Why it’s usually crazier than you expect
collaborativefund.com
collaborativefund.com
But that never came... it was just positive feedback in perception.
2. It's not "usually" crazier than you expect. Most everywhere, we have feedback loops that keep things stable. Demand rises, prices rise, people think, eh, too expensive, and demand and supply are in balance again. Airplane gets bumped nose-up a bit, angle of attack increases on the wing and the horizontal stabiliser creating upward forces, but everything (centre of gravity, tail volume, etc.) is carefully designed such that this results in a nose-down momentum until the plane is in equilibrium again. And I could go on.
That's why it is so unusual when things spin out of control (nuclear bomb, anyone?).
3. As for GME, I trust that the forces of the market will pull it back down where it belongs soon enough.
EDIT: closed parenthesis
I'm having trouble scrounging up links, but a lot of good research came out of the Santa Fe Institute and associated folks.
Therefore the gamma squeeze has a timing component, while short squeeze can happen at any time irrespective of when options expire.
Squeezing shorts is trying to make sure that the shorts (that need to buy back shares) don't find any shares to buy, thus driving up the price (as they'll offer more and more to buy the shares they're obliged to return to those they borrowed them from).
With a gamma squeeze, you also aim to drive up the price, but the mechanism is a different.
As you might know, the payoff of a call option (as a function of the stock price S at expiry) looks something like this:
__/
The price of a call option before expiry looks basically similar, but smoothed out.
The delta of an option is the first derivative of that graph, or, to put it differently, the change in the price of the option as S goes up. You can convince yourself that when S is very low, the delta of the option is very close to zero, and as S approaches K, the delta increases, and with S much higher than K, delta is basically 1.
(Take an option struck at 50. When S = 10, it's worth basically nothing, and when S = 11, it's still worth basically nothing. So, delta = 0. When S = 200, option is worth about 150, when S = 201, it's worth about 151. So, delta = 1.)
[Gamma is the second derivative. It's basically zero when the stock price is very low or very high, as delta doesn't change. But near K, gamma rises - delta changes!]
Now, if an option trader sells you a call, you're long (you win if the stock goes up), trader is short. Trader doesn't like that risk, so they'll buy the stock to cancel out their price risk. How much stock? Well, depends on delta. If S is small, and delta, say, 0.1, they only need to buy 0.1 stock. Then, for small movements of S (say, a small increase), what they lose on the option, they gain on the stock.
However! If the stock moves substantially, particularly if S approaches K, the delta of the option goes up (gamma is not zero anymore). So, the trader needs to buy more shares to be flat again.
So, here's the strategy: Cheaply buy way-out-of-the-money call options (S << K). Then, manage (somehow), to drive the share price S up towards K. The trader who sold you the options will then buy S, potentially driving up S even further. That's the gamma squeeze.
[Note: The trader that sold you the call charged you a fixed premium at the beginning. Now they must buy the stock when it has gone up, and sell it when it has gone down. So, as the share price goes up and down, they lose money (since they buy expensive and sell cheap). If the share price goes up and down a lot, they'll lose more than they got on the premium. If the share price goes up and down only a bit, say when it moves smoothly in one direction only, or not at all much, then they'll lose less than they got on the premium, so they'll win.
That's why we say that someone that wrote a call is short realised vol: if realised vol is high (higher than the implied one that he charged you for the option), they'll lose, and vv.]
When you wrote an option, you're short vol, short gamma, and long theta. When you bought an option, you're long vol, long gamma, short theta.
When you drive the price of the stock up you increase the interests the short have to pay on the shares they borrowed to sell, or maybe increase the capital requirements they need to maintain this position on their books, reducing their upside.
If the interests or the capital requirements for maintaining the position get too high, or the owners of the shares want them back, they might have to exit their position, "no matter the cost" hence the "squeeze" part.
(I'm writing it down to see if I understood it all correctly)
It is as if the option seller (who is short gamma) follows a momentum strategy - when price goes up, they buy, when price goes down, they sell.
As for the short squeeze - why would the owner of the shares want them back from the shorters? Well, presumably to sell them.
The conversation would go like this: BlackRock to Melvin: give me my shares back! Melvin: why? B: the Price has gone up to 300! It’s insane! We are a traditional fundamental investor and bought them at at 15. We want to sell them and lock in our profit! M: ok, how about I buy the whole bunch of you, and we call it even? B: done.
All the redditors that hold on to their shares for dear life: what just happened?
As for GME, there’s fundamental analysis and financial experts telling us it is only a matter of time before the price free falls. But there’s a serious behavioral dissymmetry here. The market is rich with GME stock buyers who don’t care to listen to any of these traditional buy/sell signals. I’m not sure you’re wrong, but I’m personally a little bit less certain that the price will drop — at least soon — due to this reason alone. As this article points out, feedback loops can be extremely powerful. And I suspect they can play out over longer periods than we expect.
Traditional buy/sell signals are irrelevant, because of the short seller shenanigans. The short sellers created this perfect trap for themselves, now they are scrambling to get out of using every dirty tricks. The more WSB crowd is aware of this scenario, the more they jump in to the diamond hands philosophy.
Yeah, but as I've explained elsewhere: Suppose long interest is 240% and short interest 140% (leaving net supply of 100% shares). Then, even if redditor HODLers hold 99% of actual shares, and won't sell them, it's enough if there is 1% free float, and the 141% remaining longs (who have lent out their shares to the shorts) are happy to sell at the current inflated price. The shorts can then close out their position with 140 of those 141 longs, and then you're left with 99% shares held by redditors, and 1% held by someone else who might want to sell at this point.
To squeeze the shorts, you need to control 100% or more of the long interest. I doubt that's the case here.
https://wallstreetplayboys.com/amc-gamestop-and-nokia-why-it...
The bottom line, everyone knows they can sell to short sellers at ANY price, because the short sellers have to buy at ANY price. Why would anyone sell to short sellers at less than ANY price?
no they don't. They can bankrupt, and default on their contractual obligations. And if they are smart, what they will do today is setup a structure that protects their existing assets from seizure, and then short GME, and then default if it doesn't turn out well (or gain massive profit if it does fall).
This has never happened before. Why is this happening the way it has for past week?
Those shorting shares have to pay interest, place collateral if price goes up and need to buy back those shares regardless of market price. The ones holding shares don't have that pressure and their losses are bounded.
If options are used, the effect depends on how the price of the underlying moves. Generally they just have a multiplicative effect, the losing side has to increase collateral.
A particularity of shorted calls is that losses are unbounded.
Intriguing, and (lamentably) not entirely impossible. But, you know: bubbles do have the habit of bursting.
Paying dividends is just one way a company returns profits - but there are plenty of other ways, such as share buy backs, or reinvestments in the company (thus making future returns higher).
Dividends, like rents generated by real estate, accrue based on the financial performance of the underlying asset. Dividend payout is the only way valuation has any real basis in financial performance of the underlying business.
No dividend = something else is afoot. Most stocks right now are baseball cards.
1)Possibility of issuing dividends means the valuation can't be too low. If it's too low you can just buy it out and issue dividends next year making bank.
2)The the company may hold assets valuable to other (maybe dividend paying) entities. If the valuation is too low they will just buy it out and pay out more dividends.
3)The company may buy its own stock. If the value is too low they will buy a lot of it and issue dividends later at big multiplier.
I am not sure why you're feeling so strongly about that point. It's about the first thing you learn when dealing with equities. If anything paying significant dividends right now means the business is unlikely to grow anymore.
People trade stock as if the companies were yielding something to the stock owners. Many don't. Acting "as if" the company is making those payments -- imputing a price to the stock according to the underlying fundamentals, or some temporally discounted variant -- is a fantasy. It is a symbolic act. An exercise in recursion, anchored in nothing.
The story the market is telling is a very different kind of story, now.
Aka the Modigliani–Miller theorem.
https://en.wikipedia.org/wiki/Dividend_policy#Modigliani%E2%...
Periodically people lose sight of that and start talking about a new paradigm and new valuations (usually because using that metric means prices are insane), but it always returns to future earnings.
All indicators are we are near the top of a spectacular bubble in assets from bitcoin to spacs to tech stock prices the red signs are flashing. Who knows how or when it ends though.
Yes, that's basically the point we've reached with the stock market as a whole right now. Nothing is tied to any kind of fundamentals. It's all about "we like the stock".
Not really, though. GME and other meme stocks might be out of whack a lot, temporarily, and stocks generally might be overvalued somewhat (and, I’d say, harder to value because rates are so low, making the horizon longer), but I’m pretty sure that the mechanisms are still there that fundamentals will reassert themselves.
Really? I saw a local Software Etc. and Funcoland both get replaced by GameStops. Both times, it was a straight downgrade in terms of customer experience.
A couple billion dollars in the bank buys you a lot of lawyers.
As Matt pointed out, AMC is doing it. I agree with dougmwne, this is the corporate kickstarter opportunity of a lifetime. They should take it.
It's also a negative feedback mechanism in a market full of positive feedback mechanisms (ie, the short squeeze). Creating more stock makes the market more stable.
I am financially illiterate, but I understand the reddit posts to mean that short squeeze is inevitable because GME is >100% shorted and issuing more shares would kill the short squeeze and drive the price down
A low stock price creates risk because it makes it hard (expensive) to raise capital. Well, here you are, it doesn't get better than this!
Now, if many peiple start believing that, it will cause an actual bubble. When interest rates are taken into consideration, the global stock market valuation in terms of average P/E rates is about where you’d expect it to be.
Which is higher than but a few times before, to be sure. But still in the realm of plausible fundamentals.
A share of stock represents a tiny percentage share in a company's assets and profits. For simplicity, let's say a company has 100 shares, and you own 1 share or 1%. If they then issue 100 new shares and sell them on the market to raise cash, your ownership in the company has been diluted from 1% to 0.5%.
That's why company shares will never be safe as an arbitrary store of value like bitcoin is. No one can arbitrarily dilute your share of the bitcoin pie.
In theory, what is stopping any stock from being a cryptocurrency (minus the crypto part)? Can anything tradeable with a fixed supply become a currency? What other magic requirement is missing?
Interestingly, local dispensaries at one point entertained the idea of BTC ATMs to get around the fact that they have no ability to take credit cards due to the illegal state of pot at the federal level, but this was abandoned after a bit because the volatility was too expensive to make this a worthwhile proposition.
I keep a small float in FIAT so I only do this when it’s the cheaper option.
Yes, very much so (including something with unpredictable supply). Through history, diverse things were used as currency including shells, salt, silver and gold.
The commonly used definition of a currency was coined by Aristotle and is that it's an asset fulfilling three requirements:
- being an intermediary of exchange;
- being a store of value;
- being a unit of account.
You might notice that most cryptocurrencies are not actually currency owning to the first point.
Wouldn't surprise me if GME does the same thing - just the sheer number of shorts will blunt the price declines a bit, as they cover.
It is this week. But let's be honest: (1) wallstreetbets isn't a very large community compared with the whole market, or even the capitalization of GME or AMC and (2) these are investors engaged in a fun revolution.
This won't stay fun for months. These folks want to trade in those portfolios. And if this doesn't go up any farther (it's been flat at ~$300 since Thursday), how many of those will get bored and sell so they can trade whatever the next meme stock is? Not that many, sure. But enough to push the value down lower, to a threshold where more Robinhood traders decide to get out. And we have exactly the kind of feedback loop described in the linked article.
GME is going to fall because there's no reason for GME to stay high. Once the short squeeze is over and the lols play out, it's just another failing company.
(And I continue to believe that this is going to turn out to be a big astroturfed scam when this is all said and done and I'm betting a bunch of the early players will turn out to have been executing a pump and dump.)
Bitcoin is a completely different proposition however, because so much of the demand is driven by black market commerce, and other equally inscrutable factors. Both the supply of and demand for Bitcoin are completely volatile. There’s basically no hope of performing a reasonable analysis of where it’s value might be heading.
I'd say this is very unlikely, but it's not beyond the realm of possibility that GME becomes like a TSLA or AMZN that is constantly trying to catch up to the absurdly high expectations of investors.
GameStop has fundamentals. But you're free to ignore them; they're not hurting anything. GameStop has everything Bitcoin has, plus some extra things; it is therefore worth even more than Bitcoin is.
Said another way, it is nonsensical to claim that Bitcoin has no fundamentals. If you believe that (1) Bitcoin has "no fundamentals"; and (2) GameStop has fundamentals tethering it to a market capitalization of a few million dollars, what you're actually saying is that Bitcoin has fundamentals tethering it to a market capitalization of zero dollars.
Including the ability to keep making losses in perpetuity, which would make it worth negative infinity.
Current GME situation is not investing, it's short term speculation and gambling and ideological tussle and class fragmentation thrown in. All investing strategies and tactics are thrown out the window.
The billionaire vulture short sellers got careless and lazy by shorting 140% of stock. Then, they got caught with their pants down with naked shorts and now squealing to everyone to bail them out. They could have just ate the losses, but they decided to pull all the dirty tricks and shenanigans. It may or may not work.
The WSB crowd battling the billionaire vulture short sellers are out for more than gains.
like what?
>The WSB crowd battling the billionaire vulture short sellers are out for more than gains.
I'm personally skeptical of this. It's easy to say you're doing this with noble reasons on the way up, but it's hard to tell whether the people are serious, or they they're trying to ensure there's enough bagholders to sell into.
I didn't say WSB crowd was acting with noble reasons, but they are acting with more than financial interests. If you've read recent WSB posts, lot of the emotional appeal is ideological and class fragmentation, than lolz gainz. And, very few people actually posts in forums, so you have to multiply the sentiment by thousands, if not millions.
The bottom line is the price of GME, it's still above $300. Which everyone knows and agrees is over valued. Why, especially after the turbulent week?
Maybe everybody is kinda hoping for the short squeeze? WSB is to stick it to the man but the other market participants?
The stock is shorted above 100%. If the price goes up enough, maybe the shorters will be have to exit their position and then will be the one left bagholding?
It really depends at which price they started the short. $8, $20 $350 $450?
But the puzzle is that "retail" is only a third of the market. a lot of the after hour kept it above 300 on Thursday and on Friday, and that is not the John Q Public doing those trades, so the big fish seem to be in agreement that it might be worth a try to go for the squeeze?
That's not too strange. It's entirely possible for them to close their short position by doing a private sale to another hedge fund. I don't imagine it's too hard to find takers given how inflated GME is.
(genuinely curious, I'm learning about this to distract myself from covid-19)
Well, it still failed to compile because you didn't have a trailing ";" and the rest of your comment wasn't even in programming code.
* Reflexivity is a theory that positive feedback loops between expectations and economic fundamentals can cause price trends that substantially and persistently deviate from equilibrium prices.
* Reflexivity’s primary proponent is George Soros, who credits it with much of his success as an investor.
* Soros believes that reflexivity contradicts most of mainstream economic theory.
https://www.investopedia.com/terms/r/reflexivity.asp has some additional info.
I wonder if there's a way to marry "efficient market hypothesis" with "reflexivity on the edges" somehow. Well outside my ballywick, in any event.
The hypothesis is just false. Markets do seek efficiency, but not the way it states. But the Efficient Market Hypothesis leads to tractable mathematics, so people try to approximate the real world into it.
"It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees."
The best I could summarize it is that "reflexivity" postulates that economic equilibria are usually not stable, but metastable. That is, they can be easily pushed out of their stability regime, at which point the feedback loops will no longer balance, and the equilibrium will get re-established elsewhere (if at all).
That's the only thing I can see that requires some empirical justification. Other than that, the postulates seem to be basically "feedback loops 101", and the "mainstream economics" concepts, as I understand them, are built on the same principles too.
Another way to put it: You might be the best poker player at the table, but you might not be enough better to beat the rake. Or, sure, you can count cards and win at blackjack, but the casino ensures through table limits that on average they'll still come out ahead. Card counters will spend too much money finding a table with a good count that they won't win enough back exploiting the count to make up for the cost of information. On average.
The GME rally amazingly even exceeds the biggest bubbles of 1997-2000 in %-change and volume.
The key to this synthesis is that there is sometimes genuine, fundamental value to be had in creating a Schelling point for a resource or a certain kind of transaction. This is (part of) why online marketplaces are valuable and defensible businesses, for example.
"Reflexivity" is simply what it looks like when a Schelling point is in the process of forming. There are some very rare but very real cases in which a bubble really does create its own reality, and that reality sticks around because a shared delusion turns out to create enough real value to justify its existence. There is an art to identifying those cases, and that art is as well-compensated as one might imagine. (Most of the time, though, a Ponzi is just a Ponzi.)
Actually, he pushes this idea even further: in the book, our solar system was already engulfed in a few spheres millions of years ago. He suggests that this why Venus is such a hellscape: the aliens came, took the resources they wanted, and left behind a polluted mess. In the case of Venus, they left lots of greenhouse gases behind as the result of some chemical process used to extract resources; as a result, Venus quickly became the warmest planet in the solar system. It's a fun twist on the Fermi paradox: signs of aliens are actually all around us, we are just too dumb to notice them.
Another interesting idea he explores a bit is "ownership" of resources. Do the resource-rich asteroids in our solar system really belong to us? Or are they available to any alien race who happens to pass through? In the book, we first notice aliens by observing unexplainable infrared radiation from the asteroid belt (later revealed to be thermal emissions from their resource extraction). He suggests that these aliens will potentially crowd out humans; even if they are not overtly hostile, they could gobble up all the resources we would have used to expand our civilization.
Highly recommend this book.
Put it another way, is there any predictive power here or is it only something that can be observed after the fact? Seems like the latter.
100%. We're certainly not yet after the fact.
This is almost the opposite of Jevon's Paradox:
> the Jevons paradox occurs when technological progress or government policy increases the efficiency with which a resource is used (reducing the amount necessary for any one use), but the rate of consumption of that resource rises due to increasing demand.
https://freakonomics.com/2010/01/19/do-bike-helmet-laws-disc...
On the other hand, if you are getting a helmet because you have to but don't really want to, your selection criteria will be different. You are less likely to invest in quality equipment.
The problem with dodgy headgear is that a badly fitting helmet will not feel right, or align well with your head movements. This in turn means such a helmet is a source of low-grade irritation and distraction - and due to bad fit, may actually limit your field of vision when you turn your head around. The latter clearly increases the wearer's risk.
Hence, a cyclist who wears a helmet only because it's mandatory is (sadly enough) more likely to get into dangerous accidents. They are unable to give their surroundings their full attention, and may also be suffering from ill effects of their chosen gear.
Net effect? More dangerous situations, with smaller safety margins between the cyclist and their surroundings.
Full disclosure: I prefer to wear a good, lightweight helmet that fits snugly and doesn't accidentally impair my vision. I have also experienced badly fitting helmets and consider them hazardous. This is the reason why I am against mandatory cycling helmets - regulation can not guarantee ergonomics, so with mandatory helmets the truth is that more people will be in the traffic with headgear that will make them less safe to themselves, as well as everyone around them.
https://theconversation.com/ditching-bike-helmets-laws-bette... Has references to many papers
Edit: According to Elon Musk and others.
We should be looking at deferral of death, not just death count. Death is certain to everyone and I am reluctant to value everyone’s remaining life expectancy equally, at least as far as the healthcare system is concerned.
A much bigger issue is the lost of QALYs from lockdown but not from deaths, including the socio-economic impacts.
ONS have a more through report than a Sunday morning post from a phone.
https://www.ons.gov.uk/news/statementsandletters/estimatingt...
The people who mainly benefitted from lockdown measures are the over 60s
The people who mainly lost out were the under 35s
The recovery plan needs to address this - including fixing the massive wealth disparity. A generation of property owning shareholders who have retired have seen their wealth and income balloon over the last year (and decade). But it won’t, millennials will be screwed.
The economic issues and the associated death increase was avoided only in countries which successfully managed to limit the spread of disease, which generally involved aggressive early lockdowns.
but the hunter that figure out how to farm elephants will be even richer. So the problem becomes one of technological breakthru coming first, or extinction coming first.
What makes the future difficult to predict is that negative feedback loops and positive feedback loops are often fighting each other and you never know early on which will ultimately dominate.
Previously: https://news.ycombinator.com/item?id=24793170
And in 2008/09, people probably didn't want to buy from a bankrupt GM because it's hard to get spare parts from bankrupt car manufacturers. At least for the common definition of bankrupt (i.e. shuttered).
However, the author made it sound as if "momentum" is the only thing that drives human behavior. While it's certainly a part, I wouldn't say it's the only force driving human decisions.
Or maybe simply selling tusks is profitable and there does not need to be a feedback loop for elephants to go extinct.
but that's not logical, because if selling tusks is profitable, then more people will want to join in, thus increasing the number of tusks being sold (implying more elephants being killed for it). Until profit goes away due to drop of demand at least.
If people weren’t trying to get rich selling tusks we would have more elephants and if people weren’t trying to get rich with GME stock we would have less fear of our other investments being randomly targeted.
I don't want to strawman anyone. Are there really Anachrocapitalists who believe that the market should decide whether or not we have mass extinctions, or is this post mostly satirical?
There are so many problems with this idea, not the least being that markets aren't designed to eliminate niche ideas, they're designed to support them -- and because wild populations of elephants are a shared common resource, even a small number of people who are happier owning tusks means that their preferences suddenly outweigh the vast majority that want them to stop killing elephants.
Markets aren't designed to stop people from irreparably damaging commons and messing up the world for everyone. That doesn't mean markets are bad, it just means... that's not what they were ever designed to do. You're using them to try and fix a problem that they're not optimized to fix.
This is very much a, "if all you have is a hammer, everything looks like a nail" proposal. We don't need to solve literally every single problem with Capitalism. We especially shouldn't look at every single problem and say, "Capitalism doesn't solve that, so it's not a real problem."
Reducing demand certainly helps, but tourism and poaching are not exclusive markets, you can have tourism and poaching happening at the same time -- and demand for one isn't necessarily going to reduce demand for the other. If 100 people are giving tours, and 20 people are deciding that they'd still rather just shoot elephants because they don't like dealing with tourists, then you still end up with zero elephants. Reducing demand is only going to be one part of the puzzle, a slight reduction isn't enough on its own to solve the problem.
And regardless, looking at market demand as a part of the solution is still kind of missing the point. Sure, we might be able to leverage some market forces to help with the overall problem, but it's still a problem regardless of what the market says about it. The market in this case is at best a tool, it doesn't define what the right outcome should be.
It doesn't matter if the vast minority of people rich enough to spend money on this prefer elephant tusks or tours. It should not be their choice to make. We don't want the market to decide whether or not we have mass extinctions. If we end up with zero elephants, saying, "well, the market just didn't create enticing tours, so we'll never have elephants again" is not a valid response.
What percentage of the population is rich enough to go on wildlife tours to another country? They don't have the right to choose for everyone else whether or not elephants go extinct.