The past few weeks have been nothing sort of extraordinary. Not in terms of big money moves on the market. Not in terms of political and economic fallout. In fact, the most amazing thing is that normal people actually paid attention to investing for once!
The fact that ‘meme stocks’ managed to become front page news was exciting and frustrating in equal measure for the personal finance community.
Exciting because people were actually engaging with the broken financial system on a mainstream level. Frustrating because it didn’t last and most people went about their business.
It is a sad truth that most people who can invest don’t, and that investing is see as both boring and complex. The general public totally understand that the financial system is rigged but they don’t want to engage with the solutions.
This suits the big financial players like hedge funds perfectly, because although we have collectively more buying power, we are told from birth to believe the selfish individualism is the perfect way to be.
That was of course until the internet came along and allowed egalitarian individualism on a global scale. The little guy making money at the expense of the big guy is the true spirit of Capitalist Democracy.
The internet has allowed us to organize with enough power to counteract market manipulation. Whether it is pumping stocks or cancel culture, the internet mob has enough power to act as a physical mob.
Is this good or bad? So far the jury is out, but what is certain is that it terrifies the powerful.
What happened with WSB and Gamestop?
The Stonk Boyes
Wall Street Bets is a subreddit, that is, a popular subsection of the massive website Reddit. It is, in essence, what happens if you get a bunch of friends together over drinks but they’re all also stock traders. It is passionate, and mostly hairbrained and harmless…until it isn’t.
Many people wrote off WSB as a pile of novices but in reality, there is a hard core of financially educated members (albeit surrounded by memers). What’s more is that they are individually invested in the market.
They have a much greater personal stake than anybody working for a hedge fund. So they sit, they discuss, they joke, and sometimes they scheme.
They are as much financial activists as they are financial alchemists. All they needed was the right stock, the right enemy, and millions in meme money. Enter Gamestop, Melvin Capital, and a Mongol horde of Money Twitter and TikTok stock traders.
The Latest Meme
WSB has occasionally tried to effect stock prices of companies in the past, with varying degrees of success. This time was different however.
The advent of fast no-fee or tiny-fee trades made the operation affordable.
The growth of social media money communities made the operation scalable.
The global economic slump that yet again screwed the little guy made the operation memeable.
What WSB had access to is what the hedge funds had access to, billions of dollars, trading platforms, and a propaganda arm. Tiktok is the new CNBC folks.
The Wall Street Vandals
Our villain in this story is Melvin Capital, a $12.5 Billion operation before the Gamestop saga. Melvin made its bread and butter in short selling companies. It is a hedge fund, or hedgie (it makes money but playing/manipulating investments).
They had been incredibly successful at this, making their founder Gabe Plotkin a bona fide billionaire and highly admired asset manager. However, throughout 2020 they had amassed a precarious short position on Gamestop shares.
What this means in simple functional terms is that Melvin Capital had committed to Gamestop shares falling. If they rose? Melvin had to immediately buy shares to cut their losses. If Melvin bought shares? The price rose even further. It would be a circle of failure.
The ‘finest minds’ of Wall Street Bets saw this and took small, individual actions. The price rose significantly in late 2020 and for some reason, possibly arrogance, Melvin doubled down. Instead of cutting their losses they assumed that The System would ‘self correct’ and they could get out without too much embarrassment.
In one sentence, they thought they could weather the attacks of the little guy, they thought they could weather the meme.
The Fallout – Corporate America Loses Its Mind
The fallout was nothing short of obscene. Melvin lost over $7 Billion in value in a month, and it was bailed out by its brother hedge funds. The financial media immediately jumped in to claim that the activity of WSB was undermining the stability of the market.
Even the head of the federal reserve said Janet Yellen stating she’ll take a regulatory review to see what this ‘all means’. Will the Federal Government intervene to protect the little guy? Hey, that’s what happened in 2008, right?
And then there was Robinhood.
Robinhood is a retail investing app. In short, it is a company that allows you to buy securities cheaply via an app. It is simple, affordable, and cuts out the middleman. They also sell your data and outsource your trade to hedge funds in a process known as payment for order flow.
In theory there’s nothing wrong with this. In practice Robinhood has used this in the past to screw the retail investor to milk more money from the trade.
So what happened with Gamestop? Well, quite simply, Robinhood (and some others) restricted trading in the stock after it skyrocketed over 1700%. They also restricted several other ‘meme stocks’, likely preemptively.
On the face of it, this is both justifiable and understandable. Robinhood has obligations to hold enough money to fulfil its trading obligations. With the massive increase in trading during the GameStop saga, they were faced with building a buffer many times larger than normal. They were potentially at huge risk.
The interesting thing here though, is that the only people that benefitted from this were Melvin Capital and other short sellers. Remember the friendly funds that bailed out Melvin? One of them, Citadel, is also one of Robinhood’s largest sources of income. They are also trying to make it illegal for retail investors to have the same trading advantage as they do.
This could all be a massive coincidence of course. Like the dozens of other coincidences where large companies have worked toward identical goals without coordination.
So the meme investors got to make a point, and them the Empire struck back. Everything is wrapped up in a neat little package.
But what about long term fallout? This is the real question, does Wall Street have the tools to silence people like WSB? What will that mean for the rest of us?
What is ‘The System’?
The System means different things to different people. To the conservative minded it’s an overarching conspiracy of ‘LGBT Communists’, to the liberal it’s an overarching conspiracy of ‘Rich Old White Men’, and to the socialist it’s an overarching conspiracy of color blind, ideology blind, capitalists. To the guy standing outside your local 7/11 it’s probably aliens.
All of these types of ideology add or remove pieces that don’t fit their simple narrative. Some parts are ludicrous, some are just small lies. All of them however, seek to explain the same thing, and have some element of truth in them.
In reality, The System is a mix of many different ideas and institution designed to keep the powerful in power.
How the System Works On Paper
The System is a great idea on paper. It is based on the ideas of competition, economy freedom, and choice/value for consumers. In the theoretical sense the systems has the following features:
- Markets are deregulated and competitive = Better quality lower price
- Balanced Market = Poor quality is pushed out by better offers
- Privatization = Lower taxes, more efficient services
- Economic Dynamism = Increased Wealth and Opportunity
How The System Works in Practice
The System in practice does not maintain any the benefits that it promised in its theoretical model. When this form of Neoliberalism meets the real world, and is under the guidance of real, corruptible human beings, it suffers several failures :
- Markets are deregulated and competitive = Markets are held captive by large players who exploit their leading position (e.g. Comcast)
- Balanced Market = Big companies can crush small, higher quality competitors
- Privatization = Public Services get worse and end up costing more, people suffer
- Economic Dynamism = Economic inequality increases and the taxpayer routinely bails out the wealthy and corporations.
Sound like a conspiracy? It is, and it worked.
So Who Are ‘The Powerful’?
The powerful are not one individual type of person. There are rich white men, lgbt people, socialists, and centrists of every shape and size. The system is effectively blind to race, color, and creed. That’s not to say it doesn’t perpetuate racism or exploitation, it does, but this is a tool rather than a core function of the system.
The best phrase to describe the current system is ‘Neoliberalism’. Although the economic and social systems of Neoliberalism are on paper quite different and theoretically positive, the actual implementation is different. It is a system of control and exploitation designed to bring about a three tier society:
Tier 1 – The Mega Rich
Tier 2 – The Custodians
Tier 3 – Everybody Else
These are broad terms and people can live between different tiers, but lets just put one simple and modern example.
Jeff Bezos is worth $185 Billion (which I point out he earned, didn’t inherit). Tim works in banking making $130,000 a year, he buys a lot from Amazon and his IRA has some Amazon stock. Paul makes $24,000 working 10 shifts in an Amazon warehouse.
Both Paul and Tim enrich Jeff, and in turn Tim’s stock portfolio increases. Paul struggles to pay rent but it’s the best job available in his town, and is better than the alternative. The System therefore survives because Tim doesn’t want his life to ‘get worse’ and Paul doesn’t have the power to make his better.
Jeff wins no matter what, and he wins because he has created a company so large that it can avoid competition and a balanced market. Most of it above board, ‘very legal, very cool’. So how did we get here then?
The key trick therefore is to make a large enough group of people to win a little and fear that they will lose a lot so that they will instinctively defend the system. Functionally, this means that the ~25% of Americans that make over $150,000 a year have a limited appetite for change. It is worth noting that 70% of Americans support ‘Medicare for All‘ yet there has been no move on this, why?
Partly ideology and propaganda are to blame for this (fears of higher taxes, not wanting to subsidize ‘bad decisions’ etc) but there are also a large number of people invested in keeping private healthcare and its profits. These people control the law.
From this example, you can see that when The System is unstable, money is put at risk, and the custodians are encouraged to fear/attack anybody that tries to upset the apple cart. It should be clear to you by now that hedge funds are one of the highest form of custodians. They accumulate and protect wealth while endangering economic dynamism and public finances (when they need bailouts). They posses the economic power to affect competition and a balanced market.
They have hundreds of thousands of stakeholders in their success. These people understandably don’t want to lose money, whether by investing (clients) or by salary (employee, professionals like lawyers, the media). Most of these people are decent people just looking after their own interest.
Unfortunately for Melvin Capital though, the custodians have lost a portion of their power. The halls of law and finance are more accessible to Joe Schmoe than ever before.
With their new found knowledge and power, our merry band of memers decided that they didn’t like the way the deck was stacked. They decided to play the hedge funds at their own game, to gain the ‘economic freedom’ that is their inalienable, god given right.
Open Internet and The Future System
So now the entire world has seen at point-blank range the tricks that The System with use to defend itself. They will use their pets in the corporate media, they will use their influence over smaller firms, they will use their influence over politicians. They will turn all of their custodians against the normal people.
There is of course, one tool that ordinary people have that The System hasn’t total control off (yet) – the internet.
The internet has allowed seamless coordination of people all over the world and every year the amount and accessibility of free knowledge grows. You can learn about anything and talk about anything online provided you don’t like in a despotic country like China.
The entire series of uprisings called the ‘Arab Spring’ showed us the power of social media. Ten years later, the custodians are seeking to regulate it to prevent ‘hate speech’ or ‘political manipulation’. It is clear that for The System to continue, it needs to control the internet, such that it can control the speech, thoughts, and activity of people.
China’s ‘great firewall‘ is a perfect example of this. This set of institutions blocks free and fair access to information as well as political discussion. Western corporations gladly helped China built it. We have already seen the seeds of this on websites such as Twitter and Patreon. While they rightfully took steps to eliminate propaganda and racist accounts, they also do not operate under agreed principles of what these ideas constitute.
It is a slippery slope toward censorship when you let biased individuals in government or private companies decided what is and is not acceptable speech. Is ‘Stonking’ Gamestop dangerous speech because it will ‘upset the economic system?’. People have already made such arguments.
The only way to mobilize enough people to strike out for economic freedom is to support the principles of open internet, net neutrality, and digital privacy.
These principles will ensure that the internet is treated as a vital utility, that people have cheap access to it and that private companies can’t control our speed of access. In addition, what we do and what we say should be treated as private in accordance with the law.
The System already knows that more and more people are seeing through the smoke to the reality. It knows that people are getting exploited and enlightened to the point of active agitation. It will strike back stronger as time goes on.
The New System will present the follow theories and realities:
- Safe spaces online = Controlled Politically Correct Speech
- Tailored Internet = Internet Traffic controlled by corporations
- Great Reset/Carbon Taxes = Shift of the burden of globalization onto the many to prop up the few
The only question that remains is are we prepared to meme ourselves toward economic freedom?
Give me Stonks or give me death.