After getting into our offices around 8:30am Eastern on Monday morning, I was lucky enough to catch an interview with famed short seller Carson Block of Muddy Waters. As expected, CNBC anchor Andrew Ross Sorkin asked about GameStop and short sellers. Block provided his answer, but then went on to say:
…But the bigger issue really is that when you get down to what actually causes this. I’m going to throw something out there that I suspect a vast majority of your listeners have not heard, but a lot of this disfunction is being driven by the prevalence of passive investing. I want to say one thing before questions come my way. Yes, I knew about the robo-bid and I knew that fundamentals are irrelevant to the robo-bid or passive investors. What I didn’t appreciate is that as passive grows in a float that It actually creates convex pricing behavior. It basically becomes the driver of growth and it is in my mind, based on my understanding now, it’s the single biggest explanation for why growth as a style has massively outperformed value. Again, it’s not tied to fundamentals. It’s tied to supply and demand.
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