Carson Block thinks that investment sentiment is reaching ridiculous levels – and that could eventually break a market he considers fragile.
The founder of Muddy Waters, based in San Francisco, who made his name by selling Chinese shares, told MarketWatch in an interview on Monday afternoon that the discussion between a select group of individual investors using the chat forums of the Reddit and a handful of professional investors highlight the problems spinning in a market that has been underpinned by the Federal Reserve’s easy money policies and government help to help contain the economic damage of the COVID-19 pandemic.
Asked whether his view that markets are ridiculous focuses on the hustle and bustle around the retail trade that has promoted breakneck gains in stocks at companies like GameStop Corp. GME,
AMC Entertainment Holdings AMC,
Koss Corp. KOSS,
and BlackBerry Ltd. BB,
Block had a simple answer: “Abosolutely”.
“There are no grounds to justify … a stock rising 15 times where it was a few weeks ago,” said Block, referring to individual investors who gather on sites like Reddit’s message boards and have been credited with driving stock prices. shares of companies in difficulty and in the paralyzing process of short selling hedge funds that had bet against these companies.
Block, a prominent short seller, said last week it was as if some of the so-called meme stocks, defended by groups of individual investors, were taking liquidity out of the broader market.
“We have seen hedge funds decrease and if you continue to see that … things can break down quickly.”
The advance in heavily sold shares targeted by the army of individual investors has already been blamed for problems with a number of funds.
Melvin Capital Management, one of the hedge funds seen at the center of the GameStop confusion, lost 53% on its investments in January, while Maplelane Capital ended January with a loss of about 45%, The Wall Street Journal wrote, citing people familiar with the subjects.
In addition, famous short seller Andrew Left, founder of Citron Research, said last Friday that he was changing his strategy and would no longer publish short sales reports.
Block said Muddy Waters has been more focused on long-term investments in recent years, but said he still sees his short selling brand and points out the illegality as useful.
“At the end of the day, I believe that the research we produce is useful. This led to eight dropouts … and one [Justice Department] against tariff evasion, ”he said.
Ultimately, he said Muddy Waters would continue his work and that the market would determine whether he would become uneconomic.
In addition to investing, Carson launched Zer0es.TV last year, with the intention of providing in-depth discussions on short sales and investments. In a recent video, he said that the distress emanating from the Redditors may also reflect the repressed frustration with COVID’s confinement and a desire to disrupt establishment structures as the gap between the rich and the poor widens.
He said the new social media-oriented trading scenario could result in professionals being more agile.
“We may just have to be more creative and smarter in the way we structure trades and manage risk,” he added, suggesting that professional investors may need to structure more complex trades to avoid losing some positions.
Block said he is not betting that markets will break down anytime soon, but warned that we are at a point in the cycle where everything can go wrong.
“We are not in a tightening cycle, but there are many things that can go wrong and can have an indirect effect on the market, and a market that is very much tied to flows,” said Block.
“I don’t think this will end soon,” he said.
On Monday, the market recovered some of the ground lost in Friday’s beating, with the Dow Jones Industrial Average DJIA,
the S&P 500 SPX index,
and the Nasdaq Composite Index COMP,
ending solidly higher.
Block gained fame in 2011 after revealing fraudulent practices at Chinese forestry company Sino-Forest Corp., which went bankrupt the following year.
Block, in his Zer0es.TV webcast, said he has no doubts about where this ends for individual investors, and described the popular trading platform Robinhood as selling its clients to market makers, who in turn pay them for customer information, known as payment by flow order.
“When you look at Robinhood, it’s the final manifestation of the Silicon Valley model, right? You know, we are the products that are sold when you use Twitter, Gmail, etc. “, he said.
“I have no doubt where this ends, right … for retailers – I mean, in tears.”