The following note was first published on Doug’s Substack, The Contrarian Mindset.
When something extraordinary happens, the immediate reaction is to try to figure out how it will happen again. The epic short squeeze of GameStop stock by WallStreetBets is the most recent example. Everyone wants to know: What’s the next GameStop?
To think it will happen again the same exact way is the simplest mental construct. It’s actually the default expectation, which makes it consensus and unlikely to be extraordinary. When everyone expects a thing and positions themselves for it, the results cannot be extraordinary. It’s more likely that consensus makes itself wrong through collective expectation, leading to disappointing results.
What the rational mind should understand is that the most unlikely way for an extraordinary thing to happen again is exactly as it happened before. I call this the 9/11 effect. After the terrorist attacks on 9/11, the safest planes were those right after the attack happened because everyone was on heightened alert for anything that looked like a hijacking. When everyone expects something, and acts in a way to prevent it, the odds of that thing happening decrease.
In the case of GameStop, everyone is looking for the next great short squeeze, but everyone else knows that, too. As a byproduct, institutions review their short exposure and protect their portfolios, options prices increase, which decrease the upside potential of any given trade, and eventually the crowd loses interest.
Back to the question at hand: What’s the next GameStop? No one can say for sure, but we can identify the main ingredients by using a wider lens. The ingredients of an extraordinary event can help us find the next when they present in a different way, whereas looking for the exact same event will not. In the case of GameStop, we had a relatively limited tradeable float available, a loosely organized effort to support the stock, and a pool of forced incremental buyers in the short sellers.
To spark a short squeeze, a relatively limited tradeable float must create a situation where the dollar value of the float available is such that a buyer with limited capital could affect the demand/supply balance of the asset. It would be very difficult for any buyer to meaningfully affect the demand/supply balance of Apple with something like $1+ trillion in tradeable float. A relatively limited float could just mean a small market cap in absolute terms, as in the case of GameStop (about a $1 billion market cap before the squeeze really took hold), or it could mean a larger market cap company that has a significant portion of its stock tied up for some reason. The VW short squeeze is an example.
In 2008, Porsche was acquiring shares of VW in an attempt to purchase the company, which limited the effective float available for trade by investors. Given the limited dollar value of the float available, minimal amounts of capital deployed relative to the company’s market cap (in the $10s of billions of dollars) could cause a demand-driven price spike and set off a short squeeze, bringing in the loosely organized effort to support the stock. WallStreetBets was the community that supported GameStop, where it was other hedge funds in the case of VW. I say loosely organized not to suggest collusion, but to suggest that when these opportunities become obvious, common action is taken.
We know that in any speculative fervor, the speculation can only go so long as there are incremental buyers — greater fools — thus the final ingredient is perhaps the most critical. Eventually, asset prices should seem so insane that no one would want to buy the asset for any reason, speculative or otherwise. Thus, the forced buyer provides the last leg of continued growth in the speculation, resulting in an extraordinary outcome.
Some have suggested that crypto provides the grounds for the next great speculation, although I’m not sure all three of the ingredients are there today. There are certainly loosely organized communities that support various crypto assets. And there are some crypto assets with limited dollar float available that can spike (see Dogecoin). But, at least for now, most crypto assets seem to lack the force incremental buyer to push the speculation to extreme heights. It could certainly be the case that institutional buyers acquire large stakes in a crypto asset, as we’re seeing in Bitcoin, but the tradeable float still seems significant.
I don’t know what the next GameStop will be, but my guess is most of the other popular names that seem to have the potential for short squeezes won’t be it. The market is too ready for it for the outcomes to be extraordinary. To find the next GameStop, we need to look elsewhere for the ingredients that made the original, and this is true when seeking the next extraordinary event of any kind.