Goldman: Does Valuation Still Matter?

One week ago, when traders were still enthralled by the ongoing market-wide short squeeze, which started off as an isolated reddit attempt to (successfully) punish GME shorts such as Melvin Capital, and which cascaded into a widespread liquidation of most popular names as a wave of VaR shocks hit countless hedge funds which had no choice but to rapidly degross and puke their most profitable positions as their shorts spiked, leading to the biggest alpha drawdown in history.

We summarized recent events in a simple and succinct fashion: "What it all boils down to: the market has been broken since 2009, but broken in moderation and everyone is happy, the rich get richer, etc. But if someone (WSB, whoever) take this breakage to its absurd extreme (where stock prices no longer reflect anything), everything breaks."

And for a few seconds... everything did break, and only the rapid intervention of regulators/DTCC forcing Robinhood to effectively shut down trading is what gave the system on full tilt the critical time it needed to take a breath, force a reset and reverse the momentum.

Now, in a post-mortem to recent events, Goldman - which last week warned that if the squeeze wasn't halted, the consequences for market could be dire - wrote a somewhat lengthier take on what happened but its conclusion is similar: the price formation mechanism - and the fundamental investing process itself - broke when millions of retail investors (and a handful of very wily hedge fund investors) plowed into the most shorted stocks, leading to an unprecedented disconnect between price and value.

It certainly explains why Goldman's David Kostin starts off with what may well be the best quote to describe recent events:

More than a century ago and written in a completely different context, Oscar Wilde, the Irish playwright, penned a perfect description of the social psychology underpinning a short squeeze. In Lady Windermere’s Fan, one character asks, “What is a cynic?” The friend responds, “A man who knows the price of everything, and the value of nothing.” The dialogue continues, and the original inquirer states, “And a sentimentalist is a man who sees an absurd value in everything, and doesn’t know the market price of a single thing.”

Needless to say, a lot of cynics and sentimentalists were unleashed in the past two weeks.

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