One major issue with GameStop selling its own stock during a bubble is, of course, perception: GameStop leadership knows the current stock value is massively inflated, and selling stock right now could look pretty bad.
The filing acknowledges as much with a list of factors that are impacting its decision, including “capital needs and alternative sources and costs of capital available to us, market perceptions about us, and the then current trading price.”
Any money the company made from those sales could be used “to fund the acceleration of our future transformation initiatives,” the filing says. GameStop is currently amidst a “transformation” led by activist investor, board member, and former Chewy CEO Ryan Cohen.
As the leader of a new committee at the company, Cohen is attempting to do for GameStop what he did with Chewy: take on and defeat Amazon in a specific category of ecommerce.
At Chewy, it was pets. At GameStop, of course, it’s gaming.
Just over two years ago, in early 2019, GameStop’s stock value fell off a cliff: It dropped from about $16 per share to under $4.
Even in 2020, while the video-game business (including GameStop) had huge gains during coronavirus lockdowns, GameStop’s stock price remained in the gutter. As recently as last August, the largest video-game retail chain in the world had a stock value of less than $5 per share.
But in the second half of 2020, with big financial names like Cohen and Michael Burry buying up shares in the ailing retailer, things started looking up. The company’s share value gradually increased until it outright surpassed its pre-collapse value in late 2020.
And then things got really weird: Between January 20 and January 26, GameStop’s stock value leaped from just over $35 per share to north of $140 per share. By January 27, it hit new highs of over $325 per share – an over 8,000% increase from just a few months ago.
Two months later, it’s late March and GameStop’s stock value still hasn’t returned to pre-bubble levels: As of this afternoon, it was trading at just over $180.
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Bridgewater Associates boss Ray Dalio does not like what he sees when he looks out across the market.
In a major blog post on Monday, he said there are “classic bubble dynamics in so many different assets.”
Dalio, ranked by LCH Investments as the best-performing hedge fund manager of all time, said a long-term debt cycle that has seen investors gorge on bonds may be about to end, which could be “traumatic for most everyone.”
The founder of $150 billion fund Bridgewater spoke for many investors who are concerned about the recent jitters in the bond market continuing and becoming destabilizing.
He also said that the “economics of investing in bonds… has become stupid,” while sharing some strategy ideas to combat low returns. And he said the US may become “inhospitable to capitalists.”
Here are 12 of the key quotes:
1. “There’s just so much money injected into the markets and the economy that the markets are like a casino with people playing with funny money. They’re buying all sorts of things and pushing yields on everything down. Now you have stocks that have gone up, and you have classic bubble dynamics in so many different assets.”
2. “The increased supply of money injected into the system bids up investment asset prices and can cause financial market bubbles even when actual economic conditions are still weak.”
3. “Bonds have been in a 40-year bull market that has rewarded those who were long and penalized those who were short, so the bull market has produced a large number of comfortable longs who haven’t gotten seriously stung by a price decline. That is one of the markers of a bubble.”
4. “The economics of investing in bonds (and most financial assets) has become stupid…. if you buy bonds in [the US, Europe, Japan or China] now you will be guaranteed to have a lot less buying power in the future.”
5. “If bond prices fall significantly that will produce significant losses for holders of them, which could encourage more selling.”
6. A major bond-market sell-off would be “traumatic for those who are holding the debt assets and traumatic for most everyone though it eventually reduces the ratios of debt and debt service to incomes. It is also traumatic for capital markets, capitalism, and economies. During this credit/debt collapse people realize that they don’t have as much buying power as they thought and financial and economic conditions worsen.”
Major policy changes
7. “If history and logic are to be a guide, policy makers who are short of money will raise taxes and won’t like these capital movements out of debt assets and into other storehold of wealth assets and other tax domains so they could very well impose prohibitions against capital movements to other assets (e.g. gold, Bitcoin, etc.) and other locations. These tax changes could be more shocking than expected.”
8. “The United States could become perceived as a place that is inhospitable to capitalism and capitalists. Though this specific wealth tax bill [proposed by some Democrats] is unlikely to pass this year the chances of a sizable wealth tax bill passing over the next few years are significant.”
9. “Because I believe that we are in the late stage of this ‘big debt cycle’…, I believe cash is and will continue to be trash (i.e. have returns that are significantly negative relative to inflation) so it pays to a) borrow cash rather than to hold it as an asset and b) buy higher-returning, non-debt investment assets.”
10. “Rather than get paid less than inflation why not instead buy stuff-any stuff-that will equal inflation or better? We see a lot of investments that we expect to do significantly better than inflation.”
11. “I believe a well-diversified portfolio of non-debt and non-dollar assets along with a short cash position is preferable to a traditional stock/bond mix that is heavily skewed to US dollars.”
12. “I also believe that assets in the mature developed reserve currency countries will underperform the Asian (including Chinese) emerging countries’ markets. I also believe that one should be mindful of tax changes and the possibility of capital controls.”
Legendary investor Jeremy Grantham warned investors during a Bloomberg interview that the $1.9 trillion in federal aid President Joe Biden is seeking from Congress will further inflate the stock market bubble.
The GMO co-founder told Erik Schatzker that he has “no doubt” some of the stimulus aid will end up in the market. He said the “sad truth” about the last stimulus bill passed in 2020 was that it didn’t increase capital spending and didn’t increase real production, but it certainly flowed into stocks.
The plan that Biden is proposing contains a $1,400 boost to stimulus checks, robust state and local aid, and vaccine-distribution funds. Grantham said that if the package passed is worth $1.9 trillion, it could lead to the dangerous end of the bubble.
“If it’s as big as they talk about, this would be a very good making of a top for the market, just of the kind that the history books would enjoy,” said Grantham.
“We will have a few weeks of extra money and a few weeks of putting your last, desperate chips into the game, and then an even more spectacular bust,” he added.
Grantham has long-warned of the ballooning bubble he sees in the US stock market. In his investor outlook letter in the beginning of January, he detailed how extreme overvaluations, explosive price increases, frenzied issuance, and “hysterically speculative investor behavior” all demonstrate that the stock market is in a bubble that not even the Fed can stop from bursting.
“When you have reached this level of obvious super-enthusiasm, the bubble has always, without exception, broken in the next few months, not a few years,” Grantham told Bloomberg.
Grantham also said that the combination of fiscal stimulus and emergency Fed programs that helped inflate the bubble could increase inflation.
“If you think you live in a world where output doesn’t matter and you can just create paper, sooner or later you’re going to do the impossible, and that is bring back inflation,” Grantham said. “Interest rates are paper. Credit is paper. Real life is factories and workers and output, and we are not looking at increased output.”
He told investors to seek out stocks outside of US markets, as many other countries haven’t seen the huge bull market the US has. He called emerging markets stocks “handsomely priced.”
“You will not make a handsome 10- or 20-year return from U.S. growth stocks,” said Grantham. “If you could do emerging, low-growth and green, you might get the jackpot.”
Charlie Munger spoke about a “frenzy” in stocks, the dangers of excessive government spending and monetary easing, and the critical traits an investor needs during a remote interview conducted by the California Institute of Technology on Monday.
Warren Buffett’s business partner and Berkshire Hathaway’s vice-chairman also talked about weathering technological shifts, the importance of passion in any career, and his philanthropy.
Charlie Munger discussed the current “frenzy” in the stock market, the potential risks of unprecedented monetary and fiscal expansion, and the key skills needed to excel at investing during a virtual interview hosted by the California Institute of Technology on Monday.
The 96-year-old alumnus, who serves as Warren Buffett’s right-hand man and Berkshire Hathaway’s vice-chairman, also spoke about how to navigate technological change, praised Costco and Sequoia Capital, and downplayed his philanthropy.
Here are his 22 best quotes from the interview, lightly edited and condensed for clarity:
1. “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid instead of trying to be very intelligent.”
2. “It’s been a frenzy of activity in the investment field. Almost everybody smart is sucked into finance by the money. I don’t welcome it at all. I don’t think we want the whole world trying to get rich outsmarting the rest of the world in marketable securities.”
3. “Technology is a killer as well as an opportunity.”
4. “Over the long term, the companies of America behave more like biology than they do anything else. In biology, all of the individuals die, so do all of the species. It’s just a question of time” – on businesses inevitably getting “clobbered.”
5. “Berkshire owns the Burlington Northern railroad. You can hardly think of a more old-fashioned business than a railroad business. Who in the hell’s gonna create another trunk railroad. We made that a success, not by conquering change but by avoiding it.”
6. “The most remarkable investment firm in America is probably Sequoia. That venture-capital firm absolutely fanatically stays right on the cutting edge of modern technology. They have made more money than anybody and they have the best investment record of anybody. It’s perfectly amazing what they have done” – praising Sequoia Capital, an early investor in Apple, Google, and most recently Airbnb.
7. “I rub my nose in my own mistakes. I try and keep things as simple and fundamental as I can. And I like the engineering concept of a margin of a safety. I’m a very blocking-and-tackling kind of a thinker. I just try and avoid being stupid” – describing his approach to investing.
8. “The single most important thing that you want to do is avoid stupid errors. Know the edge of your own competency. That’s very hard to do because the human mind naturally tries to make you think you’re way smarter than you are.”
10. “What Buffett and I did is we bought things that were promising. Sometimes we had a tailwind from the economy and sometimes we had a headwind and either way we just kept swimming. That’s our system.”
11. “You can’t live a successful life without doing some difficult things that go wrong. That’s just the nature of the game, and you wouldn’t be sufficiently courageous if you tried to avoid every single reverse.”
12. “So many people are in it and the frenzy is so great and the reward systems are so foolish. I think the returns will go down” – replying to a question about whether he expects stock-market returns to be lower over the next 10 years than the last 10.
13. “We’re in very uncharted waters. Nobody has gotten by with the kind of money printing now for a very extended period without some kind of trouble. We’re very near the edge of playing with fire” – highlighting the dangers of unprecedented monetary easing and aggressive fiscal spending in recent months.
14. “I can remember having a five-course filet mignon dinner in Omaha for 60 cents when I was a little boy. The world has really changed.”
15. “Nobody knows when bubbles are gonna blow up. But just because it’s Nasdaq doesn’t mean it’ll have another run like this one very quickly again. This has been unbelievable. There’s never been anything quite like it.”
16. “Think about what Apple is worth compared to John D Rockefeller’s empire. It’s been the most dramatic thing that’s almost ever happened in the entire world history of finance” – commenting on the surge in technology companies’ valuations in recent years.
17. “Who would have guessed that a bunch of communist Chinese run by one party would have the best economic record the world has ever seen.”
18. “I don’t think Caltech can make great investors out of most people. I think great investors to some extent are like great chess players. They’re almost born to be investors.”
19. “You have to know a lot, but partly it’s temperament, partly it’s deferred gratification, you gotta be willing to wait. Good investing requires a weird combination of patience and aggression and not many people have it. It also requires a big amount of self-awareness about how much you know and what you don’t know. You have to know the edge of your own competency, and a lot of brilliant people think they’re way smarter than they are. And of course that’s dangerous and causes trouble” – describing what makes a good investor.
20. “What helps everyone is getting in somewhere that’s going up, and it just carries you along without much talent or work” – outlining the easiest route to success.
21. “If you pursue any career with enough fanaticism, that’s very likely to work better than not having the fanaticism. Look at Warren Buffett, he had this fanatic interest in making investments from an early age, and he kept making small investments, and he finally learned how to be very good at it.”
22. “I’m not that proud of my philanthropy. I regard it as an absolute minimum duty for somebody who’s reasonably successful to be reasonably generous. I don’t think you get big merit points for philanthropy you do.”