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Jamie Catherwood on GameStop mania: Narrative will play a bigger role in ‘all aspects of finance’

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Jamie Catherwood, O’Shaughnessy Asset Management Client Portfolio Associate joins Yahoo Finance Live to break down how other activist campaigns compare to heavily shorted stocks like GameStop.

Video Transcript

[MUSIC PLAYING]

- We are starting to see some cracks in the short squeeze trade that we've been watching so carefully over the course of the last week. GameStop, yes, is still higher, but we have gotten reports that Robinhood is not allowing its users to open new positions in GameStop or to buy the shares, but rather only to close out positions. We're seeing interactive brokers put some curbs on trading in some of the other platforms as well. So it's more of a mixed picture than it has been in recent days.

And, you know, as we have been watching this whole situation and we've been talking about how it has been fueled by a Reddit board that focuses on day trading, you might be tempted to say, well this is a very modern-- uniquely modern phenomenon. But perhaps history doesn't prove that that is so. Jamie Catherwood is joining us now. He's O'Shaughnessy Asset Management Client Portfolio associate and he also writes a blog about market history.

So Jamie, that's why I wanted to talk to you because, indeed, things like this have happened throughout history. So when you're looking at this situation-- I know you've been going way back in history to look at other activist campaigns, short squeezes, et cetera. So take us back to some of the early instances of this and parallels and not parallels with the current situation.

JAMIE CATHERWOOD: Yeah, I think to me this is, like, all kind of just a microcosm of a market that is being driven more by narrative than fundamentals. And I think we've seen this play out in a variety of ways, whether it's the rise of ESG and, I think, like, the Capitol riots. That was interesting how suddenly you had every corporate CEO have to come out and make a statement and companies were already having their political donations looked at and ESG kind of activists were going after these companies. And you had the Blackstone chairman being scrutinized and pension funds calling for it taking out money from Blackstone funds.

And I think that this is kind of another narrative and it's playing out a little more aggressively, where it's the little guy versus the big guy. And through history, what's interesting is-- I had a post last Sunday looking at the history of kind of market corners and short squeezes from 1863 and 1980-- and what was interesting is that the whole paper was talking about short sellers being nervous to get involved in a situation where there was a lot of kind of speculative activity driving up a stock price. Because they were wary of a large institution having some sort of insider information and being able to manipulate the stock price. So a short seller would say, I'm not going to short this because I could get squeezed and get burned.

But what's interesting now about this is that it's the total opposite. Where now, like, Citron Research put out the statement saying, we're not going to comment anymore on GameStop. Because instead of the big, large institutions being able to manipulate, just in terms of move the price, it's the small people on Robinhood and Wall Street Bets community. And so it is this kind of interesting narrative of David versus Goliath and David having his day in the sun now.

- Jamie, I'm curious, I guess it's kind of a difference in kind. It doesn't really matter what we call it. But is-- like, is this more of a cornering or a short squeeze? Because I've kind of gone back and forth on how to, like, actually describe this because it does feel like, as you outlined with the Citron thing-- I mean, obviously, the float says there are people on the other side of the GameStop trade but I don't think anyone wants to show their face if they are indeed that person today.

JAMIE CATHERWOOD: [LAUGHS]

Yeah I would say a short squeeze, but I'm not an expert. And it's definitely hard for, I mean, like, Melvin Capital is obviously suffering. They closed out their position. But what's my favorite, probably, financial history, like, short squeeze moment, is actually from the founder of Nomura Securities in Japan in 1905. He had made a killing on the way up in a Japanese bull market of that year. But then he kind of looked around at other markets around the world and realized the Japanese stock market was really overvalued.

And so, like, on a dime he sold all of his long positions and plowed all the proceeds into a massive short bet against the market. And for months he was just hemorrhaging money. And it got to the point where he writes about hiding under his desk as his creditors came in looking for him and demanding margin calls. And he hired a rickshaw to go through the Japanese side streets that was enclosed so no one can see him or track his whereabouts.

And eventually, he went to his friend who ran a bank and said, I need another million dollars to meet my margin calls. And the friend was, like, you are clearly wrong. Everybody is making money on the market going up. You are clearly wrong. You've lost so much money. And he bet literally everything he owned. He said, I'm pledging my life I'm right. And a couple of days later the market tanked 88%. But it just is a good reminder of, like, you've got to have some nerves of steel to be able to try and short companies because something like this with GameStop can happen and you don't really know when.

- Yeah Jamie, let's stay on that. What have you learned personally over the past two weeks from this, really, this GameStop mania?

JAMIE CATHERWOOD: Again, I think that it's just that narrative is going to play a much bigger role in all aspects of finance moving forward, I think, because you have this democratization of finance where more people can get involved. And more people getting involved means more people have an opinion. And those people are going to find like-minded opinions-- like-minded people that share that opinion and you're going to have, like, ESG moving markets. You have, apparently, this Wall Street Bets community moving markets. And as more people can get involved and more people can try and move a market and kind of develop communities, I just think that that's going to have a much larger impact.

And I think, again, the Capitol riots, to me, was kind of like this merging of all these kind of spheres of influence where you had ESG activists, pension funds, regulator-- like, every kind of major sphere that influences markets in some way came together at a head and just really showed that this is going to be kind of the norm moving forward. Obviously, fundamentals and everything will matter, but I think that, especially with [AUDIO OUT] they're very conscious of the fact that they need to kind of pay heed to what ESG activists are calling for and change policy accordingly.

- Yeah, there's definitely sort of a populism thread going through a number of different parts of not just business financial markets life, but political life, American life, et cetera, that's intertwining with all of this. Jamie Catherwood, thank you so much for being here. O'Shaughnessy Asset Management Client Portfolio associate. I appreciate your perspective-- historical perspective. The rickshaw anecdote, awesome.