24%. That number underestimated the true power of retail investors. Exclude market makers, who are in the middle of most trades, and retail traders made up about half of the volume, while institutional investors made up the rest. Although retailers’ share has fallen to an average of 18% in 2022, or around a third excluding market makers, it’s still above baseline. When stock markets rebound, it’s fashion favorites like GameStop and Tesla that lead the rush.

But what lasts perhaps the longest is carelessness. Investing is usually serious business. But even as the gang lets go of their treasures and reconsiders their old grudges, their influence is still felt. There are already many Hindenburg vs. Adani memes on r/WallStreetBets, the Reddit forum where it all started. These mirror what was done about Melvin vs GameStop two years ago, with one small difference. This time Mr. Anderson, the short seller, is the hero.■

Read more from Buttonwood, our financial markets columnist:
When professional stock pickers beat the algorithms (January 26)
Venture Capital’s $300 Billion Question (January 18)
The dollar could be in for a nasty surprise for investors (January 12)

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