The Six Cases That Agitated the Financial Markets in 2021
#2: Archegos and the flaws of the “Familly Offices”.
The year 2021 will have been marked by its share of cases that will have agitated the financial markets. Nothing abnormal, since this is what happens every year. In this article, I'll look back at the six cases that made the biggest impression on me in 2021.
This is an arbitrary choice on which you will probably not agree with me entirely. That's fine because it will be an opportunity for you to react via the comments to share with me what will have made the most impact on the financial markets in 2021.
Gamestop and the Memes Stocks madness
The incredible revolt of American small investors against Wall Street hedge funds made headlines earlier this year. An army of young traders became enamored with the stock of a fading video game retailer, GameStop, which was widely targeted by short-sellers.
GameStop's epic journey has captivated crowds. The number of active traders on the stock rose from 10,000 at the beginning of January 2021 to over 900,000 by the end of the month. Between January 1 and 27, GameStop soared 1,744% to approach $25 billion in market capitalization.
This resulted in massive losses for some hedge funds like Melvin Capital. The enthusiasm has since subsided somewhat, but the influence of the stock marketers remains strong on the financial markets. After GameStop, they have taken a liking to other neglected stocks - the famous “Memes Stocks” - such as the AMC movie chain.
Archegos and the flaws of the “Familly Offices”
It was a debacle that reminded the banking system of its worst mistakes since the financial crisis or the resounding bankruptcy of LTCM in the late 1990s. On Friday, March 26, 2021, a flash crash of American (CBS, Viacom, Discovery) and Chinese technology stocks was triggered by massive market sales - for some 20 billion dollars - attributed to the entourage of the hedge fund Archegos.
Exploiting the leverage effect to the maximum, the family office of businessman Bill Hwang took 120 billion dollars of exposure to these stocks, while holding only 10 billion dollars of capital. Their decline in the previous weeks made it impossible for him to meet the margin calls required by the banks to protect their position.
Goldman Sachs, Credit Suisse, Nomura, and Morgan Stanley rushed to sell the blocks of shares they held on behalf of Bill Hwang. The operation resulted in more than 11 billion dollars of losses, including 6.2 billion for the Swiss bank. Opaque, the hedge fund used derivatives, “swaps”, to hide its true exposure.
The U.S. Department of Justice and the SEC are reportedly conducting an investigation. The Archegos debacle triggered a deep internal crisis within Credit Suisse, pushed a series of executives to leave, and led to the complete cessation of the prime brokerage activity.
Didi at the heart of tensions between Beijing and Washington
The descent into hell began just days after its triumphant entry on Wall Street. Uber's Chinese competitor raised $4.4 billion from American investors, only to have its application suspended sine die by Chinese authorities.
The Chinese VTC giant was the first victim of Beijing's campaign to reframe the private sector. Didi is now considering listing in Hong Kong and leaving Wall Street, after losing more than 60% of its value. Most Chinese Internet companies have been under fire from the Chinese authorities, which has scared off investors.
Often listed in New York, they are also facing stricter regulations across the Atlantic. As a result, the Golden Dragon index, which includes Chinese companies listed on Wall Street, has lost more than 40% this year. One of the worst performances on the markets.
Nikola and the flops of electric cars
Not everyone is Tesla. After reaching nearly $80, Nikola, the zero-emission truck maker, is now worth only $10 per share. Lordstown Motors, which makes electric pickups, climbed to $27 in February 2021 but has since fallen to less than $4.
Canoo, Fisker, Faraday Future, Arrival, and Electric Last Mile have all had stock market misfortunes. Rivian is doing a little better; so is Lucid, which developed the Air sedan. After being worth $90 billion in mid-November 2021, its capitalization is now $64 billion and its stock is trading below its IPO price.
All these companies are loss-making. None of them has ever sold a single vehicle. All of them took their first steps on the stock market via a merger with a SPAC. This new instrument, which is gaining momentum, is faster than a traditional IPO and the sellers of the company often get a better price.
Some of these startups have been caught by the U.S. Securities and Exchange Commission. Nikola paid $125 million to the SEC in November 2021 to settle a legal dispute over misleading statements by its founder. Lordstown Motors is under investigation by the SEC; so is Lucid.
Coinbase, the IPO that made Wall Street euphoric in April 2021
In mid-April, Coinbase, one of the oldest crypto exchange platforms, founded in 2012 in San Francisco, caused a stir with its spectacular IPO on Wall Street. On the first day of trading, the stock hit a high of over $429. Coinbase allows people to buy and sell about 50 cryptocurrencies, including Bitcoin and Ether.
Coinbase was founded when Bitcoin was worth $5, by thirty-eight-year-old Brian Armstrong, a former Airbnb programmer, and Fred Ehrsam, a former trader at Goldman Sachs. The platform has benefited from the wild ride of cryptos in 2021.
Bitcoin has been chaining record after record. The latest was in early November, at $68.9K. Over the year 2021, even if it fell back at the end of December around $47K, it gained 74%. Ether has gained 410%. The prices of cryptocurrencies have been boosted by the appetite of traditional finance for this new type of investment. The arrival last October on Wall Street of the first index fund indirectly backed by Bitcoin has contributed to this craze: it has amassed over $1 billion in assets in record time.
Evergrande and the excesses of the real estate bubble in China
The Chinese real estate development behemoth has shaken the financial world with its debt of more than 300 billion dollars. Evergrande, on the verge of bankruptcy since this summer 2021, finally defaulted a few weeks ago, without triggering the shock wave so feared by investors. But this is only the first step in a restructuring process that promises to be particularly long and complex.
The fall of Evergrande was caused by Beijing's desire to calm down real estate speculation. The Chinese authorities must now manage its bankruptcy without causing the construction sector, the real engine of activity in China, to collapse.
The threat of a Chinese-style Lehman Brothers seems to have been averted, but the danger remains for the country's economy, the main contributor to global growth. The macroeconomic know-how of the Chinese Communist Party's executives is likely to be put to the test.
Some reading
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