by Greg Valliere, AGF Management Ltd.
Insights and Market Perspectives
Author: Greg Valliere
January 28, 2021
THE SECURITIES AND EXCHANGE COMMISSION doesn’t want to enter the GameStop fray but the agency may have no choice because officials know this could end badly for the financial markets and individual investors.
AFTER YEARS OF OVERLOOKING predatory hedge funds that have hammered fragile companies into extinction, the SEC is hearing from hedge funds that now want protection — as the hunter becomes the hunted.
THE GAMESTOP AND AMC stock surge has gotten Washington’s attention. Treasury Secretary Janet Yellen has her first crisis, just two days on the job, and even the White House is monitoring this. No one in the new administration wants to see market instability; the focus here is still on Covid-19.
LESSONS UNLEARNED: Every 15 or 20 years, a speculative frenzy infects the overall market and the economy; 16 years ago the crisis involved exotic financial instruments that went sour, as Michael Lewis and others chronicled.
WE’RE NOT AT THAT STAGE NOW, thankfully, but this new frenzy could end badly for small investors and hedge funds; meanwhile, ordinary investors could become apprehensive. The SEC needs to cool this crisis, but how?
THE SEC WOULD HAVE TO PROVE criminality, and that would require officials to cite an organized effort to manipulate stocks up or down. A key issue: is this just a populist Reddit revolt against hedge funds or a “pump and dump” get-rich quick scheme?
HEDGE FUNDS HAVE LOST BILLIONS — perhaps $24 billion in losses on GameStop short positions alone. Hedge funds can unwind positions, but they will need even more cash infusions from solvent firms.
OUR FOCUS IS ON THE WASHINGTON ANGLE, and it’s virtually certain that Sen. Elizabeth Warren and other industry critics will demand SEC prosecution which — Warren hopes — would result in steep fines and disgorgement of profits.
IT SEEMS LIKELY THIS WILL END BADLY for speculators, but the economic fundamentals still look solid. We don’t think this will infect the overall market and the economy, as in 2008 crisis. But the SEC will have to get involved; it will have no choice but to send a signal to speculators.
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This post was first published at the AGF Perspectives Blog.
