Memes, Money and Madness

I confess to a certain degree of schadenfreude over the Gamestop debacle.? Gamestop is a retailer of electronic games and associated paraphernalia whose stock was heading to oblivion near the end of 2020, with short interest above 100% of the company's issued stock.? Then, in January of 2021, initiated at least in part by a movement growing out of a subreddit, individual investors (for the most part) drove the stock of Gamestop to dramatic heights with anything from severe to fatal consequences for the hedge funds holding short positions in Gamestop.

Unfortunately for the shorters of Gamestop, an online flash mob of mainly retail investors took exception to the hedge funds' plans to profit from the demise of Gamestop, rapidly bidding the stock price up to a large multiple of its pre flash mob valuation.? This created a short squeeze, requiring the short sellers to cover their positions by buying Gamestop shares, while creating for them large trading losses.? In at least one case (the tawdry details are no doubt on Wikipaedia for anyone wanting to read more) a fund was driven to liquidate.? Since then, and despite boasting a current pe ratio (trailing 12 months) of around 100, the stock has remained reasonably stable.

?

Short selling is a dark corner of the financial world and short sellers are not always admired.? After all, they are in effect betting on failure and that's a far cry from popular investing heroes such as Warren Buffet.? While typically legal, it is a regulated endeavour and on some exchanges has faced curbs during times of extreme market volatility.? Nevertheless, there is surely some utility in permitting investors, with their own money and eyes wide open, taking a position open to scrutiny by other investors that will make money only if a stock loses value.? Thus can fraud and mismanagement be exposed with obvious benefits to investors.

?

Still,there are aspects of short-selling that are undoubtedly unsavoury.? Some short sellers, such as Hindenburg Research (for example when shorting Adani Group) and Pershing Square (when shorting Herbalife) have made very loud and public statements about supposed fraud or financial malfeasance, pressured regulators, and generally advocated for problems at their short targets after first putting in place short positions.? This is not illegal but it does smack of using financial power to stack the deck in favour of the short.

?

Overall though, it is probably fair to say that short sellers play a useful role in the financial world (I shall eschew the tempting animal-kingdom analogies that spring to mind).? So why, given its eternally elevated PE ratio, have short sellers not returned to prey on Gamestop?? The question is obviously at one level a case of once bitten twice shy (and which master of the universe wants to be put out of business by a bunch of online gamers, after all?)? But perhaps another way to look at things is that Gamestop has evolved into a meme stock, for which financial fundamentals are no longer important - at least, I imagine, until one day the meme crowd loses interest.

?

A more egregious example of a meme stock, in my view, is Tesla.? While people may reasonably take exception to Mr Musk's recent foray into politics, there is no denying he has done a truly remarkable job of building a globally-relevant electric vehicle company, while simultaneously upending the world of space exploitation via SpaceX.

?

Unfortunately, growth for Tesla appears to have stalled (although perhaps I am over-reading the impact of the past couple of quarters) with the outlook surely influenced by US-China tensions, the possible elimination of US tax incentives for vehicles and upstream components of the EV supply chain, and economic malaise in Europe plus growing noise, at least, opposing EV mandates.

?

None of this, however, seemed to have had much of an effect on Tesla's share price prior to inauguration day (Jan 21 2025).? At that time the company boasted a market cap of about $1.35 trillion, far greater than its top ten competitors combined, and a PE ratio of almost 200 versus a norm for its competitors of around 10.? How does one make sense of this?

?

For a mature business, a PE ratio represents (crudely speaking) the future earnings stream for the company at its cost of capital, adjusted for growth (which for mature industrial companies is unlikely to be radically greater than global GDP growth).? Very high PE ratios are normally associated with exceptional rates of growth (although I chuckle at the early internet era when equity prices may loosely have corresponded to a sales revenue multiple and "profits [were] for wimps.")? But it's hard to see where Tesla's growth is going to come from any time soon that could remotely approach the PE multiple the company trades at today.

?

As with Gamestop, it's hard to see a rational explanation for Tesla's share price other than that it is valued more as a meme stock than a rationally-priced investment.? It's worth noting, too, that the gild is off the lily somewhat in the three weeks since Mr Trump assumed power, with clear signs that likely Tesla buyers at least at the margin may be put off by Mr Musk's deep embrace of the new Administration in the US.? That being said, the stock has a long way to fall before it becomes priced as a mortal car company (say, a share price decline of 90% or more from today) and for the moment Icarus' wings are holding up.

?

The final stop on my short stroll in the outliers' garden is the mother of all memes, bitcoin.? Bitcoins were invented by the mysterious Satoshi Nakamoto and launched in 2009 as an electronic payments system based on blockchain technology.? There can only be a finite number of bitcoins (21 million at most) although fractional ownership is certainly permissible.

?

As a finite asset class that (other than via negligence or misfortune) cannot be lost, bitcoin presents some interesting aspects to collectors of arcana.? So do works of art - Vermeer and Caravaggio each painted a handful of masterpieces and any of these would be worth millions today.? And they are much less secure things than bitcoins, supported as the latter are by blockchain.? So I can see an interest in collecting bitcoins as scarce items, perhaps akin to baseball cards.

?

What I cannot see is the utility of bitcoins in transactions.? The main reason is that actually, fiat money works pretty well in most countries and across most times.? There have been examples of hyperinflation in the past century (meaning both with and without the gold standard) but in every case these were caused by external shocks (Germany, Hungary, Yugoslavia) or catastrophic mismanagement (Zimbabwe, Argentina, Venezuela).? Otherwise, fiat money works extremely well and while currencies fluctuate, it is only in instances of calamity that they collapse and in a calamity, who knows what else can go wrong.

?

As a rule, new technologies displace old ones when they are radically cheaper, and/or enable new ways of doing things.? And here, to be fair, Bitcoin does present some novel utility.? Transactions are all logged but they are anonymous, meaning that bitcoin has become an excellent option for criminals looking to move money clandestinely - think the gang of cybercriminals who lock out your local hospital's medical records until paid off in bitcoin.

?

But that's it, pretty much.? Conventional banking is very cheap and it's hard to see the financial benefits of switching from US dollars, say, to bitcoin.? And while my transactions could be truly private with bitcoin, most people and businesses in the legitimate world really don't care.

?

Then there's the insurance angle.? The unfortunate individual in the UK who threw (perhaps by proxy) his bitcoin external hard drive into the garbage is out of luck.? If those coins ever surface from the landfill the local authorities will own them.? Whereas if my identity is stolen I am made whole more or less immediately if my bank account is hacked.

?

So there seem to me to be only three values to bitcoin.? The first is the criminal angle.? Easy to understand, a clear value-add for illegal and illicit transactions, and frankly something that makes a lot of sense in the underworld.? The second is the shiny bauble.? As in a collector saying "I have some of these and there aren't very many of them, and there will never be more than there are today."? Any scarce asset can attract a premium by virtue of being scarce and that's something bitcoin offers. Like a digital Faberge egg.

?

Finally, there's the greater fool option.? Unless buyers are paying for a trinket, or to fund crime, they are undoubtedly looking to gain by selling at a higher price to a greater fool.? This is the essence of tulipmania and is why many see bitcoin as a bubble.

?

All the talk of bitcoin (and the alphabet soup of other crypto instruments) replacing money is the silky-tongued hucksterism of 19th century snake-oil salespeople.? There's just no compelling argument for this to happen, ever.? I think blockchain technology is a very clever invention that perhaps overcomes one of the core challenges of the digital age (namely, that anything I can code, someone else can uncode).? But as for bitcoin?? As a curio, and if you don't care about the money, why not?? But as a "strategic reserve," or as a replacement for the dollar?? Pinch yourself now and wake back up in the real world.

Disclosure: the author holds no positions in any form whatsoever in Gamestop, Tesla, or any cryptocurrency.