Grumpy Economist – Long and short of bubbles
Grumpy Economist John Cochrane bespreekt met Owen Lamont GameStop en hoe dit te bezien vanuit een breder perspectief.
The long and short of bubbles. A conversation with Owen Lamont on Gamestop and other matters. See my last post for background and great papers by Owen.
Owen views the current situation more as a classic short squeeze than a replay of 3com/Palm and similar affairs in 1999. These are established companies with short markets, and there is little technological news about them. We talk a bit about bubbles in general, short sales, supply responses, the puzzling lack of liquidity — people willing and able to take the other side of crazy stuff, and the state of the market today.
Publicatie 29 januari
Voorafgaand aan deze podcast verscheen ook een artikel dat de situatie rond GameStop analyseert vanuit het perspectief van de Dotcom bubble in 1999:
In case you haven’t noticed, Gamestop and a few similar stocks are in a classic bubble. At least it was at 8 AM pacific when I read the print WSJ, possibly not at 9:30 AM as I write. What’s going on?
It’s not the only time. This sort of thing has happened over and over again through history, most recently in the late 1990s. It’s too easy to just say “people are dumb,” and move on. That can explain everything. Instead, we can and should as always look at a repeated phenomenon like this and try to understand how the rules of the game are producing a weird outcome, despite pretty smart players.
The best and most prescient analysis I know are Owen Lamont’s “Go Down Fighting: Short Sellers vs. Firms,” (last working paper, ungated here) Owen’s classic paper with Dick Thaler, Can the Market Add and Subtract? Mispricing in Tech Stock Carve‐outs and of course my “Stocks as money” which offered (I think) a different and more cohesive view of the Add and Subtract event, and extended it to other situations.
There are four essential characteristics of these events, along with a few corollaries spelled out in my paper:
- Securities are overpriced.
- Trading volume is enormous. There is a big demand for short-term trading. There is some fundamental news and a lot of talk about the stock.
- There are constraints on short sales, limiting the ability to take a long-term bet on the downside.
- There are constraints on the supply of shares, among them the same short sale constraints.
The first is obvious. The second through fourth however sharply limit our view of what is going on. Simple irrationality, people get attached to a stock, can explain overpricing, but not mad turnover, why they would sell it a day later.
The central feature is a high price together with a trading frenzy.
This is the widespread and inevitable pattern. Palm price was high, but Palm trading volume was astronomically higher than 3Com. And it extends to markets as a whole. One graph from Stocks as Money:
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