Public Service Announcement: Robinhood Is Not Your Friend

Would-be populists, ranging from Senator Ted Cruz to Congresswoman Alexandria Ocasio-Cortez, questioned attempts by regulators to slow down the GameStop frenzy. Their commentary was neither informed nor helpful. 

The slowdowns, we now know, were designed not to quelch the mob nor to defend short-sellers, but to protect market makers – including especially Robinhood – from failing. They were the Capitol Cops of this story trying to do their jobs. Nobody wins when they go down. Unless you are in favor of anarchy. Which I am not.

We also now know that much of the frenzy involved large institutional investors as well as the Reddit Robinhood and Reddit Bro crowd. The Wall Street Journal has reported on $700 million, $200 million, and $150 million gains by traditional hedge funds joining the pile-on in January. I just mention this because the simple David and Goliath story is always appealing in markets, but frequently wrong.

A few other thoughts. I recently argued that despite the fact that traditional inflation in the economy seems tame, that the run-up in real estate and stock markets generally should be understood as a specific form of inflation. 

Protect yourself from the viking hats

I cannot prove the following, but I believe it: The frenzy in GameStop, like the parallel ephemeral frenzies in stocks like Tesla and AMC, cryptocurrencies like Bitcoin and Dogecoin, and commodities like silver seem to share a mob-like desperate quality. My thesis – again just my belief – is that the easy monetary policy from the Federal Reserve (low interest rates, huge securities portfolio) has created an ocean of extra cash, sloshing around the capital markets. The excess liquidity sloshing around creates waves and then occasional rogue wave tsunamis. The appearance of these rogue waves in the markets are a kind of inflation. 

They are dangerous and possibly destructive, but only if you put yourself in harm’s way. Stay inland, and defend your castle against the viking hats.

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