Show Transcript
Some short sellers have found themselves on the wrong side of the trade as a new breed of retail investors flex their market muscle. Kim Parlee speaks with Michael Craig, Head of Asset Allocation, TD Asset Management about the who, the how, and the long-term implications of a changing investing landscape.
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[MUSIC PLAYING]
- It has been an exciting time in the markets. But just in the past few weeks, we've seen a new trend emerging. And that is the strength of retail investors showing up in some very specific ways, and so much so that the word "gamma squeeze" is being used now in regular talk when we're talking about investing.
Michael Craig is the head of Asset Allocation at TD Asset Management. He's here to explain what the heck is going on, whether it's material, and what we should be watching. Mike, first off, thanks for coming on and helping us understand what's happening.
I think if I say the word GameStop, AMC-- I mean, these are companies that are public, that have gone from shares worth a couple bucks to, I think, up over $200, $300 in a matter of days. Can we just start with the basics? What is going on?
- Oh, great, thanks, Kim. And thanks for having me. So first off, I was chatting with my family last night. And I was trying to explain short selling and I didn't really do a very good job. So maybe I'll try again.
What started this was very large short positions in these companies. So hedge funds had borrowed security from other investors, sold that to the market on the expectation that the prices would drop. They didn't believe in the businesses. And they would eventually buy them back at a loss and make money on that difference.
And so that's been going on for a long time. And that is what it is. Within the kind of social media community, particularly Wall Street bets, a large band of investors, which is now counting north of 2 million, have really kind of moved together as a pack and attacked these shorts, bidding up the shares where they're buying the shares or buying options on them. And because of the lack of liquidity, because the market really isn't set up for this type of dynamic, you're seeing some pretty explosive moves over the last couple days, things that I haven't seen pretty much since the late '90s.
- It's interesting because we've seen the retail investor become much more relevant, I'll say, in the markets over the past year. And but I think what's interesting is this idea about liquidity. And I always have the idea of, you know, you can picture a big lake and then a small bucket. And in the small bucket, if you pour water really fast, things move up really quickly. And when I think about these small caps, the same kind of thing happens.
Is this also just the combination of, to your point, that, you know, got more retail investors in the market? They're focusing on these companies. It's not really organized, though, is it, per se? I think it's more that just people are seeing a way to make money very quickly.
- Well, actually, I have spent some time on the forums.
- [CHUCKLES]
- And there is a degree of organization. I think it would be a mistake to dismiss this. This is real.
And many of the people in themselves are not big participants. But when you compile over 2 million people with, say, $10,000 each, some more, some less, it becomes meaningful. And I think it is a bit of a collision between what's-- last year, we saw firms offer free trading. With COVID, where lots of us have not much to do right now and they're staying at home, many have lots of savings because they're still working but not spending. And so they've got excess savings. And so you've got this collision of multiple factors that's now been directed at a few parts of the market. And to your point, there's not much liquidity there, gamma squeeze, et cetera.
And I think it's important. I mean, we're in a period of time where we have very, very easy policy, tons of stimulus, no signs of it abating. And so you've got the central banks, the governments, really focusing on growth and trying to fight deflation. And the risk of this is financial stability. And I think what you're seeing is a result of that. Start to see weird things like this, which, in itself, is strange. But it is a function of a lack of financial stability in the marketplace right now.
- I wanted to kind of pick at this a few different ways. And I know that one thing that you believe is this is partially generational divide because the people, perhaps, that are getting involved in this market, they're doing it on their phone, and they're doing it fast. And that's just not something you wouldn't have seen or heard of 10, 15 years ago.
- Yeah, there's that, and there's also-- look, younger people. There is this kind of clash amongst generations right now, whether it be COVID and lockdowns, whether it be wealth inequality, income inequality, cost of real estate. And so there's a little bit of, almost, I don't want to say revolution happening, but there is this kind of battle happening right now of different investors.
I find it, by the way, incredibly interesting. I mean, we're kind of geeks in our profession. Our job is to try to look at the world and figure out what's going on. I find this fascinating on a number of different dimensions.
And one dimension is that there's a bit of a prisoner's dilemma happening now, where those who bought these securities are sitting. And the short sellers now are facing borrowing rates that are in excess of 100%. So if you actually went to go-- today, I wanted to go and short sell GameStop, I'd have to pay 120% to borrow it, more than you would make in a year if it went to zero.
And so that's why now you're just starting to see these hedge funds cover, and as a result, you're seeing these kind of spectacular price gains as people scramble. So a lot of things happening right now. And I think this is kind of an early warning blow as far as this clash of generations that's, for this point, playing out in the financial markets. But something that I think we need to be mindful of in the days to come.
- Well, let me ask you then-- so, I mean, from your perspective, because I think people who are watching this, you're in one of a few camps. You're either making the money and you're thrilled. You're either not making the money and you're mad because you want to be part of it. Or you're sitting there, and maybe as a longer-term investor going, like, what does this mean? Is this going to change? Is this a problem? How material do you see this being? And I guess are you still long equities given these things that are going on?
- So in our profession-- look, the markets change all the time. They evolve. And you need to figure out how things are changing.
So this is just part of the job is to understand the changing dimensions of what's happening. From a longer-term perspective, we buy quality. We look for real businesses. I don't change my investment style. I don't look for these places to make money.
I am a curious onlooker, as is my teams. And we're just trying to understand the nature of it and manage portfolios accordingly. My fear, in many ways, is that people see this as a quick way to get rich. And that's not the point of the stock market.
The point of the stock market is to participate in the growth of the economy, growth of productivity, to participate in rising living standards, et cetera. And this, if you want to call it gamification or making the markets look like a casino is not healthy. Short-term, it's a bit of a lark. Longer-term, it's very damaging to credibility of capital markets. And so these are big philosophical questions that need to be asked and things that we're thinking about as we watch this unfold.
And we will keep watching. Michael, thanks so much for joining us. Appreciate it.
- My pleasure.
[MUSIC PLAYING]
- It has been an exciting time in the markets. But just in the past few weeks, we've seen a new trend emerging. And that is the strength of retail investors showing up in some very specific ways, and so much so that the word "gamma squeeze" is being used now in regular talk when we're talking about investing.
Michael Craig is the head of Asset Allocation at TD Asset Management. He's here to explain what the heck is going on, whether it's material, and what we should be watching. Mike, first off, thanks for coming on and helping us understand what's happening.
I think if I say the word GameStop, AMC-- I mean, these are companies that are public, that have gone from shares worth a couple bucks to, I think, up over $200, $300 in a matter of days. Can we just start with the basics? What is going on?
- Oh, great, thanks, Kim. And thanks for having me. So first off, I was chatting with my family last night. And I was trying to explain short selling and I didn't really do a very good job. So maybe I'll try again.
What started this was very large short positions in these companies. So hedge funds had borrowed security from other investors, sold that to the market on the expectation that the prices would drop. They didn't believe in the businesses. And they would eventually buy them back at a loss and make money on that difference.
And so that's been going on for a long time. And that is what it is. Within the kind of social media community, particularly Wall Street bets, a large band of investors, which is now counting north of 2 million, have really kind of moved together as a pack and attacked these shorts, bidding up the shares where they're buying the shares or buying options on them. And because of the lack of liquidity, because the market really isn't set up for this type of dynamic, you're seeing some pretty explosive moves over the last couple days, things that I haven't seen pretty much since the late '90s.
- It's interesting because we've seen the retail investor become much more relevant, I'll say, in the markets over the past year. And but I think what's interesting is this idea about liquidity. And I always have the idea of, you know, you can picture a big lake and then a small bucket. And in the small bucket, if you pour water really fast, things move up really quickly. And when I think about these small caps, the same kind of thing happens.
Is this also just the combination of, to your point, that, you know, got more retail investors in the market? They're focusing on these companies. It's not really organized, though, is it, per se? I think it's more that just people are seeing a way to make money very quickly.
- Well, actually, I have spent some time on the forums.
- [CHUCKLES]
- And there is a degree of organization. I think it would be a mistake to dismiss this. This is real.
And many of the people in themselves are not big participants. But when you compile over 2 million people with, say, $10,000 each, some more, some less, it becomes meaningful. And I think it is a bit of a collision between what's-- last year, we saw firms offer free trading. With COVID, where lots of us have not much to do right now and they're staying at home, many have lots of savings because they're still working but not spending. And so they've got excess savings. And so you've got this collision of multiple factors that's now been directed at a few parts of the market. And to your point, there's not much liquidity there, gamma squeeze, et cetera.
And I think it's important. I mean, we're in a period of time where we have very, very easy policy, tons of stimulus, no signs of it abating. And so you've got the central banks, the governments, really focusing on growth and trying to fight deflation. And the risk of this is financial stability. And I think what you're seeing is a result of that. Start to see weird things like this, which, in itself, is strange. But it is a function of a lack of financial stability in the marketplace right now.
- I wanted to kind of pick at this a few different ways. And I know that one thing that you believe is this is partially generational divide because the people, perhaps, that are getting involved in this market, they're doing it on their phone, and they're doing it fast. And that's just not something you wouldn't have seen or heard of 10, 15 years ago.
- Yeah, there's that, and there's also-- look, younger people. There is this kind of clash amongst generations right now, whether it be COVID and lockdowns, whether it be wealth inequality, income inequality, cost of real estate. And so there's a little bit of, almost, I don't want to say revolution happening, but there is this kind of battle happening right now of different investors.
I find it, by the way, incredibly interesting. I mean, we're kind of geeks in our profession. Our job is to try to look at the world and figure out what's going on. I find this fascinating on a number of different dimensions.
And one dimension is that there's a bit of a prisoner's dilemma happening now, where those who bought these securities are sitting. And the short sellers now are facing borrowing rates that are in excess of 100%. So if you actually went to go-- today, I wanted to go and short sell GameStop, I'd have to pay 120% to borrow it, more than you would make in a year if it went to zero.
And so that's why now you're just starting to see these hedge funds cover, and as a result, you're seeing these kind of spectacular price gains as people scramble. So a lot of things happening right now. And I think this is kind of an early warning blow as far as this clash of generations that's, for this point, playing out in the financial markets. But something that I think we need to be mindful of in the days to come.
- Well, let me ask you then-- so, I mean, from your perspective, because I think people who are watching this, you're in one of a few camps. You're either making the money and you're thrilled. You're either not making the money and you're mad because you want to be part of it. Or you're sitting there, and maybe as a longer-term investor going, like, what does this mean? Is this going to change? Is this a problem? How material do you see this being? And I guess are you still long equities given these things that are going on?
- So in our profession-- look, the markets change all the time. They evolve. And you need to figure out how things are changing.
So this is just part of the job is to understand the changing dimensions of what's happening. From a longer-term perspective, we buy quality. We look for real businesses. I don't change my investment style. I don't look for these places to make money.
I am a curious onlooker, as is my teams. And we're just trying to understand the nature of it and manage portfolios accordingly. My fear, in many ways, is that people see this as a quick way to get rich. And that's not the point of the stock market.
The point of the stock market is to participate in the growth of the economy, growth of productivity, to participate in rising living standards, et cetera. And this, if you want to call it gamification or making the markets look like a casino is not healthy. Short-term, it's a bit of a lark. Longer-term, it's very damaging to credibility of capital markets. And so these are big philosophical questions that need to be asked and things that we're thinking about as we watch this unfold.
And we will keep watching. Michael, thanks so much for joining us. Appreciate it.
- My pleasure.
[MUSIC PLAYING]
