Banks potentially face large losses from Archegos Capital Management’s implosionand that may be one more sign of the fervor playing out in markets that are marked by excess, according to Ben Inker, head of asset allocation at GMO.
“It is very strange that they would have left themselves open to this,” Inker told MarketWatch in a Tuesday phone interview.
“That speaks to an attitude of fear of missing out,” suggesting that maybe banks would rather not take a pass on fees they might earn in providing leverage to investment firms like Archegos Capital Management.
Archegos, the family office of Bill Hwang, liquidated massive blocks of stock following margin calls from its lenders, according to reports, including those from the Wall Street Journal. While potential losses from financial institutions don’t seem large enough to be systemic, Inker warned that it would be “scary” if it turned out that “there is a lot of this going on,” and that the market is built on “huge amounts of borrowed money and relatively little equity.”
GMO, co-founded by legendary value investor Jeremy Grantham, has been warning about speculative behavior it sees bubbling up in markets lately. Inker pointed to the surge in blank-check companies capturing investors’ imaginations with mergers in sectors of the future, as well as the fervor for so-called meme stocks like GameStop
and the uptick of interest in nonfungible tokens known as NFTs.
NFTs are “weird,” he said. “Your NFT is this unalterable statement that you own something, except it doesn’t convey any right to anything other than your exclusive ability to say you own it.”
The tokens may be tied to things like art work or sports highlights. CEO Jack Dorsey recently sold his first tweet as an NFT for $2.9 million.
Meanwhile, the “extraordinary burst of issuance” of special-purpose acquisition companies, or SPACs, is “a classic sign of speculative excess,” according to Inker. Also known as blank-check companies, SPACs are shell companies that raise money and list on an exchange with the intention of merging with a private firm to take it public.
In a recent example, electric air-taxi startup Lilium GmbH announced this week that it was going public through a merger with a SPAC called Qell Acquisition Corp. The deal is valued at about $3.3 billion.
As for GameStop, Inker described the videogame retailer’s stock as “a speculative bubble because its price has nothing to do with anybody’s view of the future of” the company. As individual investors piled into GameStop earlier this year, the company’s soaring stock price meant losses for shorter sellers who had been wagering its shares would fall.
The GameStop frenzy also stands out amid speculative bubbles for the “anger” underlying investors’ desire to inflict losses on others –– in contrast to the more typical, collective joy shared during past bubbles on the prospect everyone can get rich, according to Inker.
In recent months, GMO started running a long-short strategy designed to profit from the bubble it sees in growth stocks. The GMO Equity Dislocation Strategy is performing well this year, according to Inker.
The strategy, which had $2.5 billion of assets at the end of 2020, has returned a net 15.9% this year through March 30, according to a spokesperson for the firm. Since its inception on October 23, the strategy has gained a net 20.2%.
“For that fund to do well, we need value stocks to outperform growth stocks, which they have been doing in recent months,” Inker said of the Dislocation Strategy. “Being a long short fund, if value stocks are outperforming because they are going down less than growth stocks, it can win in that world too.”
Indeed, by one measure value has outperformed growth by 8.4 percentage points, with the iShares S&P 500 Value ETF
up 10.7% so far this year, compared against a gain of 2.3% for the iShares comparable growth exchange-traded fund
according to FactSet data. Much of that outperformance has come in March, with the value ETF up 6.3%, versus a 2.9% gain for growth.
Among the main U.S. equity benchmarks, the Dow Jones Industrial Average
is up 7% in March, with a year-to-date gain of over 7%, while the S&P 500 index
has climbed 4.7% this month and has advanced over 6% thus far in 2021.