GameStop Flashback As 'Roaring Kitty' Returns

Welcome to the almost end of the week show. We're doing this a little bit earlier than normal. It's actually a Wednesday we are recording this. Normally we do this on a Friday. We got two things, and that's why we want to do an early episode. One is, what the heck is going on with GameStop? It's only been three days, and I think they've gone up about 200%, and they've come off another 40% today. So it's been real, rollercoaster price action. So I want to dive into some of those things, talk about things like inflows, short squeeze, the mechanics of how that works, about, um, GameStop shares being on loan, and then AMC looking to refinance some of their debt. There's a lot of good learnings on the back of what otherwise is quite a funny story to, to cover. And then we've just had the release of US CPI, and as a result of that release, the S&P 500 is on course for a record high. Essentially, we've seen a slowdown in US inflation and that has brought back rate cut discussions. Piers and I were only talking less than a month ago about rate hikes. The market is now pricing in a rate cut, 80% probability by September. I can't promise by the time you listen to this episode in a few days' time that any of those percentages will still hold merit. But here we are. So yeah, let's talk about GameStop then, Piers. So what exactly is the headline here and what has been going on?

I love it. Just love it. Love these sort of market episodes that kind of really, you know, I guess just keep you guessing, keep you thinking anything can happen in these markets. But really, I mean, the headline is that, well, Roaring Kitty, or the, the guy— well, his name's Keith Gill, but he comes under a few different handles.

But, um, hold on, I thought Roaring Kitty was your WhatsApp name. Is this not you then?

Well, that's, that's still classified. Um, but Roaring Kitty, he's got a much better name on Reddit. Do you know his name? Do you know his handle on Reddit?

I think I do. I think it was— it's like, um, kind of covered up. It's like bleated out. So I'm sure—

I'm assuming it's, uh, I'm not sure if I'm allowed to say it on the podcast, but I'm gonna say it.

Well, it's not your name. It's not your name, is it?

No, it's Deep Fucking Value.

Nice.

That's his handle on Reddit anyway. It wasn't on Reddit, it was on X, uh, his, his The Real Kitty sort of, um, The Roaring Kitty handle. So it's been— so look, GameStop, as everyone knows and remembers, they've even made a movie out of it. It was in 2021 that it became the meme stock frenzy. And GameStop, amongst others like AMC— and I'd say GameStop, for those who don't remember, this is like a bricks-and-mortar computer game shop, very old-school sort of business model. Go down to an actual shop, rent a video game. And take it home and play it, right? It's all very quaint and old-fashioned, which is why a lot of the big hedge funds of this world were, you could say, quite rightly thinking, well, hang on, surely that business model's dead. It's the past. It's a dinosaur. So there was a lot of shorting of the stock because investors and analysts were saying, well, look, this business is dead. So It will go bankrupt. It's only a matter of time. Let's go short the shares so that we profit as it declines to its death. Okay? Then out of nowhere, this guy, Keith Gill, somehow, somehow, somehow fires things up on social media and gathers an army of retail traders, and he has a thesis which is the antithesis of the Wall Street hedge fund strategy. And his analysis was saying, look, we should be buying this stock. It's not a dying company. The hedge funds are wrong. Let's buy it. And he just drew in millions, literally millions of other retail traders through his posts on WallStreetBets and through his activity on Twitter and all the rest of it. It went viral. And literally millions of punters who knew not much about trading just jumped on the bandwagon. And it was very much all about David versus Goliath. It's about us versus Wall Street. And they took the stock, you know, smashing up through the highs. It went up in the end, it went up 1,500% January 2021. Okay, massive story. Gill made millions. But June 2021, he suddenly vanished and silenced.

S—

dead silence. Like, he made millions and it just seemed like he just swanned off into the sunset. And literally radio silence across all frequencies until Monday this week. And there was a little post that suddenly appeared on his X handle Describe to me this post.

What would I be looking for if I was scanning my Twitter feeds?

You, well, I can, I'm looking at the picture. It was just a picture, no text. And it was a picture of a guy, um, sort of a kind of pencil drawing of a guy sat on a chair. And it's a bit of a GIF where the guy's leaning forwards. That's it.

Okay. So let, let me get this right. If I go to LSE to study economics, I pay 70, 90,000 sterling. Or if I went to Bocconi in mainland Europe to study economics and finance, and you're saying there's a sketch of a guy in a chair and then he leans forward.

That's right.

Okay.

And that, if you understand that sketch, you'll be better off trading these markets than if you'd have gone to one of those world-renowned higher education institutions to learn about economic theory, it would seem.

Makes perfect sense.

I've kind of now since discovered that this meme is quite a— it's one that gamers use to indicate that they are taking the game seriously. So look, all his fans were like, oh my God, and then the media were, oh my God, he's back! So what does that mean, he's back? Well, maybe he's back. And then the speculation started to just go wild, and he's back and he's going to be buying GameStop. And so, right, GameStop shares went up, and on Monday, um, Monday they went up 75%. By Tuesday they were up 180%, and actually, to put that into context, that is adding $10 billion to the GameStop market cap just because of this one little tweet with a picture of some guy leaning forward in a chair.

Hmm, okay, so, so talk me through this then, because the shares have come off quite sharply today, so Tell me about the differences between 2021 and the meme stock frenzy and what's happened the first 2 days of this week.

All right. In 2021, so let's, let's go back to those hedge funds that were shorting. Okay. In 2021, one of the key parts of Keith Gill's kind of thesis and analysis was the fact that almost 100% of the shares in issuance of this business were actually lent out. They were on loan to hedge funds for shorting purposes. So the mechanics. So if you think, if you're a hedge fund, you think the share price is going to go down, you can go short. Okay, now the kind of mechanics of that, if you're not going to use derivatives, right, you want to just use the actual physical shares. Well, then you have to, to enter into that short position, you've got to borrow the shares. And this is a service that an investment bank will provide, like a prime brokerage division of an investment bank will provide. We talked about prime brokerage last week when we covered hedge funds, right? Prime brokerage divisions provide all these different services for hedge funds, one of which is lending them stock so that then they borrow the stock, they pay the investment bank a fee. For that, for lending them that asset. Then they take that asset and they sell it. They sell it out into the market. All right. There's buyers out in the market. So they sell those stocks. Then they wait. And if they're right, their strategy is right, the share price declines and declines and declines. And then when they're happy that they've made their, they've hit their targets, they buy back the stock at a much lower price. And then they give the stock back to the prime brokerage division at the investment bank. And the hedge fund profits the difference from where they sold at a high price to where they bought at a low price. Okay, now back in 2021, almost all, literally all the shares in existence were, were, were lent out via Prime Brokerage Division to hedge funds to sell. Okay, and like Keith Gill, Keith Gill, one of his things was, this is ridiculous that the entire float of the business is, is being taken up for this purpose. And so he kind of saw that as an extraordinary, extreme, unsustainable sort of market dynamic. And so he set this thesis about, right, let's start buying. Okay. Now, so 100% of the stock was out on loan in 2021. This time, if you go back a month, it was like 20%. Was on loan for shorting, and it's kind of crept up, and it's been creeping up, and it's got back— like, on Monday, or on the close on Friday last week, 30% of the stock was out on loan for shorting. So over the last month, it had— the short positioning has been building, and I guess it's built enough for your man Keith Gill to come out of hibernation and maybe just have a little bit of a laugh. Um, I don't know, but so that's one thing that's different. Another thing that's different is the amount of retail trader volumes at play here. Okay, so you can track the amount of money that's coming in. Um, so we call this net retail trader inflows. Okay, and people like Van Der Research, they kind of track this and they have the data. Okay, on Monday this week, um, $15.8 million inflowed, as in there was $15.8 million worth of GameStop share purchases from retail traders. Okay, so of course the price was going up, so what's pushing the price up? Well, buyers, right? So $15.8 million came from retail traders. Compared to 2021. During that time, the average kind of daily inflows at the peak of that move for GameStop, it was more like $100— it was more like, sorry, $87.5 million per day. All right, so 6 times more. So there's only 1/6 of the retail trader inflows here now this week compared to 2021. So you might say, well, well, how's the stock going up? By so much then, and I would say it's almost certainly the hedge funds panicking and going, oh my God, he's back. Because what happened in 2021, he smashed them. Um, I mean, some of these hedge funds lost literally billions. Um, Mervyn Capital lost over 50% of their entire fund in this trade. So any hint that this guy is back They panicked and they're kind of heading for, you know, stampeding for the door to get out of their short position. To get out, they have to buy, right? So most of the buy-side inflows here this week, I would suggest, are hedge funds buying back the shares to take off their short positions because they don't want to get Keith Gill'd like they did in 2021.

Yeah, such a great story. I reckon that's the last you've heard of Roaring Kitty for another couple of years, probably. I mean, let's see.

Who knows? Have you, have you seen his ex handle? Because he sent that, he posted that one tweet, and then it could have come from any— like, someone could have hacked his account, right? I mean, who knows? But ever since then, it's just been bombarded, like every sort of 10, 20 minutes there's another post with loads of videos, like video clips of movies where, you know, people rallying the troops and yeah, like Terminator's back and all this kind of stuff. And yeah, I think he's probably just sat there going, let's have a laugh here. Look, let's just—

yeah, let me put my long on. And let's have a little bit of a giggle, maybe.

Yeah, who knows what I like. So it wasn't just GameStop that went up. Oh, by the way, I should say, and you mentioned it, they have come down today. Just to put some numbers on this move, uh, on the close on Friday, GameStop closed at about $17.30. Uh, the peak on Monday was $37, so more than doubled. Um, at Monday's peak, it then kind of came off a little bit, so settled and closed 75% up on Monday. Then big spike again on Tuesday's open, went up to $64. So that's like quadruple Friday's close. Then lots of volatility on Friday, closed around about $50. Today it's opened and it's down at $33, so it's given back more than half of the move to the upside. Um, probably things will just settle down now. And I don't— yeah, it's hard to predict these things, but I wouldn't be surprised if that's it and it's not going to be a repeat 2021.

And to finish, there was an interesting kind of side part to AMC jumping on themselves as a company, some of this price action. So what happened with that?

Well, so these meme stocks, right? It wasn't just GameStop, of course. So there were plenty of other companies where it was considered that their business model was dead. So AMC is a, um, cinema chain, and it was thought, you know, during COVID it was thought, well, cinemas are dead, streaming's here and it's going to take over. Um, so AMC became one of these meme stocks as well. So as GameStop went up, all these other meme stocks went up as well. So, um, on Monday, uh, let me just get the stats here. AMC, uh, sorry, was up Similar kind of thing, right? I've lost the stats, but it doesn't matter.

I've got it here. They're up— before Wednesday, they were up 135% for the week before the pullback on Wednesday, right?

So same kind of stuff, right? But what, what AMC did, I mean, it's genius to have pulled this off in such a short space of time.

Oh, signs of collusion there. Well, why don't we just Give our man Keith a little backhander. Keith, you pop it up, we'll get away a $100 million debt refinancing, and I'll park you $10 million in your bank account on Monday.

I tell you what, that's a hell of a good point. That's a great conspiracy theory. You'll have to ask Steven about it because this is more his area. This is share issuance, right? And as you'll have heard from the episodes you do with Steven, issuing shares, right? You need an investment bank. You know, the equity capital markets division to help you do that. That's not a process— well, I don't know, can it be done so quickly? Well, so this is what happened on Monday. AMC shares started to rifle higher in line with GameStop. So the company themselves thought, hang on a minute, let's take advantage of this. So they issued 72.5 million new shares on Monday, sold them into the market. You could say, who's buying those? Well, it's probably the hedge funds that are trying to get out of their short positions. They need to buy back, right? And if you suddenly got huge volume on the buy side of the book as all these hedge funds are queuing up trying to get out and there aren't enough sellers, well then AMC step in and say, don't worry, lads, we'll provide you some sell side volume here. Issued new shares, raised $250 million. A price that was like double the share price as it was trading on Friday. And as a result, they've raised $250 and paid down a load of their debt.

I mean, I mean, I can tell you now that you cannot execute it that quickly. So I'm not going to ask questions because that's beyond my pay grade, and I do want— I do not want to know the answers.

So that, that Unless they've got— look, unless they've got an amazing Treasury Department where basically they've been prepared for another sort of meme stock spike, and maybe they've been sat on this sort of share issuance, maybe all the work had been done and they were just waiting to kind of press the button and really—

I don't know, maybe, maybe the, um, maybe the measurement of the scale of short positions Yeah, slowly building up, which would trigger the Treasury team into action to get their scenarios underway for the moment.

But what's it worth? I mean, look, if AMC, they tracked down Keith Gill. Oh, just, just, just do us a tweet. You know, we'll, we'll, we'll slide you a brown envelope with, wow, I don't know how much.

Okay. Quiz question then. How many $100 bills can you fit into a standard size? Envelope.

I like that conspiracy theory a lot.

Okay, well, look, I don't want to get anyone in trouble, not pointing any fingers, saying no names. So let's move on and talk US CPI to conclude this episode. So US inflation, it's fallen to 3.4% in April. That was actually in line with economists' expectations. We'll have a look at it though and break it down. Perhaps you can do that for us, Piers, with the general patterns that we've been seeing, a look at the core numbers and what exactly that is and what it represents. Then let's talk about interest rate expectations.

The backstory, as everyone knows, because we bang on about inflation on this podcast way too much, but it is the big game in town. The headline inflation reading has just been stuck in a sideways pattern for 12 months. Um, it's been stuck above 3%. Of course, the Fed's target is 2%, and everyone was hoping and assuming that in 2024 inflation would carry on moving down through and below 3% and down towards 2%, and the Fed would start cutting rates, and everyone's happy, right? And they just didn't happen. And most importantly, The January inflation reading, the February inflation reading, the March inflation reading all came in higher than expected, higher than expected, higher than expected. March came in at 3.5%, which was the highest for like 6, 7 months. And everyone was like, oh my God, inflation, not only is it not going down, it's going back up. The Fed aren't going to be able to cut. Worse, they might even have to hike, right? So the relief here is that it's the first inflation reading. So this is for April. It's the first inflation reading of the whole year where it's come in below expectation. So the headline, we were expecting 3.5%, but it came in at 3.4%. So it's below, but like just below. Let's not get too carried away here. Um, but the good news is it was lower than expected. When you then go and look at something called the core inflation, which is basically taking that— so inflation, remember, is the, the cost of goods, right? And how the rate of change of the prices of those goods over an annual period. So 3.4% means the price of goods has gone up 3.4% in the last 12 months. But then we take certain elements of certain goods out of the equation. And we take out food and energy just because they're notoriously very volatile. And actually, that price volatility is often driven by supply-side functions. But really, with inflation, and when you're thinking about interest rates, you're really mostly interested in demand-side consumers and how much are they buying. So we take out food and energy, and this is core inflation. And it's more— it's considered to be a better reading of really what's going on on the ground from a consumer demand point of view. Now, that has been drifting lower. That hasn't been going sideways like the headline inflation, but it's been drifting lower at an annoyingly slow rate. Every couple of months, it's gone down 0.1, and then it'll stay there for a couple of months, and it'll go down 0.1. It's the least steep staircase you could possibly imagine. Frustratingly slow. What's happened here is, It's gone down, it's lower than expected, it's gone down to 3.6%. So it's actually the first 0.2% drop that we've had since last summer. So it's like, well, hang on, the core, not only is it going down, it's got— it's maybe it's starting to go down faster. So that's the kind of, that's the kind of main takeaway here. Add— sorry, final part— add in there's been other data announced at the same time. It's not just inflation. We've also had other really important data. US retail sales figures that came in quite a bit worse than expected. And then there's something else called the, the new Empire State manufacturing figure, which is looking at the manufacturing sector kind of sentiment gauge. That's worse than expected. So you've got all this data that's worse than expected and maybe core inflation's picking up speed on the downside and you wrap all this up and it's just this relief that actually maybe the Fed are going to be able to start cutting this year after all.

And relief in a, uh, in context of an intraday market reaction is equities rallying. Yields dropping, dollar weakening. Is that all correct in terms of how it's worked out?

Yep.

Okay.

Absolutely right.

So one of the things I, I saw here was that traders in interest rate swaps have now priced in more than an 80% probability that the Fed will cut rates by 0.25% by September. Now, if I just kind of think about the last 5 months. So taking us year to date, started the year anticipating to cut 7. We were talking about a relief and oh my goodness, they're not going to hike only about 3 or 4 weeks ago. And now we've gone back to cutting in September and probably more for the rest of the year in the back end. So I think, you know, a couple of things. One of my observations recently, because my role as as Chief Content Officer is, you know, I'm following the news, I'm writing content, I'm putting out new daily newsletters. And the narrative has been quite negative for stocks over the course of the last few months, really. And I guess rightly so, because we shifted so dramatically in that first quarter period from deep cuts to potential hikes. And The narrative hasn't changed yet because we've just had this one number. And is this just a one and done, or is there more underlying pattern? I guess the thing that you might not be used to, if you're not a market participant, is how quickly intraday reactions occur to factor these things. Now, the dust may settle, and as you rightly said, I think relief is probably a good description. But if you think of the human emotion of relief, it typically doesn't last long and then the rational mind returns and things tend to kind of mean revert back to a more steady baseline. So yeah, it's interesting because, you know, stocks are back at record highs and yet everyone's telling you they should be crashing. I mean, I think it was Stifel put out a report yesterday, 2 days ago, and they said a 10% US stock market correction is going to happen. In that case, they dropped that headline the day before the CPI. So they come out on the wrong side of that, perhaps timing-wise.

Yeah.

But I guess one of the things I wanted to highlight for any student thinking about a career in global markets is that I think when I look back retrospectively, I used to think, okay, here are all these amazing minds where these big financial institutions can recruit from global candidates from the best business schools around the world. They've got access to the best technology. They have the best models that you can create because the best people are making them. And so, and so I guess there's always this idea of a lot of intimidation of you've gotta have all the answers, you've gotta always get it right. I think there's a mis— big misinterpretation of really what a sell-side institution's role is within this entire ecosystem, which is, I guess this is a great environment, right? For a sell-side institution because of changing of opinions, asset prices get increasingly more volatile, and that requires then people like hedge funds or portfolio managers to adjust. Require your services in different forms.

Yeah.

In different forms in terms of research, research that you might be putting out in terms of facilitating new trades for new changes in the composition of your portfolio. But yeah, I just think it's a good time to just stop for a second and just think, look, it's not about having all the answers. Actually, it's far from it. It's almost about understanding the now and what is the current market expectation and how do you provide value to instill confidence both in the ecosystem as a central bank to consumers, to companies, to operate, to make an economy function down to, you know, banks trying to engineer more revenue for themselves and all these different types of things. I just think there's lots of different things that go on that perhaps then would calm your mind a little bit, that you've got to come in and be like guns blazing, calling every market turn correctly, because you don't actually need to.

Yeah, I mean, I always say to people, just have an opinion and have a reason for that opinion, or several reasons for that opinion. Opinion on something that might or might not happen in the future, like interview questions, you know, where's the S&P going to be trading at the end of the year? When are the Feds going to cut rates? You know, where will interest rates be by this time? You know, these questions, I mean, no one knows. So it's just, right, have an opinion and then be prepared to tweak and adjust that opinion as time moves on. As new information comes in, right? But ultimately just have an opinion and be prepared to confidently back it up. And so, yeah, and that kind of interest rate, when is the Fed going to cut? I mean, it's just like, yeah, I guess people have been changing their opinion on that weekly. And like the expert, you know, super experienced people in the industry, I've been flip-flopping on this every other week. I've never known a period like it, to be honest.

Okay, so a question to finish. From your experience, you used to be one of the biggest European rates traders in a particular product back in the day.

Yeah.

So you were, you were trading interest rate expectations, this specific conversation. So what would be your process as to when you had thought, my thesis is wrong and I need to change. So you said there you need to be agile and adaptable, pliable around the situation, the incoming factors. One would imagine there's a risk of being too flexible and not having conviction. So from you, in your experience, how did you manage that process?

Well, that's it, isn't it? That's— that, that I think is the skill that unfortunately can only really be learned from experience. That skill of, well, it's news dissemination. It's like filtering because there's so much news all the time. And even if you strip out all news and just take news related to monetary policy, right? Just take that. There's still like bucketfuls of this news. And so you've just got to be able to know, well, all right, 90% of it, okay, it's interesting, might create a bit of a market reaction, but it's noise. It's not really changing the trajectory here of expectations. So I'm going to ignore that. It might be uncomfortable for a bit as prices kind of wobble. But then there's the 10%, or maybe it's not even 10%, where it's okay, actually, that is a meaningful notable, significant piece of information that actually does meaningfully change my expectations. And right, therefore I am going to adjust my trades. And it's just, how do you know what to ignore and what not to ignore? It's a hard one to explain, but certainly knowing, well, what's the key date? Ultimately, who's going to change interest rates? Well, it's the central bank. So, right, it's who's at the central bank and when are they speaking and what are they saying, and is that a different angle than when they spoke last time? So it's that kind of stuff. Then it's, right, what data are they— what economic data are they themselves using, the central bank, to monitor the situation and decide on what to do with rates? And at the moment, of course, it's inflation, right? Well, then what goes into inflation? What are the contributing factors to inflation? You start going down the list. That's why today retail sales being lower than expected. All right, that's the consumer. That's the consumer demand is a key component of the inflation story. If you've got retail sales lower and at the same time that core inflation reading dropping by 0.2%, the fastest drop we've seen since last summer, I think together that's like, okay, interesting. Um, maybe the Fed are going to be cutting. They're not going to wait till the end of the year now. And look, you don't— it doesn't matter if they do end up cutting in September or they do end up waiting till December. That's actually irrelevant. What's relevant is right now, today, people's expectations have changed, and so markets change accordingly. The expectations might change again in a few weeks' time. Great, another trading opportunity.

Yeah, I think that's a really great way to put it, because I think if you're not used to these types of products that you're trading, you would think it's like any other bet. I'm betting they're going to cut in September, and I will not know if that bet comes good until September, right? But actually, I could be betting on September cut, and I take a bet now I could be out of that bet tomorrow, right? And if the market shifted, I bank that money and we're still months away from September.

Exactly that. Yeah, I will add, like, moving outside of rates and bonds and stuff, I do want to point out just one other thing about this stock market, right? Because the S&P is clocking a new all-time high right now as I speak. The NASDAQ 100, new all-time high right now as I speak. And it's like, well, hang on, how are these stocks at all-time highs given that there's been such a concern about the Fed might even have to hike and all this stuff, right? Um, but what I would say is about this new high that we're seeing right now today, what's interesting is that the Magnificent Seven are not making all-time highs today. They're not back to the highs. Point being, it's the, it's the rest, it's the 493 that are actually now joining the party. And actually, if you look back over the last month or two, the best performing sector in the S&P has been utilities, which is actually a defensive sector. That's your signal that people are concerned and they're worried. So there's been a bit of portfolio, you know, readjustment as they've been selling off some of the Mag 7, booking a bit of profit, and buying some utilities because it's safer. So I actually think here you've got a much broader-based rally that's no longer reliant just on these 7 tech names. And that's because ultimately, I don't know, I just guess people are saying, well, oh, you know, I guess they're now confident to fully commit to the fact that rates are at their peak. This is the top of the cycle and rates will now come down from here and that'll happen before the end of the year at some point.

Spold.

Yeah.

Okay. Well, thank you very much for sharing your insights, Piers, and shout out to my man Keith Gill. Loving your work. Big fan. Thanks for the tip-off, and I'll see you in 3 years. All right, thanks, Piers.

Over and out.