1st February 2021 | Davos | Gamestop

Davos? What is it good for?; Understanding the GameStop bubble

Welcome to Just Two Things, which I try to write daily, five days a week. Links to the main articles are in cross-heads as well as the story.

#1: Virtual Davos

Normally at this time of the year, the Swiss resort of Davos is full of the world’s elites gladhanding each other under the auspices of the World Economic Forum. This year, they’ve had to do it virtually. This has had several good effects. The best of them is that almost no-one noticed the event. Apart from some diplomatic sabre-rattling by China’s Premier, there was almost no coverage. I’m taking this to be a media effect: when senior journalists go on an expensive trip, their paper or channel feels the need to publish copy, whether or not it is interesting. No out of pocket costs, and the copy has to fight its way in on merit.

A related effect was that I didn’t have to read a single article profiling a billionaire tech bro taking an afternoon away from the proceedings to go skiing.

The lack of noise—which reflects the genuine news value of what happened during the World Economic Forum’s virtual event last week—allows me to think about WEF as a construct. It basically does three things:

• acts as a network for members of the political and financial elite

• promotes slightly progressive business perspectives (but nothing too far ahead of the mainstream)

• sponsors collections of “performative futures” work about sectors and ideas.

The WEF was created in 1987, out of an earlier European Management network. This was just at the point where the financial “big bang” and right-wing political ideas had combined to create an elite that were far wealthier than the mainstream. As a reference point, Michael Lewis’ book Liar’s Poker about the high-rolling ‘big swinging dicks’ of Salomon Brothers was published in 1989. So they needed somewhere to huddle together.

WEF also positions itself as progressive, but in practice, only just. Davos events are famous for the handwringing of the powerful about outcomes they could influence, if only they could be bothered. But it never heads too far off piste. For example, the 2020 WEF manifesto about stakeholder capitalism was published months after the Financial Times had re-branded and the fairly conservative US Business Round Table had declared that shareholder capitalism was over.

Finally, performative futures. WEF has popularised the idea of the “Fourth Industrial Revolution” in 2016, which on inspection looks awfully similar to the “Third Industrial Revolution” that Jeremy Rifkin described in his book of the same name in 2011. Rebranded for marketing purposes? Who knows? Most of this work is led by big-hitters from the global consultancies, attached for free or way below cost because of the people you get to meet. But again—the thinking never strays too far into territory that WEF’s corporate members would find not to be “plausible”.

As a futurist, this has its benefits. When WEF says something, you can know that this is a view that mainstream business opinion is already close to. It’s a signal of an idea’s maturity. The annual risk assessment, which asks members of the elite for their perception of the risks landscape, is a case in point. Here’s a diagram from this year’s risk report, showing the top perceived risks—by likelihood—over time. There are, every year, a couple of headline-driven outliers. But we can see they are now persuaded of climate risks. But the risks of inequality (outside of the digital sphere) have completely fallen off their radar. Well, we’ll see how that works out.

#2: Gamestop, reddit, and playing the market

(Adapted and cross-posted from my blog)

Like everyone else I have been trying to work out what to make of the GameStop bubble as it blew up last week. These are some notes from my reading over the week. I’ve been helped here by my son Peter, who sometimes hangs out in the reddit subgroup that has caused some of the trouble, and who wrote a nice explainer last week on his Substack.

My best take is this: that it represents one of those conjunctions of weak signals that you sometimes see when you use Wendy Schultz’s Manoa method, that combine to create unanticipated outcomes that are explicable in hindsight but hard to see, at least in detail, in advance.

The first is: the hatred of forms of extractive “locust” business (pdf) represented by hedge funds is real. It hasn’t declined over time. From Peter’s substack:

[O]ne interesting facet of this whole avalanche of trading is the hostility shown towards anyone in ‘traditional’ finance world. This isn’t just about GME, there’s a real sense of injustice. One user comments: 

“These are the same kind of guys that got bailed out while people lost all their pensions and life savings in '08. I don't even care about the money anymore, I just want to know we actually made a stand and tried to make a difference if this doesn't work out.”

But how much better to be able able to make some free money at the same time.

Second, it’s an expression in the finance sector of the same kinds of directed but loosely coupled engagement that the internet enables and which is more familiar in politics. James Surowiecki compared it to some of the grass-roots political campaigns that supported Trump in 2016:

What [the alt-right] did, in effect, was exploit the opportunities created by social media to disrupt the normal workings of the political system, at least in part for the lolz. The traders on r/Wallstreetbets — which describes itself, tellingly, as “Like 4chan found a Bloomberg Terminal” — are trying to do the same thing to Wall Street.

How are they doing it? By embracing companies that Wall Street, for good reason, hates: beaten-down firms in legacy businesses with weak economic fundamentals. 

Third, and most obviously, it’s a function of the democratisation of access that happens over time with technologies (and not just digital ones). Technologies start in the business and professional world, and move to the consumer world. It’s just a function of the cost curve.

And maybe there are also new forms of social and psychological learning about trading in volatile markets—as Kathryn Cramer suggested to me on Twitter—that has come from the growth of cryptocurrencies.

One of the outcomes, though, is that it has reminded people of Keynes’ famous observation that stock markets are casinos. At a point when the pandemic has pulled the curtain away from the wizard, spelling this out so starkly has political consequences. Clearly markets where a middle of the road video game retailer is worth $25 billion are not functioning properly, as John Authers noted at Bloomberg.

But nor should we think of stock markets as being a signal to meaningful economic information. As Peter Radford says, at Real World Economics Review: “Then, of course, there’s the argument that stock prices are indicative of a notion of future economic activity... More likely, the stock market reflects the collective wisdom of the wealthy elite as to where it thinks its future rents can be extracted.”

But as John Authers observes: doing anything about all of this that benefits Wall Street in general, and hedge funds in particular, at the expense of redditors or other individual investors, is political poison. And rightly so.

j2t#021

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