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The GameStop Squeeze Will End Badly

The GameStop store in Westminster, Colo., January 14, 2014 (Rick Wilking/Reuters )

So, it was another hilarious day where, after falling from a $150 high, GameStop’s stock touched $250 on Tuesday.

Reddit’s WallStreetBets forum is in the midst of euphoria, on the news and rumors that they have absolutely crushed Melvin Capital, a firm that took a huge short position against GameStop. The Reddit hordes squeezed Melvin Capital and may have squeezed out the firms that tried to bail out Melvin Capital. The originator of this play, who goes by the YouTube name Roaring Kitty, seems to have turned his $50,000 investment into a fortune topping $20 million — so long as he liquidates.

But then that’s the question right now. Will the Reddit kids liquidate?

Right now the forum is roiling not just with David-beats-Goliath strutting, but political manifestos aimed at hedge funders and the Wall Street Establishment. There are vows to take GameStop to $1,000, defeating any incoming short-sellers, or die trying. There are posts trying to get people excited to reload their GameStop positions even if only to make a political point, or simply to wreak havoc on the institutions. There are even some moving posts where users post their screenshots of a major student loan paid off by GameStop stock, which is almost poetic, in its way. Elon Musk tweeted about it, and my guess is that GameStop is going to pop Wednesday to even more absurd heights. This is going to end in misery for a lot of these kids.

Smarter money, I think, is leaking toward buying stocks and options against other vulnerable short positions — Bed Bath & Beyond, or AMC Entertainment — though none was quite as vulnerable to a squeeze as the GameStop short-sellers.

The whole cycle of stories about instant-millionaire day traders reminds me of the dot-com bubble. I was just a teenager, but even at a small family-owned grocery I remember all day hearing the absurd stories about people who risked it all on the Red Hat IPO, and won big.

Even with all this money sloshing around from the Fed, and the way it is propping up Boomer retirement accounts — it really feels like a silly season just before a correction.

But what do I know?

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