Budget, volatility and GameStop short squeeze

To say 2021 started with a bang would be an understatement. As vaccine uncertainty dawned upon the population at large (that it is not a magic bullet) coupled with stratospheric valuations, we have seen markets surging and crashing weekly. The three factors which lead to spiking volatility were delayed US stimulus (which is now both an ‘if’ and a ‘when’), Socially engineered short squeeze (more on that later), and the annual dating ritual between the government and the economy which is the ‘Budget’.

With debate raging between Democrats and Republicans in the US House, the rest of the world waits with bated breath for that flood of newly printed Dollars trickling into both investment and consumption. In the absence of such stimulus, and except for China, a global slowdown, skittish investors were quite keen on taking money off the table. Egged on in no small part by a strengthening USD and hedge funds who lost billions in the short squeeze.

This David(s) and Goliath battle fired off Reddit servers (r/wallstreetbets to be precise) had social media and the larger investment universe riveted. There was no secret meeting, the planning and execution was carried out in broad internet daylight and some, like AMC, managed to stave off bankruptcy, raising much-needed cash off the back of a redittor onslaught. Where this will end, no one is sure. What is certainly going forward is wall street algorithms will now begin to factor in ‘sentiment’ ‘mood’ and opinion, lest some amoral hedgie raises public hackles with their less than benign stock raids. What we may also see is a more social approach to trading and investing. So far investing has remained an individual private activity where individuals are usually at the mercy of much larger firms that always hold sway. Now, rather late but with free flow of information and cooperation, we have a class of young investors who collectively have taken the fight to the street, succeeding where the original short squeeze specialist, Clarence Saunders (inventor of the modern-day self-service discount supermarket) failed.

People may have found a way to take on large market players in the US but in India, businesses are awaiting the Finance Minister’s panacea for a virus-hit economy. Markets too have continued to show nervousness, oscillating between greed and fear in equal measure. While Europe mulls an American style direct cash payment, countries like India are left with standard fiscal and monetary measures to jump-start the economic growth engine. While there has been quite a buzz about an unprecedented budget, there are very few real expectations from this one. The government and the central bank have already stretched their inflation rates target and doing more brings forth a real specter of stagflation, so they are unlikely to go much further on that route.

This too seems to have been priced in by volatile but range-bound bond markets. While the story will unravel by the time you, the reader, have already finished with your morning paper, there are some expectations from all budgets and more so this one: extreme volatility. While standard long-only people may prefer to stay away during Monday’s trading session, for traders an opportunity exists to trade. For allocators too, Intraday movements also present an excellent opening for booking profits and rebalancing.