Wednesday, May 12, 2021

Jim Chanos deplores the politicization of the ‘surreal’ GameStop saga

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Renowned short seller Jim Chanos say it GameStop Saga was the most “surreal” episode of his career and worries that things will “completely go off the rails” with populist politicians seeking to capitalize on the situation.

“It was a week that even we alumni haven’t seen before,” Chanos said in an interview with the Financial Times. “I’ve been doing this for 40 years and I can’t remember a time like the last 10 days.”

The remarks of Mr. Chanos, the founder of Kynikos Associates, come after a dramatic period for the US stock market. Shares of companies like video game retailer GameStop and struggling movie theater operator AMC Entertainment have risen stratospheric as retail traders besieged to short sellers who bet against companies.

“One of the more surreal things is that it has become political and the corollary is that they blame the short sellers, the guys who were killed,” Chanos said.

The chaos captivated Wall Street, as several large hedge funds were hammered with multibillion-dollar losses inflicted by an amorphous, lay group of day traders loosely organized around a forum on social media site Reddit called r / WallStreetBets.

“The squeeze on US stocks and deleveraging in global markets inspired by Reddit this week reminds us that social media has not lost its influence in markets just because Trump left office with a blocked Twitter account,” John Normand, head of the cross-asset fund. strategy at JPMorgan, marveled in a note to clients on Friday night.

Mr Chanos, who rose to fame two decades ago for predicting the downfall of energy giant Enron, said he was particularly shocked by the vitriol aimed at short sellers – investors who bet stocks of companies will fall. – given how hard they’ve been struggling lately. years.

“This is a euphoric market that has gone from a new high to a new high,” he said. “The short sellers were beaten up and left for dead and we still blame them.”

Capital Melvin, a $ 12.5 billion hedge fund managed by Gabe Plotkin, was forced to seek a $ 2.75 billion cash injection from its biggest rivals Citadel and Point72 Asset Management, after losing 30% to during the first three weeks of January.

The New York-based company, which revealed its bet against GameStop in regulatory filings, has drawn the wrath of retail inventors who have taken to online forums such as Reddit to increase the shares of companies the company bet.

The narrative quickly turned from a short push on Melvin – which proved successful because the company’s short position was huge relative to the float of the stocks – and into an anti-establishment movement which has been compared to Occupy Wall Street.

Last week, a wave of other hedge funds also increased shorts and forced long positions to be reduced, as they closed the hatches in case r / WallStreetBets traders targeted their positions. That contributed to the S&P 500’s 3.3% loss last week, its biggest weekly loss since the nervous trading leading up to the US presidential election.

S&P 500 Index Weekly Performance Column Chart (%) Showing Wall Street Suffers Worst Week Since October

But Mr. Chanos was shocked by the idea that GameStop is a political movement aimed at “sticking to the costumes”. He points out that there were a number of hedge funds that had long positions in the company and profited from the rally.

“What really happened here is a bunch of short sellers and hedge funds lost a lot of money and a bunch of retail investors and a bunch of hedge funds did a lot. money, ”he said.

Mr. Chanos also called the political fury and conspiracy theories that erupted after frantic trading forcing online brokerages, which cater primarily to retail investors, to crack down on betting on retail investors as absurd. popular actions.

The founder of Kynikos said the movements were mainly due to regulations requiring brokers to deposit collateral for the transactions their clients make with central clearing houses, and the frenetic activity meant that many of them were struggling to do so.

“We are seeing a level of misunderstanding about how markets work that is being brought on by a whole new generation of investors who have never seen a bear market and somehow think they are being held back. rightful place at the table by these evil hedge funds, ”he said.

Line chart of intraday stock price, $, last five days showing GameStop, time Gamma

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