Le Reddit Army vs. The World
Le Reddit Army vs. The World
It’s Finance Week in Chazzy’s World
u/DutchOven420: Just bought an Admiral Van der Eyck tulip bulb for 2000 florins at the Harlaem Tulip Auction. I’m not selling until it hits 4000 florins. Sold two sturdy mules and my wife’s silver cup for this so I’m in for the long haul. To the moooon!! 🚀
u/DutchOven420: Ignore the haters. Tulips are inherently valuable because of their lustrous colors. The noblemen want you to sell so they can keep the tulips for themselves. KEEP BUYING. 🚀🚀🚀
u/DutchOven420: What the fuck. WHAT THE FUCK. The Harlaem Tulip Auction just suspended all trading. They’re saying my bulb is worth 100 florins. Are you fucking kidding me? This can’t be legal. The Provincial Council at Den Haag is meeting to discuss what to do. Good.
u/DutchOven420: Fuck me. The Provincial Council says the purchaser has to buy my tulip at ten percent of the original price. So I’ll get 400 florins for my Admiral Van der Eyck? I’m fucked. Wife walked out because I sold her cup for this. Can’t even cart crops to market because I have no mule. Might as well walk under a windmill at this point.
Well, folks. Happy Thursday. I’m wearing a suit as I write this. My computer is plugged into four monitors. A dominatrix named “The Twilight Priestess” is dripping hot candle wax onto my fleshy bits. It’s Finance Week in Chazzy’s World.
Everyone is talking about GameStop right now. The videogame retailer, founded in 2000 to guarantee employment for young men with ear gauges, has everyone’s eyes on Wall Street. I’ll explain the situation as simply as possible, and I mean that, because people often try to explain finance simply then make it really confusing. (NOTE: I am a moron. I am not an expert in this or anything else. If you want to understand it in depth, I recommend Matt Levine’s column, Money Stuff.)
GameStop is losing money. That usually means a company’s stock price will go down. If you want to bet that a company’s stock price will go down, you can “short” it. Many hedge funds (companies that invest other people’s money for a large fee) shorted GameStop. But if you short a company and the price goes up, you lose a lot of money. Some people on Reddit thought GameStop was still a good company and would rise in price. Others just wanted to fuck over hedge funds. So, they all bought GameStop, which made the price go up by a truly insane amount. The overall situation was so crazy that trading was paused and the government might get involved. Many average people made a lot of money, and a few hedge fund managers are screaming “I’m ruined!” and hiding in the back of a freight train wearing a barrel held up with suspenders.
We will not know the ripple effects of this event for some time. For one thing, the mania is certainly not over and more surprises are surely on the way. For another, the Securities and Exchange Commission, Treasury Secretary Yellen, and members of Congress have all signaled that a government response is coming in some shape or form, be it legal investigations, bailouts, or new rules. It is cool to see Ted Cruz saying he “fully agrees” with AOC. I hate when pretty girls fight!
But why should that stop us from speculating on the meaning of all this speculation? The most common interpretation I’ve seen is Occupy-style: “Fuck the 1%! It’s all rigged! Anyone selling weed or dick in the Zuccotti Park area?” And I like that. It’s fun to see normal people taking advantage of a financial system which is calibrated like a Formula 1 racecar to screw them over. Many stories from the (now banned) r/wallstreetbets subreddit which coordinated the short squeeze were inspirational: people used their earnings to pay for a sister’s Lyme Disease treatment or knee surgery for their dog. It saved a heckin’ goodest boy chonker pupperino!
The instinctive institutional response went one of two ways: 1. Decrying the surge in a worthless stock as dangerous and divorced from reality; or 2. Shaming the public for conspiring to manipulate the stock, in no small part just to hurt others. My rebuttals: 1. The 2008 crash was caused largely by lending out junk mortgages, financializing those junk mortgages, and giving false ratings to those junk mortgages. These people have a lot of nerve to chat shit about making money on something risky and worthless. 2. People talk. People make deals. Whether those deals happen over steaks at Delmonico’s, drinks at the Yale Club, or in a subreddit where u/PornAddictPepe is gifting gold and saying “you, kind sir, just won the Internet,” should not make a difference.
Many people on r/wallstreetbets went into detail about their financial hardships. They feel, rightfully, that the odds are stacked against them. Our generation has lived through the worst economy in a generation twice. That’s not how it should work. In fact, my crackpot theory is that you can see this alienation in the stocks they are choosing: GameStop, AMC Theaters, Build-A-Bear Workshop, Nokia, and Blackberry. For a twenty-something, these are brands you grew up with. There’s nostalgia there. So, when hedge funds and analysts tell you these companies are done, it hurts. It makes you feel old. And it’s a cold reminder that the economy you grew up with, the economy you were promised, was ripped away from you. No wonder they wanted to fuck people over.
Who will get fucked in the end and by how much is still unknown. Two firms who bet big against GameStop, Citron Research (which sounds like where a Bond villain would build a ray gun) and Melvin Capital (which is a good name for a Welsh aristocrat) are pretty much toast. Melvin Capital lost so much that it had to be bailed out by two other hedge fund billionaires: Ken Griffin of Citadel, and Steve Cohen of SAC Capital and new owner of the Mets, whose firm was caught insider trading in 2016. These guys were the real winners, adding a hedge fund to their empires for an excellent price (Chazzy’s Note: If you get caught insider trading, you should be banned from investing forever. And if you can still buy a baseball team after, you didn’t get fucking fined enough.)
As I said, a hedge fund is a company that invests peoples’ money for a very high fee. That fee is usually “2 and 20,” meaning two percent of the total investment and twenty percent of the profits. In order to justify that fee, hedge funds have to not just make money for their investors, but huge, outsized, unparalleled returns. One of the ways they do that is by paying stock brokerages to know what their customers are buying. This gives them a millisecond advantage over the rest of the market, which is extremely valuable in today’s world of algorithms and fiber-optic cables. A major example of this is the relationship between the hedge fund Citadel (which bailed out Melvin) and the trading app Robinhood, the most commonly used platform for r/wallstreetbets during the GameStop debacle. If this all sounds sketchy, that’s because it is. It sounds an awful lot like “front-running” to me, which is a crime. Robinhood already paid a fine for failing to disclose this relationship to investors.
That brings us to today. Amidst the absurd volatility, potential illegality, and general confusion of the GameStop episode, Robinhood and other brokerages halted buying of GameStop. They stopped options trading and told users they had to get rid of the shares they owned. This, understandably, outraged people. How could the little guy ever win, if as soon as soon they started winning, the other team called the game?
But Robinhood exists to turn a profit. The platform became extremely popular because it offers free trading with no fees. Instead of fees, it makes money by selling your data to big fish like Ken Griffin’s Citadel. We know this story from Facebook and Google and Amazon Prime. If a product is free, it means your data is the product. (For more on this, read The Age of Surveillance Capitalism, a book that will Chazzypill you for life.) So, of course Robinhood would sacrifice you to save their actual, much richer customers. Not to mention, our financial system as a whole is held together with Scotch tape, and a few hedge funds going under would be enough to send the whole Jenga tower toppling, Robinhood along with it. I don’t say this to defend the system. I just think it’s better to understand how it works. It’s a 7 Mile Spanking Machine, and they don’t intend to let you crawl out of it.
But, now, a word of caution. I am not an expert, and I don’t claim to offer financial advice or tell you what to do with your money, and I probably don’t know any better than you do. But I don’t want to see ordinary people get hurt when there’s already so much pain these days.
This smells like a bubble. A bubble is “an economic cycle that is characterized by the rapid escalation of market value, particularly in the price of asset.” In other words, this. Bubbles have happened many times throughout history: with Internet stocks in the late ’90s and housing prices in 2007, as well as during the French colonization of the Mississippi in the 1700s and with Dutch tulips in the 1600s. There have even been bubbles in religious relics, where claimed their toenail clippings were a saint’s and sold for huge prices. (Link to a really cool book I’m reading on this subject right now.)
Bubbles burst. They tend to pop exactly when people think there’s no way they will, when everyone’s feeling great, when everyone is trying to get in on the action. In other words, right now. When bubbles burst, people lose money. It just so happens that rich people bounce back and ordinary people don’t. I want those Redditors to be able to pay for their sister’s Lyme Disease treatment and get that surgery for their dog. But in order to do that, they have to actually sell the stock for a profit. I fear the window to do that is already over and that many more people stand to lose a great deal. Please be careful.
Some have positioned this as a great win for the masses. A democratization of finance. Comeuppance for the rich and powerful. I just don’t believe that. I want everyone to have access to the financial tools the elites use. I want working people to have 401Ks so they can actually retire. I want ordinary people to invest, with the access and advice they need to do it well. I want real people to use tax advantages and loopholes so they too can leave money to their kids. This is not that. Getting disillusioned young men into day-trading is not progress. Funneling hard-earned money into a get-rich-quick scheme is not socialism. Casinos love poor people for a reason.
I’ll conclude with a piece of financial news from earlier this week. Leon Black, chairman of private equity firm Apollo Capital, stepped down because he paid Jeffrey Epstein $150 million. A review, conducted by a law firm hired by Apollo Capital, found no indication Black was involved in Epstein’s sex trafficking operation. Hmm, I can think of a possible indication. 150 million possible indications, in fact. (The Times said Epstein gave him tax advice, and mentions sex trafficking as if it were only a curious footnote.) And now Black must figure out if he can keep doing his side hustle: being the chairman of the Museum of Modern Art. We need a complete and total shutdown of naked lady paintings in our museums until we figure out what the hell is going on.
When Jeffrey Epstein died, I learned a lesson I intend to remember for the rest of my life: it’s a big club, and you’re not in it. Most politicians are rich, and they are all friends, and they are friends with all the other rich people, and they all flew on a plane with the Pedophile-in-Chief. They didn’t like Trump, not because he ever wanted to help the common man, but because he was annoying. Even he got invited to their parties; he was just the guy they invited but hoped wouldn’t show up. In the grand struggle and in finance, the same rules apply: if it feels too good to be true, it probably is.
P.S. Ever since I wrote about McKinsey, I have gotten a lot of new readers who work at equally large, multinational financial services firms. I know that many of you enjoyed it because you liked hearing that your competitor was evil because it meant your company is not. I could write that article a thousand times over. Don’t get too comfortable.