Any moment might be our last. Everything is more beautiful because we’re doomed. You will never be lovelier than you are now. We will never be here again.Homer, The Iliad
Buy Happy Sell Sad was started over 4 years ago in recognition of the emotional nature of free markets. My goal, although lofty, was to help bring the humanity back to economics, investing and finance. While I have always strived to take a lighthearted approach to markets, satirizing our fragile inclinations to inflate expectations and behave irrationally, the recent return of market volatility and subsequent rush of optimistic sentiment has made the need for emotional investing even more salient.
Last month the investing world witnessed an incredible event as, from January 12th to January 27th, Gamestop stock climbed 1,641.9%. Much has and will continue to be written about this particular event, from the sociology of retail traders to the sociopathy of institutions and traditional finance news media, this event will no doubt continue to ripple through our lives in ways we may not realize for many years to come.
With that being said, I have little to add to the postmortem of the Gamestop short squeeze, nor do I view Gamestop as an isolated event. Rather, I would like to discuss the nature of Gamestop and reframe this event in the context of the years leading up to it, and what we might expect from the aftermath. In doing so, I hope readers will come to understand that Gamestop was not an anomaly, but rather, an inherent and necessary event that emerged as a result of this chaotic hydra of money, markets, and emotions we call humanity. This will be the first post of many.
The seed of Gamestop, and our fundamental concept of intrinsic value, are meme. A crowded theatre, a crowded earth, and a crowded trade, memes are held most dearly by the most absurd among us, financial institutions, hedge fund managers, and day-traders. We cling to notions of immortality, material wealth, and meaning, all the while ignoring the abyss staring back at us from the vastness emptiness of infinity. We inherent and propagate patterns of behavior to the point of exhaustion, blinded by recency bias, hubris, and greed.
In our quest to delay the inevitable annihilation of our fleeting reality, we carefully construct higher-order systems (democracy), carefully choose initial conditions, and enforce boundary conditions (at gunpoint). And it was good… right?
But our artificial creations are always imperfect. Degrees of freedom come at a cost, and injustice is a feature, not a bug. Constraints, like DTC collateral requirements or financial bailouts, keep the boat afloat, and someone needs to man the oars – after all, our manifest destiny is ever-forward. The system is preserved in spite of its imperfection – in the name of progress towards, well, towards what exactly?
Gaps in income inequality have grown for over 40 years. Two generations of Americans have experienced decreasing relative wealth. At the same time, the top 5% by income have experienced the fastest income growth relative all other Americans.
The theatre of inequality is becoming increasingly crowded.
The allure of the crowded trade, or any meme, is psychological safety. A microscopic look at this self-symmetrical system reveals symptoms, already malignant, at smaller time-scales, shorting dying companies proved simply too alluring in 2021 – as with shorting volatility in 2018 – as with buying synthetic CDO’s in 2008 – when there’s money to be made, ignorance is bliss. Why pay employees a fair wage when they should negotiate? Never mind the entropic beast, leering from the shadows, whose job it is to ensure the laws of physics, and probability are maintained.
This illustration of a Lernaean Hydra is symbolic of the world we find ourselves in. While we are distracted by the fangs of our beast, and our Sisyphean task, violently hacking, chopping the endless onslaught of serpent heads, we are left vulnerable to the Hydra’s lethal tail.
And yet we continue to fight, thrashing out against the inevitable, ignoring what we sow. Our addiction to the game fuels our belief in progress, our belief in growth, despite the law of equivalent exchange. We act as though our markets and our society are walled gardens protected from reality. In doing so, we forget, in a crowded theatre, even the dream of fire can prove lethal.