The Game Stop Fairy Tale And Its Lesson

The Game Stop (GME) Fairy Tale And Its Lesson

Once upon a time, there was a zombie corporation named Game Stop ($GME). For the last few years, it has been circling the bankruptcy drain. Similar to Blockbuster, its business model, renting and trading video games and equipment, is going the way of digital streaming. GME’s brick and mortar operations held a competitive advantage versus most competitors. Unfortunately, in today’s digital streaming world, they are minnows, prone to attack by the likes of Amazon.

We tell the story of GME because it’s fascinating. More importantly, however, it holds an important lesson about the level of speculation the Fed is fostering.

Preamble- Know Who You Are Squeezing

As we wrote this article, the short squeeze phenomena were shifting toward the silver sector. There are two essential differences between shorting SLV, an ETF, and GMEFirst, because SLV is an ETF, dealers can create shares. Such makes it more difficult to squeeze. To create shares, the dealer must deliver silver in exchange for the new shares.

Second, while squeezes in GME primarily only affect GME shareholders, SLV affects the price of silver itself. If SLV continues to rise, it brightens the outlook for silver miners but raises input costs for manufacturers that use silver in their production process. Silver is widely required to produce many high tech goods; therefore, a rising price has economic implications. As such, it is a more critical squeeze to follow, and no doubt the Fed is closely watching.

In our article –What The Hunt Brothers Can Teach Us About Gamma Squeezes we wrote:

“As the Hunt brothers can attest, do not bet against the establishment, the banks, and those who sponsor them (Fed, Treasury, etc.)”

GME- Dead Man Walking

A hedge fund quant doesn’t need a supercomputer to realize that GME is a company with a dim future. Like other companies that did not adapt to technology, GME will likely follow them into bankruptcy or become an inconsequential player.

GME’s stock opened in 2019 at $15 a share, and by January 2020, it was only $6. The writing on the wall was becoming fate. COVID-related economic shutdowns made matters worse, and the stock flirted with $3 in March 2020.

Some hedge funds likely value GME near zero. Surely a few of them were accumulating shorts in large quantities, hoping to repurchase them when GME was a penny stock. It appeared to be easy money, and the market was proving them right. Even with a low price, shorting GME offered good returns. Accordingly, the shorts stuck with the trade.

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