Reading about how YouTubers and Redditors with screennames liike "RoaringKitty" and"DeepF*ckingValue"contributed to last week's financial mania with posts and videos expounding the virtues of GME, AMC, BBY, BBBY, NOK, KOSS andthe other "Wall Street Bets" stockshas been a big part of the drama in the aftermath of last week's trading chaos.
For the last week, a parade of financial analysts, academics, regulators and bankers have warned that the capital markets sickness that sent GME shares to nearly $400 can be blamed on a handful of rogue charlatans hawking an absurd "stick it to the man" narrative on social media (and not the hedge funds trying to short GME into oblivion with naked short positions so large, they amounted to more than 100% of GME's float before the explosion).
WithJanet Yellenand the rest of the top financial markets regulators in the country meeting on Thursday,we learned last night viathe New York Times, and viaan interview with House Financial Services Committee Chairwoman Maxine Waters, that a key player in the Feb. 18 House committee hearing/media circus will be Keith Gill, the former MassMutual employee known alternatively on Reddit and YouTube as "DeepF*ckingValue" and "RoaringKitty".
Aswe've reported, Gill seemingly minted millions of dollars trading GME and other stocks, at one point displaying a screenshot of a brokerage account balance with almost $50MM in it. While that number appears to have declined substantially in the ensuing selloff, more recent screenshots suggest Gill has amassed quite a substantial fortune from his trading, just like another former scapegoat we can think of.
Of course,small-time traders like Gill aren't the only ones who profited from the chaos, and while Tenev and other witnesses will be appearing in a professional capacity, Gill is being painted as some kind of financial terrorist, and it's already becoming clear that - just like regulators did withNat Sarao after the May 2010 "flash crash"-they will once again find a small-time trader to scapegoat, regardless of whether their actions actually had a major impact on the market volatility in question.
But not only is Gill being dragged in front of the Committee (though Waters couldn't say whether he was "confirmed", only that she was trying to "get" him for the hearing), but regulators in Massachusetts are taking aim at him, and it looks like they have found an excuse to punish and scapegoat Gill, due to the fact that, technically, he was still employed by a major insurance firm, and was a registered securities broker, while carrying on his anonymous social media persona and pitching stocks online. Some might construe that as a conflict, and regulators are reportedly - according to the NYT - putting pressure on both Gill and his former employer, MassMutual, one of the biggest financial services firms in the state of Massachusetts.
MassMutual has reportedly told regulators that it was unaware of Gill's extracurricular social media activity. Nevertheless, according to federal regulations, the firm is responsible for monitoring the activity of its employees.
Moonlighting under the name Roaring Kitty, Keith Gill became something of an online folk hero for his dedication to GameStop, the struggling video-game retailer at the center of a trading frenzy that sent its share price into the stratosphere.
But now a regulator in Massachusetts wants to know more about Mr. Gill, a registered securities broker, and his former day job as a financial wellness education director at an insurance company based in Boston.
Inspired in part by Mr. Gill’s cheerleading, thousands of small investors pushed stock in GameStop to as high as $483 a share and made Mr. Gill fabulously rich on paper. A picture he posted last week on the Reddit WallStreetBets forum showed his GameStop investment was worth $48 million, though his actual returns could not be independently verified.
But Mr. Gill’s former employer, MassMutual, has told securities regulators in Massachusetts that it was unaware that Mr. Gill had spent more than a year posting about GameStop on social media, online message boards and YouTube.The insurer also told regulators that had it known about Mr. Gill’s outside activities, it would have asked him to stop or possibly fired him.
William Galvin, the Massachusetts secretary of the commonwealth, has already sent letters to MassMutual asking to learn more about Gill's employment at MM, where he reportedly served as a "financial wellness education director," a position that required him to be a licensed broker. Though Gill reportedly put in his notice on Jan. 21, he was still technically an employee of the firm. And this apparently opens him up to liability for breaking rules set by his employer, or any regulations or laws.
In a statement to the NYT, Galvin said: "I am not trying to inhibit anyone’s ability to access the marketplace,...the issue here is transparency."
On Friday, Mr. Galvin’s office sent a letter to MassMutual’s general counsel seeking information about Mr. Gill’s employment status and whether the company was aware of his outside activities promoting GameStop.
The letter also sought details about the firm’s “process for identifying undisclosed business activities” and for monitoring an employee’s use of social media.
Debra O’Malley, a spokeswoman for Mr. Galvin’s office, said much of MassMutual’s response was confidential because the inquiry is open.But she confirmed the date of Mr. Gill’s departure and reiterated the company’s contention that it was unaware of his activities.
Ms. O’Malley said MassMutual had told securities regulators that it previously denied a request by Mr. Gill to perform side work managing an investment portfolio for a family friend after he joined the company in April 2019.
Paula Tremblay, a MassMutual spokeswoman, said in an emailed statement that Mr. Gill was no longer employed by the company and that the matter was under review. She declined to comment further.
An outside lawyer quoted by the NYT said thatwhile it's too soon to saywhether Gill may have violated securities laws,but it's certainly possible that he might have violated rules set by his former employer if he was posting without their knowledge, which it looks like he was.
Andrew Calamari, a lawyer with Finn Dixon & Herling and a former director of the Securities and Exchange Commission’s New York office, said it was too soon to determine whether Mr. Gill had violated any securities regulations. But Mr. Gill could have violated company rules if he did not receive permission for his posts on Reddit and YouTube.
“Firms don’t allow employees to go out and make predictions on stock,”he said of employees who aren’t analysts. Many financial firms also require employees to disclose if they have brokerage accounts with other firms to monitor their trading activities, he added.
But as we noted above, state regulators in Massachusetts might be the least of Gill's worries.
In an interview with Cheddar yesterday, House Financial Services Chairwoman Maxine Waters confirmed that Robinhood co-founder and CEO Vlad Tenev was on "her list" of prospective witnesses for the Feb. 18 hearing before the House Financial Services Committee, along with Gill, representatives from the hedge fund community, representatives from Reddit - even representatives from GameStop, whom Waters is inviting to essentially pitch their business model. Waters added that she wants "all the big boys here".
"I understand that they are working on turning it around and there is a real possibility that they could be successful at this, so I want them here, too. I want to know a little more about GameStop, I want Robinhood, I want Reddit and I want the big boys here."
As for the Redditor's "stick it to the man" narrative, and its consequences for financial stability, Waters said she's not taking sides.The Democrats are simply trying to bring all the parties to the table, and listen to what they have to say (albeit with a few aggressive "gotcha" questions, grist for reelection in just under 2 years).
We also can't help but wonder, if Waters is truly trying to gather all the parties involved, who else might be called to testify? Dave Portnoy? Chamath Palihapitiya? Steve Cohen?
Despite its best efforts to the contrary, Robinhood did end up stealing from the rich and giving to the poor.
Melvin Capital, the $8 billion hedge fund that didn’t find GameStop funny, lost 53% of its portfolio in January ($7 billion) trying to short against the rallying cries of the Reddit Capitalist Union. Gabe Plotkin also faces the embarrassment of having to get bailed out by your old boss.
Ken Griffin, owner of the Citadel hedge fund (an investor in Melvin), and Citadel Securities (a massive market maker and buyer-of-order-flow for Robinhood), is seeing capital losses in the former and Washington cries for scrutiny into market structure in regards to the latter.
Robinhood itself — which for goodness sake is *not Wall Street*, but as *Silicon Valley* as it possibly gets — raised $1 billion immediately to protect itself from class action lawsuits, DTCC capital calls, and a now-rapidly-closing IPO window. That means Yuri Milner of DST Global chipping in yet again.
That’s at least 4 people that have had a very bad, no good day.
The Reddit Wallstreetbets army has 8 million members. Robinhood has 13 million users. These are the opposing force. They are, loosely speaking, having a pretty good day.
But there are other billionaires who are having way more fun with this too. World’s richest man Elon Musk is raising the crypto rallying flag, and ex-Facebook billionaire Chamath Palihapitiya is trading along with Reddit for quick profits. Decentralized hedge fund and all. This isn’t how much money you have. This is about a mindset, and a framing of the world. It’s about who you are, and who you are not. And it’s about what you did and did not do.
Do you side with the Internet’s gamer heroes, wearing Nyan cat shirts and crying out sarcastically for “moar Stonks, money printer go brrrr, number go up”! A post-Gawker-4chan swirl of human vectors, coalescing into one giant middle finger to every Karen and Ken? Dopamine splashing out from our pituitary glands into a vortex tornado of well-earned resentment.
Or, do you like your finance suited, ministerial, administrative, and gated? Do you think that it is storied, respectable, and *important*. That you have to go to HYP, and then do your “two and two” at Goldman and HBS, before hopping to KKR or Tiger or SAC and then into your own cozy fund. All that work, all that sweat for the GMAT and the SAT and the bootlicking, to be undone by someone literally making fun of you in the language of money.
It’s not about some truth about Wall Street, or Silicon Valley, or the Internet, or Bitcoin, or DeFi, and least of all about GameStop. Those are just flags of our armies. And we are at war with ourselves.
Market Structure on Display
GameStop is a mall shop that sold video games. The mall shops that rented videos (Blockbuster) or sold books (Borders) are bankrupt and rightly dead. The Internet, and its children Netflix and Amazon, killed them. And yet, their names are etched into the collective childhood memories of millions. GameStop has no chance against Steam or Epic — both brands that are also deeply loved by nerds all over the world. We say this as self-incrimination. And yet, GameStop is a symbol, a feeling, a reminiscence.
The person building financial models and analyzing this stuff according to economics is “right” to point out bad things about “fundamentals” of the business. Within the game of financial capital markets, the fundamentals are the gears of the economic machines that you evaluate with capital decisions. You buy good fundamentals, says Warren Buffet, and you sell bad ones. Another Warren, Elizabeth Warren, also believes in fundamentals. She believes in them so much she wants government to regulate them into the market to protect consumers from losing a traditional approach to value, and “fair, orderly, and efficient function”.
All that might be right, and we are not doubting the wisdom of Keynes, or the animal spirits. But Warren Buffet is no longer number one. It’s an Elon Musk world now.
Fundamentals are what the financial doctors will tell you that you have. Do you think the Internet cares about their diagnosis? No. The Internet cares about being patronized by people in coats. Musk and Chamath are the mushrooms of the Internet. It is in their DNA.
The GameStop trade itself is worth a pause. While some of the original thinking by DeepF*ckingValue that led to his $30+ million capital gain reflected on the GameStop business, the core insight was market structure. The trade was not about GameStop beating its analyst estimates, or any of that boring-play-by-the-rules stuff. It was about a short squeeze. It was about restricting the supply of the stock in such a way as to blow up a levered short bet that Melvin Capital was putting into play.
In other words, we are talking about the metagame, not the grunt Excel spreadsheet game. SAC, Tiger, Point72, Melvin Capital and every other hedge fund worth its salt plays the metagame. That’s the whole point. You get a PhD in financial instruments by doing the work and testing the levers, rather than believing in them blindly. And Wallstreetbets dared to play the metagame as well. Retail investors aren’t supposed to self-organize into a hivemind of levered derivatives strategy driven by spite. And here we are.
To go short, Melvin has to borrow. To borrow, you have to pay an interest rate. To cover your short, you have to buy back the stock. You’re paying an interest rate and have to buy back the stock. Nobody is selling you the stock, because they hate you. Everyone is buying, to troll you specifically. They are levering up with options. And you keep raising your bids until you cover your position.
Robinhood is a broker/dealer. They came into being in Silicon Valley, a place where consumer services are free, because they are actually not services, but honeypots that aggregate user demand, package it at large scale, and re-sell attention to advertisers. Such is Facebook and Google. Our lives are better because of these services, but also compromised and profoundly insane.
Robinhood uses this playbook to aggregate consumer demand with the honeypot of free trading, and then sends it to market makers like Citadel Securities and gets paid $600 million for the orders. TD and eTrade and other discount brokers do this too! But Robinhood does it most, and does it best. Check out our prior explanation with Paul Rowady here.
Robinhood, as well as TD Ameritrade, ended up restricting trading in the instrument as a result of this capital call. If you are burning and raising a USD billion per year, you probably don’t have a “tenfold” of cash lying around to give to the DTCC to make them feel comfy. So, you know, they just removed the “Buy” button for a whole bunch of crusaders on a mission, with their capital on the line. They didn’t remove the “Sell” button, and threw fire on the Internet conspiracy meme machine.
Was this done on instruction from Citadel billionaires? Was this the banksters colluding against the common person? Was “Wall Street” trying to take away our constitutional freedom to trade on a mobile app? Even Ted Cruz and Alexandria Ocasio-Cortez found common ground in finding someone to blame!
If it caused losses in reliance, then damages will come. They will follow the class action lawsuits and the rioters.
The New Social Contract
It’s not a lot of rioters yet.
But remember, Fintech — including Robinhood, Revolut, SoFi and the rest — is supposed to democratize access to financial services. That meant very little a decade ago, and "dumb money” was disorganized and uninformed. Now, information is free and available to all. Equities trading is largely costless and frictionless. And the scariest part, for the suited part of finance anyway, is that strength lies in numbers and can now self-organize.
In addition to this, we have the crypto currency ecosystem. Unlike Fintech, which went after distribution, blockchain goes after manufacturing. If you are a trader or market-maker on Ethereum, there is no clearing house. There is no broker/dealer. There is only you, and the distributed machine with its smart contracts, automated rule sets, and software-enforced property rights. All data is real time. The blocks click into being one after another without a single lawyerly piece of paper in sight. Hundreds of millions of people in the world have touched this asset class, and it renders financial intermediaries unnecessary in their imagination.
Now don’t get us wrong. A trade on Ethereum is going to cost you $10 to $100 today, and another 1% in slippage. It is going to cost you some immeasurable but ever-present probability of cyber risk and regulatory overhang. But you nobody can take away your “Buy” or “Sell” button, and the speed and scale issues are mere technical problems to be solved by the entrepreneurial gods.
Here’s the rub. Post-fintech-crypto-democratization and all.
Humans are social animals. It is on our bones. The concept of fairness has been selected through the evolutionary filter, and fueled a cooperation-based multi-billion person civilization. We’ve shared the below video before, but check out again what it means for our monkey relatives to experience unfairness. After a minute of injustice, you can see the monkey occupying Wall Street.
Redditors are monkeys in the same way that we at the Fintech Blueprint are monkeys.
Democracy is not oligarchy. Democracy means that each person has one vote. If you were to vote according to assets under management, which is how finance has done it to date, you get very different outcomes than when you vote person-by-person. James Madison is deeply eloquent around these points in the Federalist Papers, talking of the dangers a democratic majority will impose on its minorities. Unintentionally funny is the mention of an unchecked power to sacrifice the obnoxious individual, i.e., Melvin Capital.
So we now have a set of promises and representation from companies like Robinhood that suggest a democratic empowerment of individuals to access the storied products of finance. Most people don’t know, or want to know, how the actual machine works. When the promises have a gap to reality, because of whatever reason, this creates kinetic energy for Twitter and Reddit.
It creates energy for people in position of leverage who understand the machine, and want it to change. Elon Musk hates short-sellers for their dampening, and perhaps manipulating, effect on his promises of Tesla greatness. Certainly Chamath, having launched endless SPACs to take Silicon Valley Fintech distributors like SoFi public, understands the machine as well. For them, this tear in the fabric of reality is a power. It is a rallying cry.
If we really want to put this into dystopian, let’s at least reference the theory of overcrowding elites from Peter Turchin. The historian eerily predicted the 2020 rioting and disaffection back in 2010, suggesting that too societies fall apart when they over-produce members of the ruling class. Education has minted PhDs, MBAs, and entrepreneurs who have no seat to inherit from a retiring predecessor. As a result, they take on the populist mantle, and position themselves as outsiders to attack the insiders, while of course being fabulously gifted. Thus Donald Trump and all the rest.
If you are holding power today, you probably don’t want everything to fall apart just because Redditors hate a caricatured notion of hedge funds. So you tweak things at the edges. Edit out the glitches in the current Matrix. It is through this lens that we see Google deleting 100,000 negative Robinhood reviews for being “inauthentic”.
Of course they were coordinated. But they were very authentic to the people that wrote them. They were, however, “inauthentic” to the current rule-set of the game. Based on fundamentals, market structure, and a variety of other “this is how things work” explanations, Robinhood did nothing wrong. Nor did Melvin, really, as far as we can tell from the media coverage. They just played a game that has become a cartoon that millions of people despise. Google’s app store is also an incumbent, a rule-set as well of what constitutes good behavior and what you should do according to its Terms, and so on. Protecting Robinhood’s reputation because it did not fundamentally err is what you do when you believe the current system works.
What’s also notable is that TD and other brokers that couldn’t support trading didn’t get such a backlash. The answer as to Why? is obvious — the brand promise of Robinhood is to bring in a new world, which it simply can’t do using old world tools.
Who wins and who loses?
This is a rich vein, but we’ve got to wrap up. How does this all shake out?
In the short term, it’s a bit of a mess. Robinhood is getting amazing publicity, and like Facebook, will flourish in growth despite repeated calls to “cancel it”. It will IPO a year late, but with 10 million more pragmatic users who don’t care about Internet culture. Its Fintech competitors, Public and WeBull, will pick up disenchanted users who still want to trade stocks.
Crypto/Fintech bridges like FTX or Synthetix will get some of that spill over as well, by creating trading pairs in Reddit darling stocks with derivatives. Coinbase will win, as more people start to believe in the underlying philosophy of crypto assets. They will win so much that their websites will break under new volume.
Regulators have an urgency here, and scapegoating will be important. It’s possible that order-flow payments are restricted as a result, like they are in Europe, even though that has little to do with collateral calls from the DTCC. Or perhaps, they finally see the benefits of blockchain-based capital markets infrastructure, and open up the gate to stronger innovation in clearing and settlement, however improbable that sounds. We don’t see how the traditional finance world benefits from this at all — as increased scrutiny usually lead to more regulation and downward fee pressure.
Longer term, the people will win.
We are in an age of anarchic, capitalist collectivism. This philosophical word soup is important to understand. The populism that seeped out of Donald Trump’s presidency, with roots in the right-wing Internet, and the anarchic trolling pleasures of Anonymous, 4chan, and Crypto Twitter, will continue to put focus on and find leverage in the needs of the “people”. This is at the expense of “those in power”, despite such words holding little meaning but lots of emotion.
Even longer term, however, is where there is a thick fog. As we move more of our economic activity onto decentralized software and participate in DAOs, as decentralized finance eats traditional finance, there is a redistribution of value. Early adopters of the crypto paradigm earn asymmetric returns for the risk they take — the risk of being entirely wrong, and being perceived as anti-social psychopaths.
This all evens out once the new machine and its digital property rights enforcement mechanisms are up and running. But collectivization is no cakewalk. It can become a tragedy. Taking the crown from Silicon Valley and Wall Street is not a friendly game, as we can already see with something as silly as GameStop. Also, collectivization often fails; it loses to free market capitalism in the annals of history.
A good answer eludes us. For now, we hold dearly the question.
"ROBINHOOD WILL HAVE TO BREAK INTO MY WIFE’S BOYFRIEND’S HOUSE IF THEY WANT TO FORCE ME TO SELL MY GME" -r/WallStreetBets meme.
An Inverse Of 1987
One of the more interesting takes on the GameStop (GME) saga last week came from Bloomberg's Joe Wiesenthal, drawing on the work of Emanuel Derman. For those unfamiliar with Derman, he was one of the first physicists to make the transition to quantitative finance in the '80s, moving from Bell Labs to Goldman Sachs (full disclosure: we've corresponded and met with Dr. Derman in the past, and he was kind enough to offer some feedback on our security selection algorithm).
Wiesenthal referred to Derman's memoir, My Life As A Quant.
In that book, Derman observed that after the 1987 crash, put options permanently became more expensive. Wiesenthal speculated on Twitter that in the wake of the GameStop melt-up, the same might happen to call options. Derman agreed.
More Expensive Calls, Less Expensive Collars
All else equal, more expensive calls would be good news for investors looking to hedge with collars. We haven't seen that with GameStop itself yet, but we did get a preview of it with one of the other meme stocks last week, Nokia (NOK). In our previous post (WallStreetBets Versus The Crackdown), we presented an extraordinary collar on Nokia:
A Hedged Bet On Nokia
Nokia offers an even better setup than BlackBerry did earlier this week in terms of upside potential versus downside risk. Let's say you picked up a 1,000 shares of NOK on the dip Thursday. This was the optimal collar, as of Thursday's close, to hedge your 1,000 shares of NOK against a >25% drop over the next month while capping your upside on the stock at 100%.
It's rare that you're able to cap a collar this high, which makes for the attractive risk-versus-reward setup here. Also, note the negative hedging cost.
That hedge was as of Thursday's close; using the same parameters, you could have found a similar optimal collar on Friday as well.
Still Too Risky For Some
For at least one reader, that Nokia hedge, with its 25% maximum downside, was too risky. Our regular commenter "propaganda4u" wrote,
Your worse case loss should never be more than 5%. Didn't you learn anything from William O'Neill?
William O'Neill, the founder of Investor's Business Daily, is of course known forhis trading rules, including those regarding cutting losses. His rule is to sell when a stock drops 7%, not 5%.
My philosophy is that all stocks are bad. There are no good stocks unless they are going up in price, if they go down instead, you have to cut your losses fast. The key is to lose the least amount of money possible when you're wrong. I make it a rule to never lose more than 7% on any stock I buy. If a stock drops 7% below my purchase price, I will automatically sell it without any hesitation.
This rule does not limit your potential losses on a stock to 7% though. Stocks can gap down much further on bad news. It's not unheard of for a stock to open down 20% or more from its previous close after an earnings miss or other bad news. Here's an example of Snap (SNAP) doing that a few years ago (there are more recent examples, but this chart was handy).
If you had a stop order to sell this after it pulled back 7%, that wouldn't have helped you there. Hedging, unlike trading rules, can actually protect against drops of more than 7%, or more than 5%, if you're that risk averse.
Investing Without Risking A >5% Loss
The good news for our extremely risk averse readers such as "propaganda4u" is that it is possible to invest without risking a drop of more than 5%. Our system can construct hedged portfolios designed to maximize returns for investors only willing to risk a 5% decline.
The Tradeoff Of Risking Only A 5% Decline
The tradeoff is that hedging against such small declines narrows the universe of securities available. To quantify that, consider this. Our universe includes about 4,500 securities with options traded on them in the U.S. On Friday, 1,860 of them passed our initial screens and were hedgeable against >9% declines. Only 231 of those were hedgeable against declines of >5%.
Whenever you ask our system to construct a hedged portfolio, it populates your portfolio with names that it estimates have the highest potential returns, net of hedging cost, out of the ones that fit your risk tolerance and portfolio size. If you indicated you were only willing to risk a decline of >5%, on Friday, it would have started with those 231 names that were hedgeable against a >5% decline. If you indicated that you had $100,000 to invest, our system would have filtered out names like Amazon (AMZN) that were hedgeable against >5% declines, but had share prices too high to fit a round lot in your portfolio. This is the hedged portfolio it would have presented you:
As you can see in the portfolio summary, the max drawdown there was a decline of 4.86%. That's how much the portfolio would be down if every security in it went to $0 just before the hedges expired.
Another Approach For The Risk Averse
Although the portfolio above limits your downside risk to a drop of 4.86% in the worst case scenario, its expected return over the next six months is fairly modest: 3.72%. Another approach for a risk averse investor would be to keep most of his money in cash and then take more risk in a hedged portfolio. For example, instead of investing 100% in a portfolio hedged against a >5% decline, invest 25% in a portfolio hedged against a >20% decline with the rest in cash. Our guess is that the second approach may do better. Let's check back in six months and see.
Update (1100ET): For some background on just how unprecedented this weekend's action in silver markets is, Tyler Wall, the CEO of SD Bullion writes the following (emphasis ours):
In the 24 hours proceeding Friday market close, SD Bullion sold nearly 10x the number of silver ounces that we normally would sell in an entire weekend leading to Sunday market open.
In a normal market, we normally can find at least one supplier/source willing to sell some ounces over the weekend if we exceed our long position (the number of ounces we predict we will sell over the weekend).
However, everyone we talk to is afraid of a gap up at Sunday night market open.
This is about ready to get really interesting as there was very little inventory left from suppliers/mints going into Friday close.
Our direct AP supplier informed us after close on Friday that the "US Mint will be on allocation for the remainder of Type 1" (Current Silver Eagle Design).
Our sales for the month of January exceeded any one month last year during the heart of the pandemic. It was an all-time record month in our company history.
And, perhaps most importantly, as QTR tweets so succinctly, "this is a red pill moment for many, and it's beautiful."
Additionally, there are also signs of a notable regime shift, as Bloomberg points out, investors are holding onto silver they own, rather than trying to take profits.
“Now we’re seeing nothing, no single offer, which is scary,” Peter Thomas, senior vice president at Zaner Group, said by phone from Chicago.
“Whatever we sell, people are holding it. There’s no inflow of metal at all.”
* * *
Update (1030ET): It would appear the run on silver has begun. With the market closed, traders have rushed to secure some exposure to silver ahead of what WSB suggests could be "the world's biggest short squeeze" and that has left bullion dealers
As we noted below, the premium for physical silver had soared late Friday and into Saturday (after the massive flows into SLV), but as Sunday rolled around, bullion dealers are now facing massive shortages of physical coins.
And as one investor noted, the shortages are widespread...
We can only imagine where SLV will open after this.
* * *
While all eyes have been focused on GameStop and a handful of other heavily-shorted stocks as they exploded higher under continuous fire from WallStreetBets traders igniting a short-squeeze coinciding with a gamma-squeeze, the last few days saw another asset suddenly get in the crosshairs of the 'Reddit-Raiders' - Silver.
Silver Bullion Market is one of the most manipulated on earth. Any short squeeze in silver paper shorts would be EPIC. We know billion banks are manipulating gold and silver to cover real inflation.
Both the industrial case and monetary case, debt printing has never been more favorable for the No. 1 inflation hedge Silver.
Inflation adjusted Silver should be at 1000$ instead of 25$. Link to post removed by mods.
Why not squeeze $SLV to real physical price.
Think about the Gainz. If you don't care about the gains, think about the banks like JP MORGAN you'd be destroying along the way.
...
Tldr- Corner the market. GV thinks its possible to squeeze $SLV, FUCK AFTER SEEING $AG AND $GME EVEN I THINK WE CAN DO IT. BUY $SLV GO ALL IN TH GAINZ WILL BE UNLIMITED. DEMAND PHYSICAL IF YOU CAN. FUCK THE BANKS.
Disclaimer: This is not Financial advice. I am not a financial services professional. This is my personal opinion and speculation as an uneducated and uninformed person.
...and judging by the unprecedented flows into the Silver ETF (SLV) they just got started...
SLV saw inflows of almost one billion dollars on Friday, almost double the previous record inflow for this 15 year-old ETF.
Source: Bloomberg
Which helped prompt a spike in SLV off Wednesday's lows of over 11% (and note that every surge in price was mimicked by gold, but gold was instantly monkey-hammered lower after the spike).
Source: Bloomberg
And judging by the asset flow, SLV has room to run here...
Source: Bloomberg
Just as short-interest in the ETF has been building...
'TheHappyHawaiian' cites two reasons to buy - The Short Squeeze and Fundamentals.
The short squeeze:
Buy SLV shares (or PSLV shares) and SLV call options to force physical delivery of silver to the SLV vaults.
The silver futures market has oscillated between having roughly 100-1 and 500-1 ratio of paper traded silver to physical silver, but lets call it 250-1 for now. This means that for every 250 ounces in open interest in the futures market, only 1 actually gets delivered. Most traders would rather settle with cash rather than take delivery of thousands of ounces of silver and have to figure out to store and transport it in the future.
The people naked shorting silver via the futures markets are a couple of large banks and making them pay dearly for their over leveraged naked shorts would be incredible. It's not Melvin capital on the other side of this trade, its JP Morgan. Time to get some payback for the bailouts and manipulation they've done for decades (look up silver manipulation fines that JPM has paid over the years).
The way the squeeze could occur is by forcing a much higher percentage of the futures contracts to actually deliver physical silver. There is very little silver in the COMEX vaults or available to actually be use to deliver, and if they have to start buying en masse on the open market they will drive the price massively higher. There is no way to magically create more physical silver in the world that is ready to be delivered. With a stock you can eventually just issue more shares if the price rises too much, but this simply isn't the case here. The futures market is kind of the wild west of the financial world. Real commodities are being traded, and if you are short, you literally have to deliver thousands of ounces of silver per contract if the holder on the other side demands it. If you remember oil going negative back in May, that was possible because futures are allowed to trade to their true value. They aren't halted and that's what will make this so fun when the true squeeze happens.
Edit for more detail: let’s say there’s one futures seller who gets unlucky and gets the buyer who actually wants to take delivery. He doesn’t have the silver and realizes it’s all of a sudden damn difficult to find some physical silver. He throws up his hands and just goes long a matching number of futures contracts and will demand actual delivery on those. Problem solved because he has now matched the demanding buyer with a new seller. The issue is that the new seller has the same issue and does the exact same thing. This is how the cascade effect of a meltup occurs. All the naked shorts trying to offload their position to someone who actually has some silver. My goal is to ensure that I have the silver and won’t sell to them until silver is at a far higher price due to the desperation.
The silver market is much larger than GME in terms of notional value, but there is very little physical silver actually readily available (think about the difference between total shares and the shares in the active float for a stock), and the paper silver trading hands in the futures market is hundreds of times larger than what is available. Thus when they are forced to actually deliver physical silver it will create a massive short squeeze where an absurd amount of silver will be sought after (to fulfill their contractually obligated delivery) with very little available to actually buy. They are naked shorting silver and will have to cover all at once and the float as a percentage of the total silver stock globally is truly miniscule.
The fundamentals:
The current gold to silver ratio is 73-1. Meaning the price of gold per ounce is 73 times the price of silver. Naturally occurring silver is only 18.75 times as common as gold, so this ratio of 73-1 is quite high. Until the early 20th century, silver prices were pegged at a 15-1 ratio to gold in the US because this ratio was relatively known even then. In terms of current production, the ratio is even lower at 8-1. Meaning the world is only producing 8 ounces of silver for each newly produced ounce of gold.
Global industry has been able to get away with producing so little new silver for so long because governments have dumped silver on the market for 80 years, but now their silver vaults are empty. At the end of WW2 government vaults globally contained 10 billion ounces of silver, but as we moved to fiat currency and away from precious metal backed currencies, the amount held by governments has decreased to only 0.24 billion ounces as they dumped their supply into the market. But this dumping is done now as their remaining supply is basically nil.
This 0.24 billion ounces represents only 8% of the total supply of only 3 billion ounces stored as investment globally. This means that 92% of that gold is held privately by institutions and by millions of boomer gold and silver bugs who have been sitting on meager gains for decades. These boomers aren't going to sell no matter what because they see their silver cache as part of their doomsday prepper supplies. It's locked away in bunkers they built 500 miles from their house. Also, with silver at $23 an ounce currently, this means all of the worlds investment grade silver only has a total market cap of $70 billion. For comparison the investment grade gold in the world is worth roughly $6 trillion. This is because most of the silver produced each year actually gets used, as I have mentioned. $70 billion sounds like a lot, but we don’t have to buy all that much for the price to go up a lot.
**If the squeeze happens, it would be like 40 years worth of their gains in 4 months **
The reason that only 8 ounces of silver are produced for every 1 ounce of gold in today's world is because there aren't really any good naturally occurring silver deposits left in the world. Silver is more common than gold in the earth's crust, but it is spread very thin. Thus nearly every ounce of silver produces is actually a byproduct of mining for other metals such as gold or copper. This means that even as the silver price skyrockets, it wont be easy to increase the supply of silver being produced. Even if new mines were to be constructed, it could take years to come online.
Finally, most of this newly created silver supply each year is used for productive purposes rather than kept for investment. It is used in electronics, solar panels, and jewelry for the most part. This demand wont go away if the silver price rises, so the short sellers will be trying to get their hands on a very small slice of newly minted silver. The solar market is also growing quickly and political pressure to increase solar and electric vehicles could provide more industrial demand.
The other part of the story is the faster moving piece and that is the inflation and currency debasement fear portion. The government and the fed are printing money like crazy debasing the value of the dollar, so investors look for real assets like precious metals to hide out in, driving demand for silver. The $1.9 trillion stimulus passing in a month or two could be a good catalyst. All this money combined with the reopening of the economy could cause some solid inflation to occur, and once inflation starts it often feeds on itself.
What to buy:
I will be putting 50% directly into SLV shares, and 50% into the $35 strike SLV calls expiring 4/16.
This way the SLV purchase creates a groundswell into silver immediately that then rockets through a gamma squeeze as SLV approaches $35.
Price target of $75 for SLV by end of April if the short squeeze happens.
Edit: for the part of your purchases going into shares, some people recommend PSLV because they think SLV might start lying about having the silver in their vault. Or that the custodian will be double counting, ie claiming that the same silver belongs to multiple people (banking on the fact that people wont all try to get their silver at once). So if you buy SLV shares and calls, that's great. But I think it could be prudent for us to buy options in SLV (no options on PSLV) and shares in PSLV. It all depends on how paranoid you want to be. There is a lot of paranoia in the precious metals world.
Alternate options:
buying physical silver; this also works but you pay a premium to buy and sell so its less efficient and you take fewer silver ounces off of the market because of the premium you pay
going long futures for February or March; if you are a rich bastard and can actually take physical delivery of 1000s of ounces of silver by all means do so. But if you simply settle for cash you are actually part of the problem. We need actual physical delivery, which is what SLV demands and is why SLV is the way to go unless you are going to take delivery
miners; I don’t recommend buying miners as part of this trade. Miners will absolutely go up if SLV goes up, but buying them doesn't create the squeeze in the actual silver market. Furthermore, most silver miners only derive 30-50% of their revenue from silver anyways, so eventually SLV will outperform them as it gets high enough (and each marginal SLV dollar only increases miner profits by a smaller and smaller percentage)
Details on SLV physical settlement:
When SLV issues shares, the custodian is forced to true up their vaults with the proportional amount of silver daily. From the SLV prospectus:
"An investment in Shares is: Backed by silver held by the Custodian on behalf of the Trust. The Shares are backed by the assets of the Trust. The Trustee’s arrangements with the Custodian contemplate that at the end of each business day there can be in the Trust account maintained by the Custodian no more than 1,100 ounces of silver in an unallocated form. The bulk of the Trust’s silver holdings is represented by physical silver, identified on the Custodian’s or, if applicable, sub-custodian's, books in allocated and unallocated accounts on behalf of the Trust and is held by the Custodian in London, New York and other locations that may be authorized in the future."
'TheHappyHawaiian" ends with a call to (financial) arms:
Join me brothers. Lets take silver to the moon and take on the biggest and baddest manipulators in the world.
Please post rocket emojis in the comments as desired.
Disclaimer: do your own research, make your own decisions, everything here is a guess and hypothetical and nothing is guaranteed, not a financial advisor, I have ADHD and maybe other things too.
Bear case: silver does tend to sell off if the broader market plunges so it’s not immune to broad market sell off. It’s also the most manipulated market in the world so we are facing some tough competition on the short side
Interestingly, 'TheHappyHawaiian' dropped this update on 1/29:
Due to the manipulation and collusion of citadel, hedge funds, and brokers to change the rules and rig the game in their favor. Who likely knew ahead of time and bought puts right before and calls at the bottom, GME is too important to abandon still. SLV is still my next play but GME needs to go to $1000 and these people need to go to jail.
However, judging by the massive physical premiums for silver we are seeing this weekend at APMEX...
