My usual opinions:
- the Efficient Markets Hypothesis is bunk
- r/WallStreetBets and Robinhood day traders are risk-insane, irrational, etc

HOWEVER, I think:
- GME stock is priced efficiently.
- the crowd-sourced short squeeze of Gamestop is brilliant & rational

BEGIN THREAD!

Readers of @matt_levine’s Money Stuff (reccomended!) will be familiar with the Boredom Markets Hypothesis: stocks no longer trade based on their fundamentals (like discounted future cashflows), but rather trade for the lulz (fun stonks go up, fun stonks go down).

Are markets in GME Bored, or are they Efficient? My hot take: markets are correctly pricing the true value of GME.

Do I think the current price of GME (>$300/share) reflects the discounted future cashflows of Gamestop’s business? Absolutely not.

So how is GME correctly priced??

A share of GME is a fractional claim on Gamestop’s assets and future earnings.

BUT, a share of GME is also a claim on the unit of account in which a few hedge funds decided to take on large liabilities.

When you “sell GME short”, you borrow a share from an existing owner, write them an IOU denominated in shares of GME, and sell the share of GME.

Your hope is the price will go down, you’ll be able to repurchase the share for less, and cover your IOU while making a profit.

The catch? You’ve contractually obligated yourself to acquire GME in the future. You must, in order to cover your IOU.

In the case of GME, short sellers have written IOUs for >100% of extant GME shares. They have, contractually, fucked themselves.

So a share of GME is a claim on:
A) Gamestop’s assets and future earnings, and
B) the unit of account that certain hedge funds have contractually obligated themselves to buy

GME’s price today primarily (and efficiently!) reflects (B). Any added value from (A)? A nice bonus!

Given (B) above, buying GME as a short squeeze is entirely rational.

And working up a mob of risk-insane and irrational day traders who are more motivated by group belonging than by profit is … maybe the most rational way to do a short squeeze???

ASIDE: This is similar-ish to a banking or debt crisis.

Banks take deposits (write IOUs) and increase the money supply. In a liquidity crunch, they can't redeem all deposits at once, and face a run on the bank. Here, short sellers are “banks” for GME, facing a run on their IOUs.

MMTers say sovereigns can't default on debt in their own currency. But sovereigns can absolutely default on debt denominated in others' currencies (e.g., Greece in EUR, Argentina in USD).

Here, short sellers took on debt in a currency (GME) they don’t control, and risk default.

In this case, the only possible “lender of last resort”, which could issue new units of currency to bail out the short sellers, in Gamestop itself.

Ironically, the very same Gamestop that short sellers were betting on being a failure. Lulz.

/END THREAD