Markets were off to a slow start on Thursday, with one exception: meme stocks.
Shares in videogame retailer GameStop have risen more than 20% this week while cinema group AMC’s stock price has nearly doubled, and shares in technology group BlackBerry rose more than 30% on Wednesday alone. While GameStop and AMC have dropped in morning trading, BlackBerry was up.
The meme trade was in focus late January and early February because of individual investor attention on companies including these three. A flock of investors, largely organized on social media platform Reddit, helped squeeze the short positions of hedge funds, causing multibillion-dollar losses and some unbelievable gains for individuals that timed it right. It also epitomized a new era of investing, as individuals took advantage of crowdsourced strategy and no-fee brokerage accounts.
Our call of the day, from economist Mohamed A. El-Erian—the chief economic adviser at Allianz—is that the meme trade frenzy represents three key long-term changes in finance which must not be ignored, and that one thing is certain as AMC stock in particular has soared.
“It has been tempting for some to dismiss this retail investor phenomenon as nothing more than a mob of young irresponsible gamblers treating the stock market like a casino,” El-Erian said,writing in Bloomberg. “That would be a mistake.”
First, the trend represents what the economist calls a “realignment of the investment landscape at its outer edges.” Reddit allows individual investors to coordinate effectively and intelligently, similar to the way that other social media platforms have helped activists coordinate actions.
Second, El-Erian said it illustrates how ultraloose monetary policy enables risk-taking. Cash handouts and easy leverage are the main forces, and themselves come from a shift in central bank strategy toward low interest rates and huge injections of liquidity.
“It is the same combination that has fueled the SPAC and cryptocurrency phenomena that are causing belated indigestion for a growing number of governments and central banks,” the economist added.
Finally, the meme stock frenzy is the latest in a series of episodes where market regulators have been too late to the game, El-Erian said. Regulators face difficult questions “for which there is no broad agreement on answers,” the economist said, ranging from investor suitability and protection to market manipulation and stability.
“Dismiss the AMC whirlwind at your peril,” El-Erian said. “It is part of a much wider phenomenon whose implications go well beyond the immediate and well beyond retail investors.”
El-Erian added that it is hard to tell what may undermine the current jump in AMC’s stock price. “What is certain is that the further the price goes up exponentially, the tenser the tug-of-war will become between new speculative buyers and those looking to sell and monetize significant returns,” the economist said.