Billionaire bond investor Bill Gross thinks that investors who have been taking a wild ride on the GameStop stock frenzy need to fasten their seatbelts—because a crash is on the way.
"The GameStop/Reddit wolfpack plan of herding shorts into a self-destructive, short-covering frenzy seems to be failing for several primary reasons," the noted bond investor said in an investment outlook released today entitled, "Gamestonk/Gamestink." "The GameStop model also fails to recognize that players would change targets quickly—GameStop turning to silver turning to whatever—which would weaken their stranglehold on poorer but unvanquished victims."
Gross, formerly chief investment officer for fixed-income at Pimco, the giant bond fund complex, described the mass investing phenomenon as a "leaderless posse" composed of individual investors who are likely to head off in separate directions like "dating partners."
"For one, the movement appears to lack sufficient size and staying power in order to finish off established hedge funds and unconstrained individual investors who can close their eyes to daily fluctuations that have forced smaller, more short-term-performance-critical funds to throw in the towel," he wrote.
The GameStop frenzy hit Wall Street like a tsunami last week when online investors who frequent the internet Reddit forum WallStreetBets zeroed in on buying the stock as a way to counter hedge funds and other institutional investors that were heavily shorting the stock. GameStop's share price surged as the Reddit crowd turned its focus to other investments, including silver.
The ripple effect of the buying wave was profound, with Congress and the SEC already announcing probes into both the buying frenzy and Robinhood, the online investing platform that made it possible.
There are already signs, however, that the Reddit buying rush is losing momentum, with GameStop shares falling as much as 64% today and losing $27 billion in value, according to Bloomberg News.
In his investment outlook, Gross noted that GameStop call premiums were priced and purchased at an unrealistic 700% that ultimately points to the company's share price falling back to earth.
"The victims in the GameStop experiment have and will continue to be the Robinhood investors storming the gates of capital markets (for which they have an admirable objective of creative destruction of hedge fund/old Wall Street dominance) without the size, the endgame plan, and the mathematical option pricing expertise to succeed," he wrote. "Even without regulatory action, the plan was doomed from the beginning."