Search

Holy Gamestop!

January 28, 2021


While what is going on with GameStop seems like noise to me, this week everyone wants to talk about it. Should we buy it? Sell it? What does it really tell us? The only thing it tells me is that there is more evidence of the incredible amount of money being created by the Federal Reserve. There is more coming, and it’s the same story I have been describing since March 2020.


This money expansion allows even nearly worthless companies access to funding that they have not had before. It allows retail traders access to cash that they have not had before. This allows them to gamble with house money (unearned through labor). One of the places that this gambling takes place is in the equity market. Someone clever figured out that hedge funds have shorted some of these companies (using leverage) that are at likely to go bankrupt. They have realized that by encouraging enough people in aggregate to buy a stock, they can squeeze out these short positions (bets on a company to decline in price) in the market. As fortunes are made in the short term, the mob gets bigger, and the amounts of money going into these stocks gets much larger, hedge funds struggle to buy back their short position, and their lenders are requiring them to pay off the margin calls.


Having read some of the posts on Reddit, it seems there is an anti-Wall Street theme that runs through this crowd. Some believe there is a higher purpose in causing hedge funds to lose money. I won't make a moral argument for either side, but it is clear for the time being that the small retail gambler is winning. My opinion is that ultimately, the small guy will likely give back all his winnings, the same way that most gamblers lose money in casinos. It seems very similar from my perspective.


What does all this mean for the market overall? Some people say the market is broken, some people say we are in a stock market bubble and headed for a crash, but I will reiterate what it says to me is there is way more money being created now than at any point in recent history. Too many dollars chasing too few real and financial assets. So, if enough people buy an asset in fixed supply, and get some of their friends to do the same, they can make something, even with no intrinsic value, rise in price to extraordinary levels.


As any braggadocious gambler would say, the other guys that think they're so smart – all of the hedge funds – are so wrong. All this means is that, in the short term, a hedge fund manager will lose, and the retail investor will win. The end for the overall market and for the economy likely won’t matter. It does, however, change the dynamic for people that would like to short companies with borrowed money. That is a dangerous game with so much access to cash at present.


At August Wealth, we do not gamble, and we do not chase fashionable trends. Our efforts are focused on (hopefully) growing our client’s wealth overtime.

I have answered many questions about GameStop this morning with another question: “What are you trying to achieve with your money?” I am sure I sound like a broken record, but simple compound interest tells you, that if you invest $1,000,000 at an average annual rate of 7% over 20 years, you will have $3.5 million at the end of the period. It is boring, and it does not need to be complicated. However, to try and achieve such a return, it requires strict adherence to rigorous process, and a constitution to stay with your plan and your discipline.


My advice is do not get distracted by GameStop, CNBC, Reddit, or the dizzying heights of some stock chart or crypto currency. FOMO (Fear Of Missing Out) is an acronym that can do great damage. Action based on FOMO says to me: I do not know who I am, I do not know what I want, and I do not know what I am trying to achieve.


So, take a step back, reflect on what you want your money to do for you. Develop a strategy and have faith that over time you will be able to grow your wealth. This wealth can bring you the freedom of time to pursue more meaningful relationships, and you can spend less time worrying about money.


Joseph Cardello, Principal

August Wealth Advisors, LLC

The Loft, 101 Franklin Street, Suite A

Westport, CT 06880

Direct (916) 461-9451 toll free (800) 985-9477

jcardello@augustwealthadvisors.com

www.augustwealthadvisors.com


Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor; DBA August Wealth Advisors.

Trading instructions sent via email, fax or voicemail will not be honored. There is no assurance that these messages can be retrieved on a timely basis, nor is there any sure method of confirming the customers identity.

The information contained in this email message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. No reader should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence. Investing in the bond market is subject to risks, including market, interest rate, issuer credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed.