GameStop - The long/short irrationality of markets.

The purpose of markets is price discovery and resource allocation. We want people to short or buy stocks when they genuinely believe earnings (or other securitized assets) will go up or down.

The theoretical problem with short squeezes is that they separate a firm’s price from its underlying value. They do this by leveraging more financial resources than the rest of the market is (usually) interested in committing to that firm.

Reddit changed the equation this time by leveraging even more financial resources than the squeezing firm/s.

So the market can be irrational sometimes, in either direction.

The finance question, for the purpose of personally profiting from the chaos, is, “can I remain solvent longer than the market can remain irrational?”

The economics question is, “can we rely on market prices if people/organizations/collaborative efforts/governments can manipulate prices in this way.” And the answer is, as long as your money is stable, yes.

Stocks are not currency like dollars, Euros, or Bitcoins. Stock prices are connected to their underlying securities by things like dividends, bankruptcy, futures, and tangible assets.

GameStop can only convert their new $25B market cap into assets by issuing new shares. Presumably, the Musk/Portnoy Reddit Army will be willing to buy those shares for the inflated price.

But unless GameStop changes or improves their business model (which would be a good thing, so problem solved), this is basically asking your Reddit Army to give charity to GameStop, instead of, for instance, the poor. Or instead of investing it in something profitable.

When these people try to realize their gains, or use the money to pay bills, or literally anything, GME’s price will collapse.

So the market can remain irrational for a while. But not longer than the entire economy can remain solvent.