If Books Could Kill - The Meme Stock Cult [TEASER]

00:00:00.000 Michael. Peter. How familiar are you with meme stocks? Not super familiar, but I do know that

00:00:06.540 if you want to get rich, it's very obvious that you should start with the place you also go to,

00:00:11.360 to buy a used copy of Banjo-Kazooie.

00:00:13.460 we purposefully refuse to commit to any particular subject matter for our bonus episodes

00:00:33.320 but i think we've largely stayed to this point within the framework of like media critique

00:00:40.720 and this is the first episode where the primary justification is that I just want to talk about

00:00:46.660 this I've been in a reddit rabbit hole on this for two years on my own I'm so excited losing my

00:00:54.960 mind and now I have a platform and I'm just going to dump it all on you and our listeners the only

00:01:00.820 reason I'm doing this is because this opens the door for me to eventually do an episode about

00:01:04.340 eurovision i'm glad we made it so this is basically the story of how a widely publicized

00:01:13.560 breakout in the stock of the video game retailer gamestop in january 2021 grew into a full-blown 0.96

00:01:23.040 cult predicated around an elaborate conspiracy theory i love this shit so did you follow the 0.57

00:01:30.140 original sort of GameStop stock run up in 2021? All of this financial stuff, I treat like sports. 0.99

00:01:38.220 People clearly care a lot about it, but like I don't get it. So it was one of those stories

00:01:44.140 that I just looked at and was like, no, I'm just not going to investigate what's actually going on

00:01:52.000 here. My understanding was it was like there were some subreddits and it was like some dumbasses who 0.98

00:01:56.480 were basically shorting the stock of GameStop, I guess. 0.72

00:02:00.740 Yeah, that is the basics.

00:02:02.840 I am going to start from the beginning here, which is a little bit before the events that

00:02:08.360 sort of entered the media spotlight.

00:02:10.440 In 2019, a man named Keith Gill, a financial analyst under the social media handles Roaring

00:02:18.640 kitty and deep fucking value started to publicize on investing forums and on his youtube channel

00:02:27.360 a thesis that gamestop the video game retailer was not headed for bankruptcy as many investors 0.96

00:02:35.740 expected but would show surprising resilience and in fact be successful moving forward so this

00:02:41.840 whole thing starts with someone thinking that like a video game store is gonna make it that's

00:02:47.220 Right. GameStop had brought in a new chairman, Ryan Cohen, who founded the online pet store

00:02:53.780 Chewy. According to Gil and I think some others, there was like a coherent plan to turn the

00:02:59.760 company around, shift away from brick and mortar retail, move it into e-commerce. This is something

00:03:05.700 that's like relatively common in investing spaces where there are companies that are sort of on the

00:03:11.320 surface just going down. Right. Yeah. But there are people that believe in the turnaround story

00:03:16.560 and some of them turn around and some don't right but you can often make a lot of money by getting

00:03:22.160 these right because when everyone believes one thing and you believe the other thing and you're

00:03:26.880 right that's a good way to make money it seemed like the fundamental fact was that like gamestop

00:03:31.480 is pretty doomed because the vast majority of people now buy video games online yeah so the

00:03:36.680 idea of like going to a store to like browse video games nothing about a video game store makes any

00:03:43.900 sense to me. So it just seemed from my distance, obviously, any video game store is going to go

00:03:50.520 the way of Blockbuster. I think that their response to that, just to give it like a high

00:03:55.520 level, is twofold. One, there was some like loose plans to do digital sales. You would buy your

00:04:02.820 like digital token for a game through GameStop and then you download it to your console. That

00:04:07.620 sort of adds a middleman to the whole process that you don't need. Yeah, I don't know why I

00:04:10.820 would do that but whatever the other part of it which i think is a bigger part of it is that they

00:04:15.700 were going to pivot away from games themselves and towards things like accessories they're selling

00:04:20.760 like funko pop okay they're doing like video game adjacent things selling things that are part of

00:04:26.800 nerd culture stuff like that right fidget spinners 20-sided dice yes yeah so keith gill is posting

00:04:34.960 about this in a couple of places. One is his YouTube channel again. The other is the subreddit

00:04:40.860 WallStreetBets. Yes. Do you know what WallStreetBets is? No, I only know it from this absurd

00:04:46.760 controversy. WallStreetBets is a subreddit, a Reddit community that's basically just a place

00:04:53.280 where people gamble, but with stocks. Okay. It's not really a community of investors. It's like

00:04:59.100 an investment themed gambling community. Okay. The main attraction has always been that every

00:05:04.100 now and then someone will post screenshots of their extremely high risk, high reward

00:05:08.640 investment plays, and the community will follow along as they either make or lose a small

00:05:14.860 fortune.

00:05:15.380 Oh, my God.

00:05:16.060 A big key feature of the community is that sort of like classically online ironic detachment

00:05:22.860 and self-awareness, right?

00:05:24.640 Like they know that this is all degenerate. 1.00

00:05:26.940 They know that it's stupid. 1.00

00:05:28.220 They lean into that. 1.00

00:05:29.240 They have fun with it.

00:05:30.120 Okay.

00:05:30.440 They call themselves the R word. 1.00

00:05:32.440 Nice.

00:05:32.600 That's like how they refer to themselves.

00:05:34.840 Great.

00:05:35.180 Good sign.

00:05:35.880 We're on good, firm ground already.

00:05:37.940 Well, you have to keep in mind, this is a different time.

00:05:39.800 This is two years ago. 0.98

00:05:42.040 So the community does not actually particularly give a shit about Keith Gill's investment 0.97

00:05:47.080 thesis because that's not really what they care about. 0.98

00:05:49.660 They care for a couple of reasons.

00:05:51.680 One is that he invests $53,000 into call options on the stock.

00:05:56.740 You don't need to understand call options, but they are essentially a high risk, high

00:06:00.040 reward way to invest in a stock.

00:06:01.920 Is that the thing where if it reaches a certain point, then you automatically buy it?

00:06:05.460 Not automatically, but yes.

00:06:06.680 It's a right to buy shares at a certain price.

00:06:10.160 So it's just sort of a volatile way to invest.

00:06:14.580 It's like part of an aggressive portfolio strategy, shall we say.

00:06:18.480 And you can readily lose and win a fortune, which means that options tend to be the focus

00:06:24.760 of a lot of these communities.

00:06:26.180 This is why I put all my money in baseball cards.

00:06:27.960 To understand the conspiracy theory that I'm about to explain, you need to understand

00:06:31.180 the basics of shorting stocks and short squeezes. So when you buy a stock, you're just buying equity

00:06:38.980 in the company, right? If the value of the company goes up, your stock goes up, you've made money.

00:06:43.480 But if you want to bet that the price of a stock goes down, there's no like security you can just

00:06:48.360 buy on the market that reflects that. So you do a little trick. You borrow shares from a third party

00:06:56.000 with the promise that you will return them. You sell those shares on the open market.

00:07:00.060 when the price goes down, you buy the shares back from the market and return them to the person you

00:07:06.500 borrowed from. That allows you to pocket the difference between what the price was when you

00:07:10.500 first borrowed and what it is now. That I kind of understand because you're basically making money

00:07:15.140 if the stock goes down, essentially. That is the bottom line, right? You are making money when the

00:07:19.420 stock goes down. You just need to do a little bit of trickery, borrowing from one person and selling

00:07:23.280 and then buying it back to do it. Now, this whole dynamic presents the possibility of what's called

00:07:28.240 a short squeeze. If you are shorting a stock and the price goes up rapidly, you might want to close

00:07:35.040 your position to minimize your losses. And again, that just means you buy the shares back on the

00:07:40.080 open market and you return them to the lender. But if other people are shorting the stock,

00:07:44.720 they will be looking to close their positions too, meaning that they would also need to buy

00:07:49.440 the shares to return to their respective borrowers. That creates demand for the stock,

00:07:54.660 which drives the price up and that creates a bit of a spiral right prices going up which causes

00:08:00.300 short sellers to close their positions which drives the price up further you lose money once

00:08:05.460 the stock starts to go up and then you try you're like scrambling to buy shares but there's all

00:08:10.280 these other people scrambling to buy shares too and then the stock goes up even more and then 0.93

00:08:14.640 there's even more people who are like oh fuck i have to buy this back yes and then just gets worse 0.79

00:08:18.280 and worse that is the but the essence of a short squeeze price is going up short sellers are trying 0.98

00:08:22.640 to close their positions out, and that's driving the price up further. So Keith Gill and others

00:08:28.400 noticed that GameStop was very heavily shorted. Many major institutions thought the company was

00:08:33.660 going to fail for the reasons that you outlined as relatively common sense, right? So they're

00:08:38.780 taking short positions. At the peak, it was reported that the short interest in GameStop

00:08:43.640 was 140%, meaning that for every share of GameStop, there were 1.4 shares sold short.

00:08:50.620 Okay. That can happen because the same shares are being borrowed more than once. Okay. Investors on

00:08:57.860 Wall Street Bets and similar forums realize that there's an opportunity here, right? If they all

00:09:03.080 start buying shares of GameStop, the price goes up and triggers a short squeeze. They can cash out

00:09:08.900 their shares for tons of money after the squeeze occurs and they're driving the price up and the

00:09:13.380 institutions that are short are trying to cover their positions. Right. They see that as a money

00:09:18.380 making opportunity. And more than that, a sort of David versus Goliath narrative angle develops,

00:09:24.160 right? Right. The people who are shorting GameStop are large institutions, hedge funds,

00:09:28.740 et cetera. So not only are casual investors potentially going to get rich, but they'd be

00:09:34.160 making the profit off of like these huge financial institutions, right? Right. This is like when the

00:09:39.020 K-pop stands made it impossible to get tickets to like some Trump rally in like Nevada by like

00:09:44.960 spamming all of the links to get tickets yeah it's it's the the power of the social media mob

00:09:50.180 right all all singularly focus on one objective yeah this idea picks up steam in january 2021

00:09:57.160 at the turn of the new year the price for gamestop stock is about five dollars a share

00:10:02.500 a few weeks later it's up to 10 and then it doubles to 20 in one day okay and that gets

00:10:08.400 the attention of like mainstream media so people start reporting on it people on reddit are starting

00:10:14.800 to like spread the word across reddit and other social media more people start buying in culminates

00:10:20.980 during the last week of january when internet users of all types are just aggressively buying 0.98

00:10:26.220 up the stock the price gets driven up to nearly at one point five hundred dollars no fucking way

00:10:33.220 it went up that much yes very briefly but it was in the very high 400s no way and then comes the

00:10:39.520 event that will spawn the web of conspiracy theories that we are going to discuss. The app

00:10:44.800 that most individual investors were using to trade their stocks on was Robinhood, a little iOS

00:10:51.360 mostly app that has like a cool stock interface. And so young people liked it. Yeah, I know it from

00:10:57.200 the ads on Planet Money. That's right. The only place I've ever heard it. Yes. In the app, the

00:11:01.580 buy button disappears for GameStop stock. You can not buy the stock anymore. You can only sell it.

00:11:08.300 Okay.

00:11:08.980 Several other brokerages either did the same or otherwise restricted trading in the stock.

00:11:14.940 Okay.

00:11:15.420 At least partially as a result, the price plummets.

00:11:18.860 I didn't know they could do that.

00:11:20.140 You just can't buy a stock?

00:11:21.420 This is something that they are within their rights to do.

00:11:24.120 It's like, you know, deep in the terms of service.

00:11:26.640 The primary reason that the brokerages provide is that they restricted trading in order to meet collateral requirements with the clearinghouses they use.

00:11:36.300 Without getting into the mechanics, brokerages work with clearinghouses to fulfill stock

00:11:40.840 orders, and those clearinghouses require them to maintain collateral capital to ensure that

00:11:49.020 the brokerages can handle all of the trades that the clearinghouses are dealing with.

00:11:53.860 In other words, to ensure that they will have the money at the end of the day.

00:11:56.620 As the number of trades shoots up, and you're getting an enormous volume of trades because

00:12:01.380 this is so widely publicized. So do their collateral requirements. And so in order to

00:12:08.140 maintain their requirements, they restricted trading. They basically said, we can't put up

00:12:12.660 the collateral, but we can restrict trading. So basically, they have to be able to put up some

00:12:17.080 sort of upfront fee to buy stocks. But then if like everyone is buying a stock and it is super

00:12:23.220 expensive, they just like can't put up the collateral anymore. Yeah, there are. So there

00:12:27.520 are middlemen in this operation, if you're Robin Hood, you route your stock orders through clearing

00:12:34.720 houses. When they are handling these trades, they are absorbing a little bit of risk each time. So

00:12:39.920 when there are tons of trades, there is a lot of risk. So in terms of the amount of trading that

00:12:46.280 was happening here, unprecedented in like the history of the stock market nearly. Oh, yeah.

00:12:51.240 To give you a sense, the WallStreetBets community on Reddit had like 2 million members before this started, and it ends with 9 million. 0.98

00:13:00.620 Holy shit. 0.98

00:13:01.920 Even 2 million is a lot. 1.00

00:13:03.620 Damn. 0.98

00:13:04.080 Right. 0.99

00:13:04.480 So the number of people that are in on this is massive.

00:13:08.680 I mean, just huge.

00:13:09.780 Dude.

00:13:10.200 Every now and then exchanges and brokers will halt trading in certain securities for like

00:13:16.280 certain periods of time based on volume, based on volatility, things like that.

00:13:21.960 But something like this is pretty unprecedented.

00:13:24.900 We're just like you can sell, but you can't buy.

00:13:28.120 It's very unusual.

00:13:29.800 And because of that, a narrative emerges, right?

00:13:33.420 Yeah.

00:13:33.640 A bunch of powerful financial players appear to have colluded to protect the interests of other powerful financial players.

00:13:41.580 Right.

00:13:41.820 At the expense of the common investor.

00:13:44.300 We're trying to stick it to the man.

00:13:45.720 And all of a sudden the man is like, oh, technically, I can't buy these stocks.

00:13:49.140 Right.

00:13:49.620 And this is not just a fringe conspiracy theory.

00:13:52.000 Prominent politicians are tweeting about it.

00:13:54.080 Right.

00:13:54.340 Oh, yeah.

00:13:54.620 There are eventually hearings and investigations.

00:13:57.600 Oh, wow.

00:13:57.960 To date, there's no clear evidence that anyone violated the law here. 0.95

00:14:02.020 But I want to say, if you were investing in GameStop stock at this time, legality aside, you got screwed. 0.93

00:14:11.180 Yeah.

00:14:11.340 They had a coherent plan, one that perhaps verges into market manipulation, but we won't go in there.

00:14:18.520 But they had a coherent plan.

00:14:19.900 They bought a stock with the hopes that it would go up and then it went down because the brokerages decided to basically click a button that would in every single case make it go down.

00:14:33.840 Right.

00:14:34.040 You might not have gotten screwed by illegal behind the scenes collusion, but you were at the very least screwed by the like abstruse technicalities of modern markets.

00:14:45.860 Yeah.

00:14:46.180 If I bought it at 500 and then the button disappears, I would be livid.

00:14:49.500 Right.

00:14:49.700 But, you know, it's essentially these brokerages digging deep into their terms of service to be

00:14:54.280 like, yeah, we can technically do this, right? No matter what you think of the legality,

00:14:59.060 et cetera, it was deeply unfair. There's no other way to look at it. And when it was happening,

00:15:04.040 I think almost everyone recognized that. Also, laws are fake. It's never that important to me

00:15:09.600 whether something is illegal or not. That's true. Also true. That's the thing is sometimes

00:15:13.260 we have these discussions about whether something's legal. And as a lawyer, I'm like,

00:15:17.040 It doesn't really matter.

00:15:18.140 Yeah, it's all people wrote it, people interpret it, whatever.

00:15:20.780 It's just people doing people's stuff.

00:15:22.020 So when the dust had settled, hedge funds who were short GameStop lost billions.

00:15:28.220 OK.

00:15:28.680 Most prominent among them, Melvin Capital, which lost over half of its total assets that

00:15:34.760 January. 0.99

00:15:35.500 Holy shit. 1.00

00:15:37.300 It was two billion and change, I believe. 0.99

00:15:39.100 The price of the stock had skyrocketed again near $500 at one point, collapsed back down

00:15:45.900 to $40 or so.

00:15:47.460 If you had gotten in early, you were still way, way up, especially if you cashed out

00:15:53.160 somewhere on the way up.

00:15:54.660 Yeah.

00:15:55.140 Keith Gill's $53,000 investment turned into tens of millions.

00:16:00.720 Yeah, because you said it started at $5.

00:16:02.600 So even just going from $5 to $40 is great.

00:16:05.460 Right.

00:16:05.680 But the thing is, it started at five bucks with a small number of investors in the Wall

00:16:13.600 Street Bets community who were aware of this.

00:16:15.780 By the time the mainstream was aware of it, it was when the price was already shooting

00:16:21.420 up.

00:16:21.920 Oh, okay.

00:16:22.560 When the price had hit, you know, 80, 100, that's when it was being talked about on like

00:16:28.380 CNBC.

00:16:29.900 Right.

00:16:30.200 Most people did not get in early.

00:16:32.240 Most people got in once the hype about all of this had gone viral.

00:16:36.760 And as a result, they were down money.

00:16:39.500 Yeah.

00:16:39.800 They were, as we say in the biz, bag holders.

00:16:43.640 Okay.

00:16:44.220 People left holding the bag after a big stock run.

00:16:47.640 And 99% of the people in an MLM.

00:16:49.640 That's right.

00:16:50.060 Just most people.

00:16:51.000 You know, a lot of the sort of online pump and dump kind of communities that form among

00:16:58.960 like young investors are predicated on this basic concept if you get in early enough you'll be the

00:17:05.840 rich one yeah but if you're chasing if you're just a little behind the curve on the virality

00:17:10.560 of what the pump and dump is or whatever you get left holding the bag that's kind of like the 0.73

00:17:15.260 fortune favors the brave bullshit that they were peddling with nfts is it like yes you have to be 0.60

00:17:19.880 the one to get in early because if you wait until like the normies are in you're going to be the one 0.98

00:17:25.900 left holding the bag. But it's like you want to be one of the savvy people who gets in early.

00:17:30.080 But of course, they use that to market to normies who ultimately will end up losing a bunch of 0.99

00:17:34.660 fucking money. Not to mention, it's easy to say, oh, you need to get in early. But when there are 0.97

00:17:39.060 a thousand possible things you can get in early on. It's basically a lottery ticket. Right. Yeah.

00:17:43.140 So to add insult to injury, Melvin Capital, the hedge fund that got devastated, gets an infusion

00:17:48.680 of cash from a couple of other big hedge funds citadel and point 72 to be clear not entirely

00:17:56.120 charity here the funds eventually redeem their investment but it formed a sense that like the

00:18:01.800 big guys as we suspected are all in it together against the little guys right right it gets a

00:18:08.660 little bit worse the citadel hedge fund is merely the hedge fund arm of citadel securities a much

00:18:15.780 larger financial institution that serves as a market maker meaning it handles orders for

00:18:21.700 brokerages including robin hood they're all connected dun dun dun even worse conspiracy

00:18:28.360 goes all the way to the top janet yellen oh who in her role as treasury secretary plays a part in

00:18:34.420 investigating the matter has collected hundreds of thousands of dollars in speaking fees at citadel 0.68

00:18:39.500 events. There are other loose connections. Jeff Psaki, a Citadel employee, is a distant cousin

00:18:46.420 of White House Press Secretary Jen Psaki. Hell yeah. You can see people going through like

00:18:52.080 Facebook profiles and LinkedIn profiles and like connecting the dots. This is always like

00:18:56.740 the first thing that happens when like internet sleuths get involved.

00:18:59.660 100%. And initially it was suspected that they were married. Okay. It turns out they're like

00:19:03.680 second cousins or something. So you can see this coming together, right? Like we have this weird,

00:19:08.640 difficult to understand market tomfoolery we have thousands of rightfully disgruntled investors

00:19:16.580 all hanging out in online communities and we have a fuzzy web of connections amongst powerful 0.99

00:19:23.480 institutions that are all involved you can see the kindling yeah like for like a big dumb 1.00

00:19:29.360 conspiracy and i'm here to tell you that it is bigger and dumber fuck yes than you could ever 1.00

00:19:35.380 imagine. 1.00

If Books Could Kill - May 15, 2023

The Meme Stock Cult [TEASER]

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