Is the ‘Elon Musk Effect’ a Good Thing?

In December 2019, Elon Musk tweeted,

“Bravo, right thing to do! Short selling should be illegal.”

This was in response to stories carried by media organizations like Reuters and Financial Times about the largest pension fund in the world, Japan’s Government Pension Investment Fund, suspending the lending of stocks for short selling.

There has been no love lost between Musk and short sellers who have lost upwards of $40 billion shorting Tesla’s stock.

In May 2018, Musk, of course in a tweet, warned the “short burn of the century” was coming soon.

He was more frank in November 2017 when he told Rolling Stone that short sellers were “jerks who want us to die” and that “they’re constantly trying to make up false rumors and amplify any negative rumors.”

So we can imagine the elation of Musk as he watched short sellers ‘burn’ this year. A host of hedge funds have mourned their losses as their positions on GameStop’s became exposed.

Melvin Capital and Citron Research both said this week that they had closed their short positions. Steve Cohen’s $19 billion hedge fund, Point72, has lost nearly 15% this year. $20 billion D1 Capital Partners had lost 20% in January.

According to BusinessInsider, quoting Ortex, short-sellers were sitting on losses of about $70 billion because of their overall short positions on US firms so far this month.

Elon Musk has played a great part in this.

On Tuesday, when Musk tweeted, “Gamestonk” and shared a link to reddit’s r/wallstreetbets, the markets spiked by 40% within an hour.

Hours before tweeting about Gamestop, another tweet stating, “I kinda love Etsy,” sent the stock up 9% in a day.

On Jan. 7, when he tweeted his support for the Signal app, investors who believed he was referencing Signal Advance sent that stock up 1,100%.

Two days ago, Elon Musk tweeted support for the video game Cyberpunk 2077, causing shares of its developer, CD Projekt, to increase by 12%.

Musk also tweeted support for Dogecoin on the same day, causing the cryptocurrency to increase by 800%.

All Elon had to do for bitcoin’s price to increase by 20% yesterday was for him to add “#bitcoin” to his Twitter bio, with the cryptic tweet, “In retrospect, it was inevitable”.

However, upon reflection on the drama of the past week, there might be an irony to the entire spectacle of Musk moving markets just by punching a couple of keys on the bird app.

If Musk accuses the short sellers as unnatural forces manipulating the markets, what do we call these maneuvers he’s orchestrated over the past one month?

Elon Musk is the world’s richest man, and with the kind of influence Jeff Bezos and Bill Gates do not have over Millennials and Gen Z. How do we ensure that this position is not abused?

Indeed, he’s been in trouble over this kind of misdirection before.

On August 7, 2018, Musk tweeted that he was considering taking Tesla private at $420 and already had funding secured. Current shareholders, he said, would either be able to sell at $420 or hold on to their shares and go private. Immediately the tweet went out, trading on Tesla went into a frenzy. The stock price shot up so suddenly that the Nasdaq stock exchange had to halt the stock altogether.

Till today, it’s unclear if Musk sent the tweet for sinister reasons. What is clear is that Tesla could not have gone private without meeting certain regulatory requirements which Tesla had not met at that time. And according to SEC it is illegal for companies and executives to give shareholders misleading information about potentially meaningful corporate events.

Of course, most buyers who flocked to Tesla’s stock on account of Musk’s tweet either would not know that Tesla had not met these regulatory requirements or not even know any such regulatory oversight exist at all. So it’s easy for those who understand how these work to take advantage of the situation at the expense of regular people influenced by Musk’s tweets.

In the end, Musk and Tesla each had to pay the SEC a $20 million fine to settle the suit of misleading information to the public. While SEC became more liquid, the average joe who may have lost money at the time (if he sold as the stock came tumbling down because of the SEC suit) is made to tuck his tail behind his back.

As Silicon Valley (led by Musk) and Hedge Funds slug it out in the stock market arena, Musk is driving up the ante by recruiting the social media crowd to his side of the divide. They are being drawn to fight with a much higher percentage of their net worth. In percentage terms, they will be spending more than those they claim to be rooting for.

Elon Musk is the ultimate social media influencer and he is using his influence to drive massive demand in (un)regulated public markets.

Is the unsophisticated investor knowledgeable enough to protect himself if Musk decides to take to his heels if his gambles against the hedge funds do not work? For emphasis, with the avalanche of access to Western stock markets from everywhere around the world, we are talking about potential billions of young people betting on the markets from every part of the globe, and with access to Twitter.

It will take time for regulators to catch up to this new brand of charismatic social media influencer.

Till then…

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