GameStop, Bitcoin, and the Emergence of Reflation Trade

by Gajan Kulasingam

Although only two months into the year, there have already been several market moving events. Of the market movers, three have stood out as major market events thus far: 1) GameStop (NYSE:GME), 2) Bitcoin and 3) the emergence of the reflation trade.

Beginning with GameStop, the trading activity has been nothing short of spectacular. Truly, a modern-day David vs. Goliath story. In the span of six months, the stock went from ~USD4.60/share to ~USD350/share, representing over 10,000% price increase! In the media, it was deemed as a battle of the little guys (represented by investors from the Wallstreetbets sub-board forum of Reddit) vs the Wall Street hedge funds. While the story around GME captivated the markets, it’s unlikely we’re going to see similar occurrences in the future. The price action of GME was a confluence of several factors that made GME a unique situation (i.e., very high short interest, low float, extreme gamma convexity, and trading platforms that effectively removed all friction for investors to trade stocks and options). While GME caused some short-term volatility and dislocations in the market, it never represented a systemic risk to the broader markets.

Moving on to Bitcoin, the cryptocurrency continues to be on a historic run as it is now nearly USD$53,000 at the time of writing this commentary. The case for owning Bitcoin continues to be framed as a hedge against currency debasement, a decentralized form of payment network and, more recently, portfolio diversification. Up until now, Bitcoin has predominantly been a retail investment. Institutional investors have struggled with its inherent volatility, lack of visibility as a form of currency, and the fact that it has no true intrinsic value (which is also the case for gold). However, it is slowly starting to be institutionally adopted. Jack Dorsey CEO of Square, Inc. and Elon Musk CEO of Tesla Inc. both made headlines when their respective corporations bought Bitcoin on its balance sheets. We’re also seeing numerous Bitcoin based ETFs come to the market, all early signs of an asset class that one day may be widely adopted.

Finally, the emergence of reflation trade. Starting in late 2020, the markets began to undertake an internal rotation away from secular growth technology and mega cap names to more cyclical and small mid cap companies, in what has been termed as a reflation trade. With the help of very accommodative global central banks, fiscal governments flooding economies with stimulus packages, and rapid deployment of vaccines, investors are starting to position themselves for a strong economic recovery from the COVID-19 pandemic. One of the unintended consequences of so much liquidity in the market is that the economy may overheat in 2022 with inflation running above the 2% target. This has significant implications across all asset classes and portfolio allocations. Market participants will be watching inflation dynamics closely in the months ahead.

Gajan Kulasingam is a Portfolio Manager at Goodwood Inc., and serves on the Board of Directors for Tamils in Finance.