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- [00:00]
A
Foreign. Hello, and welcome to the what's going on with GameStop episode of Slate Money, your guide to the only business and finance story of the week. As far as we can tell, there has been exactly one story. It is very rare that we devote an entire episode to one story, but the demand has been so great that this entire episode is going to be about GameStop. I'm Felix Salmon of Axios. I'm here with Anna Shymansky of Breaking Views.
- [00:43]
B
Hello.
- [00:43]
A
I'm here with Emily Peck of HuffPost.
- [00:46]
C
Hello.
- [00:47]
A
And because this story is so big and so gnarly, it wasn't enough to just have the three of us. We have a special guest, Hope King. Hope. Where? Welcome.
- [00:57]
D
Hi. Thanks so much for having me.
- [00:59]
A
Introduce yourself. Who are you?
- [01:02]
D
My name is Hope King. I'm a business journalist based in the New York City area. I have covered business for cnn, for Business Insider, and most recently at Cheddar, where I was an anchor.
- [01:14]
A
Hope is going to help us uncover what people are really saying about GameStop because she has done the hard legwork of spending, like, 27 hours on clubhouse. It's a hard job, but someone's got to do it. Anna is going to explain why market manipulation is bad. Emily is going to try and work out whether there's a whole Marxian take to all of this. Apparently, there is. I am going to add some stupid asides. This is going to be fun. And we're going to have a slate plus segment about AMC, which is the mini GameStop, which is interesting in its own way. I hope that many of your questions will be answered, although I fear that many of them will not be. But do stay tuned because we have a lot of GameStop content coming up on Slate Money. So let's get right into this, Emily, how many emails and tweets and random people stopping you on the street have you had saying like, oh, my God, I can't wait for you to talk about this. Please tell me you're going to talk about this on Slate Money.
- [02:14]
C
Oh, my God, Felix. I have never seen anything like this. Nothing to compare to the interest in this GameStop story in all the time. I swear to you that I've been reporting on business and finance and all this other junk. I mean, a long time, right from Wall Street Journal, from the financial crash. I have never seen this much interest in a business story as GameStop. We have gotten so many tweets directed to us saying that people are excited to talk about this. We have gotten a lot of emails. Felix went on the political Gabfest and did like a whole thing there already. You can listen to that too. I mean, it's just people are interested in this for some reason, which we should get into. Why? Why the interest?
- [02:59]
A
Let's start with that hope. What is your theory, your sort of like meta media theory here for why? What nerve has been touched here? Why is everyone obsessed with this story?
- [03:10]
D
It's actually easier to understand on the surface. You hear it, you know the name GameStop, you've probably been to a store or passed by one. So from that sort of headline aspect, it's easy to understand and get into. And then you see a trending, of course, on social media. But then, and I know we'll talk about this, once you start to unpack what is actually happening, it starts to get confusing. And that always then gets people talking about it, trying to figure out what's going on.
- [03:42]
A
Right. And that's the one question, like we got this most recently about 25 seconds ago from Jessamyn Marley. She's like, I can't wait for you to talk about this because I want you to explain what's going on. The three words I've heard most frequently over the past week is what's going on? What's going on with GameStop? And it's really hard to know where to start on this. Emily, where would you begin? Would you begin with WallStreetBets? With short selling? With Melvin Capital? With the share price? Where do we begin?
- [04:11]
C
I think we begin around the summer fall. And we begin by knowing that GameStop is, you know, one of these mall stores that is from a previous era that everyone kind of thought was going to go to zero because no one goes to the store to buy video games anymore. In my family, when we want a video game, we just press buy on the PlayStation and we buy it and that is the end of the story. So I think the place to start is, okay, a lot of people thought this company was meh. And then this guy, I think the CEO of Chewy, stop me if I'm wrong, he gets interested in the company. An involved founder.
- [04:52]
A
Yeah, the founder of Chewy, who exited Chewy too early. And he was like, no, I can turn this retailer around. And then most importantly for our story, this isn't just a corporate turnaround story. This is also a financial story. Because if GameStop went from being a struggling retailer to being a slightly less struggling retailer, honestly, no one would care. The reason people care is that Roaring Kitty got involved. And Anna is here to tell us who Roaring Kitty Wait, let me just finish.
- [05:23]
C
Let me just finish for a second because I feel like there is a little confusion and people think, like Walsh, that Reddit just jumped on this stock for no reason. And I think the kernel of the reason was a few people saw some potential here and from that things went like, wild.
- [05:40]
A
Exactly. I would thought that it wasn't. People thought that it wasn't a $4 stock and it should be like a $20 stock.
- [05:46]
C
Yes, perhaps.
- [05:47]
B
Although I think the bigger reason was the fact that it was one of the most heavily shorted stocks and it was a relatively small company that is incredibly heavily shorted, which makes it a big fat target. So that if you want to engage in a short squeeze, you do that company. I think that's the main reason why this company was targeted.
- [06:04]
A
I want to go back to what Emily was saying and agree with her that that wasn't the reason back in the summer. That that has certainly been the narrative for the past few weeks. But if you go back to when Roaring Kitty first put on his trade, in fact, he started buying the Stock Back in 2019, this was a very long in the tooth, overnight success for him. And back in 2019, this was not. You did not have short interest of 150% of the free float and that kind of thing. There was a turnaround narrative there. His name on Reddit is Deep fucking Value. He considers himself to be a value investor. And while it did certainly become a short squeeze and the financialization of the whole thing, and it became this crazy bet and valuations got completely divorced from reality, eventually the little grain of sand that turned into the pearl of crazy was actually a value play.
- [07:05]
B
I think whether or not one individual or two or 100 individual investors decided that, hey, maybe this stock is worth slightly more than we think it is, is not the real story here. Also, Wall street bets is notorious for engaging in strategies to pump up or push down prices, usually push them up. So I think that the much larger story and the reason we're talking about this and the reason that this guy is doing so well is not because this company really turned themselves around and has some new board members. It's because they figured out a hole in market structure that they could exploit.
- [07:42]
C
Yeah, so let's talk about that because I think for the start of the story was a little glimmer of interest or whatever. But the real the story and the reason why it went viral was because of Wall street bets and the short squeeze and the idea that this band of rogue traders or whatever could team up and like screw over the short sellers. So I feel like Anna should explain.
- [08:03]
A
That I think we're jumping from like part one to part three. Right? Part one is like there's a cheap struggling retailer. Part three is there's a short squeeze in between. You have part two, which is a bunch of large hedge funds, most prominent among them, this one called Melvin Capital, decide to put large short positions on the stock. So Anna, explain part two to me. Explain what they thought they were doing and why they did it.
- [08:32]
B
So any short seller, you're looking at a company, you're saying, I think this company is overvalued or I think this company, I think the value of this company is going to decrease. That is why I'm putting on a short position. You're also likely you're going to be using leverage. So you're going to amplify the return that you can make. Right? And in a company like this, where clearly all of the fundamentals are not particularly good, it is not unreasonable that this would be a target for shorts.
- [09:03]
A
Let's stop there. Let me bring hope in. This is a bet that is very close, I think in my mind to the efficient markets hypothesis. What you have is a bunch of hedge funds who are believers on some deep fundamental level that there is some truth about how much the company is worth in the real world and that the financial value of that company is bound to converge on that truth at some point and that when it does, they will make money. I mean, it seems almost pure in that. Is it the short selling hedge funds who are the pure naives here?
- [09:40]
D
No, I think what you said and short sellers would agree with you. Hedge funds who do this would agree with you that they play a role in making sure markets are efficient. And that to every very bullish story, there is another interpretation of where a certain number, where the future of a company could go. So if you look at it away from just the stock market in quotes and you look at just what the company is going through, that the word you use, fundamental is how people on Wall street talk about this. The fact is that people are not going to malls. They're buying video games online. There are cloud services that provide this. So the future of the company is not rosy. So these companies, like hedge funds, are coming in. They know that that is the fundamental story and they think that then the company ultimately will not be worth very much. And so they're putting their bet on this. And this is also something that retail investors understand. I have spent the past probably 36 hours on clubhouse. And if you don't know what Clubhouse is, It is the 2021 version of public AOL chat rooms, all audio based. And I have been listening to dozens of retail investors, probably hundreds at this point, you know, nonstop, six, seven hours a day, talk about the fundamental lack of understanding that the quote unquote financial media have. And yeah, does that sound familiar about them? You know, they're not a monolith. People are actually looking at these companies just as closely as maybe some of these hedge funds in a different way. They don't have access to the same platforms, but they see the same fundamental story. And the reason why the story is also incredibly viral is because there are almost no wrong takes on what's going on here. Almost everyone can understand some aspect of the story, whether it's what the company is, GameStop, whether it's on Reddit, whether it's about financials. So everyone can talk about this. And that's what also makes it, you know, incredibly, you know, viral. I'm getting away from your question, but yes, essentially, Felix, this is about people who feel like there's a different story to a company and they're playing a role to make this market around the stock efficient, kind of jumping off that.
- [12:09]
B
A little bit because we haven't maybe. I'm sure we will talk about this a lot more. But, you know, part of the reason that's this story has also become so viral is because there is frequently this idea that short sellers are doing something bad, that some sticking it to short sellers is somehow a good thing. Which is, I think, I imagine, most of us will probably agree, is a fairly ridiculous argument, because you need people to go short. And actually in this market where you have so many forces pushing asset prices very, very high, we really definitely need short sellers.
- [12:40]
A
So I don't understand that because what we seem to have learned over the past couple of months, but certainly the past couple of weeks, is that short selling is a mechanism whereby stocks go up. It's not a mechanism whereby stocks go down. So we just saw on Friday that Citroen Capital, which is one of the big short sellers, announced that it was no longer going to put out any YouTube videos explaining its short theses. Once upon a time, if a big short seller put out a YouTube video saying, this is why we think a company is bad and this is why we think it's going down, that would encourage people, other investors to say, oh, yeah, I think you're right, I'm going to put on short bets as well. And it would Cause the stock to go down. Now, that's been flipped on its head. And if you put out a YouTube video saying, I think that the stock is going down and I'm short, that's just going to encourage a whole bunch of people to buy it and try and squeeze you. And so in that sense, the existence of short selling does not make markets more efficient. It makes markets less efficient. All it does is it creates short squeezes and it creates crazy things like GameStop trading at $480 a share, which I think everyone can agree is far more than any conceivable fundamental value.
- [13:54]
B
We've had short sellers basically since the 17th century. I don't think because we've had activity in the last, like three weeks that we will completely change the function of people talking down stocks, of saying like, this company is a lousy company. Now, is it likely that short sellers are going to react to what has happened and are going to use techniques to take advantage of the retail investors and what they assume they're going to do? Yeah, I'm sure they will, because that tends to be how markets work. But you certainly need forces in markets on both sides putting out information. And yes, no one here is naive enough to think that, especially in this market right now, that we're getting fantastic price discovery and many different types of assets. But that doesn't mean we should discourage this type of activity. That is saying this lousy company is a lousy company.
- [14:48]
C
Yeah, we need that.
- [14:49]
A
I haven't seen a lot of people saying that we should discourage short selling, but I have seen a lot of people saying that if gazillionaire hedge fund managers like Gabe Plotkin, who just dropped $44 million on a pair of houses in Miami, because why not? If he loses a bunch of money, no one's really shedding any tears for him. That's not a sad outcome, that's not a bad outcome. And if a bunch of relatively small traders on Reddit wind up getting a large chunk of that multi billion dollar loss, I mean, that's real Robinhood, right? That's taking from the rich and giving to the much less rich. It's a redistribution of wealth in the right direction. And in a world where financial markets generally exacerbate inequality, this seems to be one of the few financial markets where inequality has gone the other way. And we are taking from the gazillionaires and giving to the poorer.
- [15:44]
C
First, we don't really know who these dudes are on Reddit, do we? I mean, I think A friend of the pod, Ben Walsh, has been posting like, yes, we should definitely be trusting these anonymous people named Roaring Kitty or whatever, telling us they've made 20 bajillion dollars so they can pay off their pets to doctor bills. Like, we don't fully know who they are. I would say. I would say that. And I'm a little worried. There have been so many takes, and most of them, like Hope was saying, are good and justified. But there have been these takes that are like, this is just men with nothing to do spending their government. Like Leon Cooperman, a billionaire, was like, this is just men spending their checks from the government sitting around. Which kind of feeds into the thesis of like, this is like the poor getting their revenge on the rich. I just feel like that's too simplistic a narrative. We don't know enough about these people. I definitely don't want to see people blaming stimulus checks on this GameStop situation, which I could see someone doing, someone who is against stimulus checks.
- [16:47]
A
But Stimmies and Tendies, man, those are the memes. Tendies, right? Whenever you get a huge amount of volatility in a stock like we've seen with GameStop, there are big players on both sides. There's no doubt about that. I'm sure. There are massive hedge funds going long. There are massive hedge funds going short. There are massive hedge funds that are just trying to go long. Volatility. And if Gabe Plotkin lost a billion dollars, there's probably some secret hedge fund manager somewhere else who made a billion dollars. But by the same token, I don't think we can write off all of Reddit as fake sock puppets, which are actually sophisticated and rich people. Like, we know, but it doesn't. We know who Roaring Kitty is. We know that he made a lot of money. He's a real person. There's a profile of him in the Wall Street Journal. And in terms of the. What people are saying that the, you know, 3 or 4 million people in that subreddit now talking about stimmies, you know, the stimulus checks, talking about tendies, the profits they're making, which they refer to as tendies after chicken tenders, which I think is the. One of the loveliest parts of this whole story. There is like a purity and a goodness to it that is actually really hard find in most Wall street stories.
- [17:57]
B
I disagree. I know this is not a popular take. Like, look, yes, no one is shedding a tear for one individual hedge fund who didn't properly factor how much risk he was actually taking. Like, no One's going to shed a tear for that. Yes, it is hypocritical when you have a lot of Wall street players who may have done really bad things before the financial crisis now coming out and complaining about market manipulation. Again, all of those things are true. However, it doesn't change the fact that the activity that enabled these types of profits is manipulating prices, which is, if you care about markets, functioning well is not a good thing. And ultimately, especially if it really starts to discourage people from taking short bets, all that's going to do is increase income inequality because it's just going to pump up asset prices farther. This isn't solving. No, no. I mean, realize nobody's saying this is solving income inequality, but this isn't even helping income inequality. All this is doing is one more thing to make markets less efficient for no good outcome.
- [19:02]
C
One thing Matt Levine said, and I assume everyone is reading Matt Levine because duh. But one thing that he said today was just like hedge fund types, short seller types, these guys like spend their days messing with each other and that's how markets usually work anyway. It's just that they don't like this new crop of people doing the messing.
- [19:23]
B
It's not that simple though.
- [19:24]
C
That's an inefficient market you're looking to save.
- [19:26]
A
Exactly. So Matt Levine had this wonderful story about Phil Falcone, who's like one of the great sort of moustache twirling villains of the hedge fund world, doing basically exactly what the WallStreetBets crowd was doing or the GameStop longs were doing, but in a just an even more egregious and sort of like, fuck you, efficient markets kind of way. And on some level it's just like, yeah, that's what happens in markets. That's glorious. And the idea that like it was fine just so long as the likes of Phil, Phil Falcone were doing it, but now we should get worried about market efficiency because WallStreetBets is doing it. That seems weird. And I think that's the thing that Elizabeth Warren is coming out and saying like, I'm sorry, now is not the time to start worrying about market efficiency. The time to start worrying about market efficiency was when you had all of the he hedge fund managers doing it and everyone else is left out in the cold.
- [20:19]
D
Yeah.
- [20:20]
B
Yes, of course, if you have large institutional investors doing things to manipulate share prices, that is something that should be regulated. Obviously, like most reasonable people think that, yes, there's always going to be some craziness in stock markets and I think that's what Matt Levine was saying. And yes, there's always some ridiculousness and that will always be it. But when you have extremely public instances of market manipulation, it is a really bad look. If the regulators just sit back and say like, okay, who cares?
- [20:47]
D
I want to jump in and talk about that word manipulation, because I think it's a very triggering word right now, depending on which forum and which story you're reading. The people that I've been listening to and that are sometimes posting in these forums and I don't think they're always the same audience, the same people, they look at what these hedge funds are doing as manipulation as well of their money. And they understand that there is a completely different customer base that these hedge funds serve, that they may only have seven clients who are all billionaires and you know, there are tens of millions of them with their fifteen hundred dollar accounts investing and they see that they are being manipulated because there is this clubhouse, to use the pun and extend it over there, of very entrenched investors who have been gaming the market for a while. And one woman, when I had opened it up to this group yesterday, said, I don't even care if I'm going to make money or lose money here. I just, I just want to stick it to the man. Now that's just one person. There are other retail investors who don't feel that way exactly. But, but there is an aspect of that where they think that they're now finally able to speak the same language because of a platform like Robinhood and also play the rules to their favor, even if it's just for a little bit. I think there are other implications of this down the line. And some other folks have brought up, well, what about nations getting into this, nation states, countries who might want to manipulate the market? So I think it opens the door, it shows what else is possible and where it could go in a bad way in a larger sense.
- [22:33]
A
Okay, so expand on that a little bit. What is the downside of, as you say, it's a very charged term, market manipulation. And it's also a kind of quasi legalistic term which kind of implies securities fraud and being illegal. And I don't think, I honestly don't think there's a case to be made that what like Warren Kitty was doing was illegal market manipulation. So let's, let's not do the sort of like legal analysis here. But what's the sort of downside of like if you play this out and you're like, okay, so Russia is going to come in and start manipulating BlackBerry stock or something like, what's the bad outcome of that?
- [23:15]
D
That's exactly right. I mean, that could be in. Somebody else said this. So I'm just paraphrasing from him, sort of a phase three of this. So if you look at the TikTok story from last year, where teens apparently took to TikTok and bought all of these tickets to the convention, at the Republican convention and no one showed up, if you apply that to any group that can mobilize around a big event, a big stock, let's say, even in the future, that's where I think some of these regulars might be more concerned and have to figure out, is there a way to stop that? Especially because bots are still a problem right now. You know, WallStreetBets and some of these other forums, I mean, you can hear and you can see that they're real people. But what if there are other ways where this phenomenon spreads to a very opaque level? And I think that's what people are afraid of.
- [24:09]
A
I guess what I'm trying to ask here, I understand what you're saying is that regulators will be concerned, we might not be able to see what's going on. There could be some kind of market manipulation. But beneath all of that, if that happens, what would be bad? Why would it be bad?
- [24:23]
D
If that happened, it could cause a major disruption to the markets. It could cause a collapse. I think that's the biggest concern.
- [24:29]
A
So just to be clear, I just want to take this slow here. Like, not here, like right now. We're just talking a bunch of. Talking about relative hands, handful of very small stocks. But in theory, if it can happen to small stocks, it can happen to big stocks. If it happens to big stocks, they can go up. If they can go up, they can go down. There could be a market crash. And market crashes are bad.
- [24:49]
D
Right. And people have talked about Apple and Tesla in these rooms as well. They said, hey, if we can do this with GameStop, why not target these other companies next? And I think that is some of the chatter that should and maybe is what concerns these regulators or people who feel like these are quote, unquote, bad guys, they're market manipulators.
- [25:12]
B
Yeah, I mean, I'd say that we're in a very different universe right now in terms of trading. While we've certainly had bubbles in the past, while we certainly had bubbles driven by day traders in the past because of how technology has changed, because of how no fee trading has changed, because of how central bank Money flooding the financial systems has changed because of all of these things. We are in an environment we have never seen before, and so we don't fully know what the result can be. And while I certainly don't think that GameStop is going to lead in itself to the destruction of the markets, and I think if GameStop went to zero, it wouldn't really matter, it does suggest that there are larger questions here. Like this is not the first thing we have brought up in the last year about something in the market that just doesn't seem right, that markets don't seem to be factoring in any type of fundamentals, that markets don't seem to be allocating capital properly, the markets don't seem to be engaging in price discovery. And markets are an extremely important part of the financial system. We are in a very, very, very financialized economy. We have shifted risk from banks to the capital markets, which is good, but that also means that the capital markets fund a lot of companies. The idea that there's no risk to hurting trust in these markets, to potentially causing massive distortions that can cause a tremendous amount of volatility that can then factor into other types of trading strategies, we just don't know. And I think it makes perfect sense that regulators will say, we're in a new world. We need to really probably figure out rules to mitigate some of the biggest risks.
- [27:00]
A
And it seems to me that what we're really looking at here is a function of zero interest rates, that with zero interest rates, everything can be a good bet. It could take 20 years to pay off. But because you're at zero interest rates, you're discounting at 0%. So it's still worth a fortune Today, zero interest rates mean much more liquidity, much more money, people just coming in and betting on just about anything. And most importantly, zero interest rates mean the cost of shorting goes to zero. It doesn't cost you anything to short a stock. It used to be that shorting was expensive. Now it's much, much cheaper. And so all of these things encourage more speculation, more trading and more volatility. And I was just talking to a friend this morning about how free markets, people love to talk about free markets. Free markets are incredibly volatile things. If you look at what markets used to do in the 17th century or 18th century or something, they would go all over the place. Markets left to their own devices look very similar to what we're seeing with GameStop. GameStop looks like what we saw with tulip bulbs in Poland. So free markets are not Orderly places where you get efficient price discovery. We have got used to this idea that markets can and should be orderly places where you get efficient price discovery. And we've kind of normalized it as this is this thing that we need. And it's true that it's the job of regulators to try to encourage that, but especially when money becomes so cheap that it's almost free. I think the sort of animal spirits and the crazy volatility and the natural nature of free markets to just go all over the place and go crazy, start revealing itself.
- [28:43]
B
Yeah, I mean, I think that most reasonable people think that you shouldn't have completely unregulated markets, that in order for markets to function properly, you actually do need some guardrails.
- [28:57]
A
Would that be a financial transactions tax? I mean, this is the thing that everyone's been sort of talking about in at least the Axios. Slack is like, fine, there's a problem here. Volatility is too high. There's a problem with this, There's a problem with that. Like, there's so much concern trolling going on, especially on cnbc like you, there's no end to it. Fine. You get all of these statements from Elizabeth Warren and they'll see, what are you going to do about it? And then when you ask that question, what is the actual thing that regulators or lawmakers should do about this? Suddenly people go very quiet. They just kind of say, oh, I think we'll hold a hearing. And the only thing I've heard that really seems remotely like an actual policy proposal is financial transactions tax.
- [29:42]
C
This is not about the financial transaction tax, which seems fine. Like, the guys on Reddit should pay a tax. It seems fine. My question is, is this the price we're paying? I mean, it's kind of. You just said it. This is the price that we're paying for the 0% interest rates. Everyone's saying, where's the inflation? There's no inflation. So instead we're getting crazy volatility in the stock market. Like, this is the downside. It's the new downside. Everyone's waiting for, you know, inflation and stuff like that. But instead we're getting this, like, wild stock market.
- [30:14]
A
And to be clear, it's only a downside in some people's minds. Right? Anna thinks it's a downside. Anna thinks the efficient markets are important and this is an inefficient market, therefore that's a bad thing. Like, it is definitely the case that a lot of people on Clubhouse, a lot of people on Reddit, don't think of this as a downside at all. They think of this as an upside. They think of this as a democratization. They think of this as like, hey, I get to make lots of money in a small amount of time.
- [30:38]
B
They like, they think it's a democratization on the upside, not on the downside.
- [30:42]
C
The one thing I'd say say about the downside, and I don't know what it is, but the thing that, that worries me and keeps me up is that we all have all our money in the stock market to retire on. Like there's trillions of dollars there that normal Americans are depending on. And it's weird to think like the bedrock of your financial future rests in the hands of people who see it as a game to be played like that. That seems like at bottom, like that's not good. We don't like that.
- [31:14]
B
That is an excellent point. I think that's an excellent point. Partly because that also affects how governments respond to markets. Is that at a time when you, as you said that you have so many people who are responsible for their own retirements and thus have their money invested and really primarily have to invest in equities because you aren't earning any yield on fixed income, are really in danger if there is a significant decline in equity values, right? And so that means the political impact is much, much larger if there is a massive decline in equity values than there may have been in the past when equity didn't play the same role in people's lives. And so I do think that's important because I think that's another reason why it encourages people to think that markets can never go down, that we will never be able to have a crash.
- [32:02]
A
But I want to come in and take the other side of this, which is that if you're worried about the risk of people having an incredibly large proportion of their net worth in the stock market and the stock market as a whole being very high, like that's a conversation that we, you know, have had over the past months and you know, is a thing like people are worried about the stock market as a whole being very high, but the stock market as a whole, as far as I can tell, has barely been affected by this whole GameStop fiasco, right? The stock market as a whole, it goes up a percent, it goes down a percent. It's at high levels. If all you are is a long term investor invested in a Vanguard Target Date fund, this entire GameStop thing has not affected you in the slightest. And while it's totally reasonable to worry about that long term investor in a Vanguard target date fund. I think it's a real stretch to connect it to the craziness in GameStop.
- [33:04]
B
I disagree because it's not GameStop itself. GameStop is one tiny company. It's what GameStop is symptomatic of. It's this idea that markets are becoming far less efficient, that you are having so much frothiness in markets that you are having all of these disruptions that you are having regulators having no idea what's going on and no idea what they should do about it. That is the concern, not GameStop itself. What it says about the larger market.
- [33:31]
D
I think it's important to recognize that there are still a large majority of people out there who don't have retirement funds in the stock market and who have never had a chance to invest. And GameStop, yes, is a symptom of what's going on. And if you actually pull back even further from people like you and I who have had the privilege of full time jobs with 401ks and have had the opportunity to save that, that is a concern from that perspective. And I totally hear you on regulators thinking about that. But I think again, what the story illustrates is that you've got this app that made it possible for people to trade for the very first time for maybe just one share of a stock.
- [34:20]
A
Like GameStop or even $1 of $1 partial shares. Yeah.
- [34:25]
D
And they really for the first time have a taste of what it's like to be a participant in the market. And I think the feeling, and again, it's not Everybody in this WallStreetBets or these groups that I'm listening to, but for some of them and people who have written about this this week are concerned about these other folks who might get hurt down the line, but they actually have gotten a taste of what that's like. So to them, they have no concept of the fact that what they're doing could ultimately hurt other people, you know, who have their retirement in the market. And I think that's really important to bring out here. And one of the frustrations and what's really driving some of this FU mentality is because it's another group of people who have felt left out. And if you listen to them on these Clubhouses, if you're, if you're reading between their lingo on these forums, these are people who really feel hurt and for the first time they have a say. Reddit CEO Steve Huffman last night was on Clubhouse for an hour and he talked about how, you know, his bottom line was if you think these guys are idiots and are just a bunch of hooligans, you need to spend some time in these communities to really understand kind of what they're going through and what they're doing. And so I just want to bring that context in because I think most of us who write for financial publications are writing for an audience who are doing this professionally, and that is our audience. But what's happening here is so much larger because it is again, the first time that people who have never been able to do this are doing this and they're exercising and they're practicing and they're learning.
- [36:07]
C
That's really great point.
- [36:10]
A
So that's a perfect segue Hope, into the second part of this story, which is Robinhood and the crazy that happened on Thursday when just before the market opened, Robinhood announced. And it wasn't the only one, but it was definitely the most high profile one, that it wouldn't allow people to enter into new positions in GameStop. If you had a position, you could close it out, but you wouldn't be able to enter into a new position in GameStop, in AMC, in Koss headphones and I think a couple of others. And the unanimous and broad anger and ire that was focused on Robinhood as a result of this decision was something to behold across every single platform, across politics, across Reddit. And Robinhood basically spent all day not explaining why they had done this. And then after the markets closed or just before the markets closed, they were like, yeah, basically it wasn't the SEC telling us to do it. It wasn't the White House telling us to do it. It wasn't Sequoia Capital telling us to do it. It wasn't Citadel telling us to do it. It wasn't us trying to paternal investors from potential losses, which is what a bunch of people also thought. It was this really boring technical reason about how they needed to post a bunch of collateral at the DTCC because trades take two days to settle and there's settlement risk and their central clearing counterparty risk and they didn't have the collateral and so they had to prevent a bunch of trading. And this to me is symptomatic of the feverishness that has landed upon this whole story. The GameStop story has been such a huge media story that everyone started jumping to conclusions. Everyone started getting incredibly angry. Everyone had conspiracy theories. And you know, we can talk a little bit if you want, about how Robinhood just wasn't set up for the kind of Volatility that it basically helped to create. But is this really just a sign, Emily, that we all need to just take a little bit of a breather and dear God, this weekend should have come like three days ago. We all just need to sort of like do a sort of 10 minute headspace tutorial here.
- [38:33]
C
I mean, you gotta think that part of the reason this has happened is because Donald Trump left a little bit of a vacuum on the Internet and we've been looking for things to fill it. I think for a while it was Bernie Sanders and his mittens sitting in a chair. And we haven't seen a lot of that lately because now it's GameStop. And it's like Hope was saying earlier, it's like one of these stories that is both easy to understand and impossible to understand and endlessly interesting because you can come at it from every angle. Whatever your take is, you can find it in the GameStop story. Like, we saw the Marxists come in and say, see, this is what Marx has been saying all along. My colleague Zach Carter was like, this is a Keynes thing. He wrote a whole take on that.
- [39:22]
B
It's really a Minsky thing, I feel.
- [39:24]
C
Yeah, like Elizabeth Warren, of course, she has her talking points. It fit for that. So it's this Trump vacuum. Plus the palette of GameStop allows us all to inscribe our own theories. And so like a Rorschach test basically for the whole Internet at this point.
- [39:43]
A
Do you know anyone whose priors weren't reinforced by this whole thing? I feel like I might be the only person who changed my mind about anything by watching this whole thing. I did actually change my mind on wallstreetbets when I came into this. I wasn't hugely aware of WallStreetBets before this whole saga blew up. And I did think of WallStreetBets as being a bunch of like, bros pumping up stocks. And now I think I'm much closer to what Hope is talking about, that there's just, there's genuine feeling left out. And also it's just a much nicer community than I thought. They're much friendlier to each other, they support each other. And I think, yeah, that's one of the few things I've changed my mind on. Hope, I don't know if you have changed your priors on anything in the past couple of weeks.
- [40:31]
D
I've been sitting back and just trying to watch everything collide. I mean, I think it's just been fascinating to see all aspects of the economy and media as you said just try to pick this apart. And yeah, I think everyone here had already mentioned this, but I mean, Robinhood was not set up to do this. And the CEO was on CNBC close to 7 o' clock last night trying to clarify that this was a proactive move, that there were absolutely no phone calls, that the reason for doing what they did was these boring reasons, as you said, Felix. And ultimately they still stand for democratizing investing.
- [41:12]
A
Do you think that Robinhood, they claim to be a mission driven company. They claim to be all for the democratization of finance. They claim that all of this activity with people buying $1's worth of GameStop share is good for democracy and good for finance and markets. Do you agree with that or do you think they are a malign force that's just creating chaos and volatility?
- [41:35]
D
I mean, it's intention versus impact. You can write out all your nice intentions, but the impact is ultimately a factor of how it grows. And it's not unlike how Facebook set out to connect the world and then ended up being this bomb of misinformation. And I think Robinhood, similarly, there is no free lunch here either. I mean, I think people also realize that you get to trade on Robinhood for free. But the trade off is that your data is also being trickled out to the same exact hedge funds you're trying to stick it to. People understand. And that's why these conspiracy theories are also bubbling up, because they get that Robinhood also gives business to the same people that are shorting the stocks that the investors on Robinhood are looking at. It's trying to level out the playing field in some way of investing information. But at the same time, because Robinhood is still free, there are still things that people with professional trading platforms have that Robinhood users don't have. And so if you're a retail investor, you can be one of two retail investors. You could be a really good day trader and invest in that, or you're only trading on Robinhood. And I think that's also where the question of democratization comes from, is the access is there, but it's still there are tiers of access. So it's a nice intent on their part, but the impact is going to play out very differently depending on where you started from in the game.
- [42:56]
B
Yeah, and I would also say that, you know, I think we've said this a million times on Slate Money, that the worst way to make money long term in investing is to be picking individual stocks and doing a lot of active trading. So this is very good for Rob or. Well, in theory, it's very good for Robinhood as a company if you have people engaging in lots and lots and lots of active trading. But long term, there is essentially zero evidence that that actually helps people long term.
- [43:25]
A
Right? This is what I have been trying to ask Robinhood. If you're a mission driven company, are your interests aligned with the interests of your users? And in the long term, it is good for Robinhood to have lots of individuals trading a lot, trading every day, getting notifications on their phone, jumping in and out of options, because Robinhood makes much more money from options trading than it does from stock trading. So it's clear where Robinhood's interest lies. It's in maximizing trading activity. It's also clear in the long term where its user's interest lies, which is in not trading, in just doing boring things. And investing should be boring. And so it seems to me that's the big paradox of Robinhood, or that's why it rings false when they call themselves a mission driven company, because they just don't have their interests aligned with those of their users. Their users may make lots of money on GameStop in the short term, but the short term is fun right now. And Robinhood wants to be around forever. And there's no way that these kind of like fun spikes in stocks is going to be a permanent part of how people make money.
- [44:38]
C
Felix or one of you, can you just remind me how Robinhood makes money? Again? I know we've talked about it before, but it does not stick in my head.
- [44:45]
A
Robinhood makes money by something called payment for order flow, which basically means that the stock market has a ticker. The ticker at any given millisecond has what's known as NBBO National Best Bid Offer. There's a little gap between the best price in the market to buy and the best price in the market to sell. And Robinhood feeds all of its order flow to high frequency traders like Knight and Citadel and Virtue, and they basically take that spread and they pay Robinhood for the privilege of being able to take that spread. I don't think that Robinhood traders are being ripped off by the HFTs, but that's how Robinhood makes its money. And that's the only way Robinhood makes its money. If I go into Robinhood on day one and put $1,000 into an S&P 500 index fund and then sit on it for 35 years and do nothing, Robinhood will make no money off me. That's a good investment strategy, but it's a terrible way for Robinhood to make money and they don't want to incentivize that.
- [45:49]
C
So have. Have the high frequency traders been cleaning up the past week? Because volatility has been so high and so many people are trading in and out of these stocks. Like, are they the real winners? Not Wall street bets?
- [45:59]
B
Most likely.
- [45:59]
A
Most likely.
- [46:00]
B
The middlemen always win. And like the people who are writing all of these calls and a lot of them will probably end up expiring.
- [46:05]
A
Out of the money.
- [46:05]
B
You know, like the people who are collecting all these premiums, like, yeah, at the end of the day, they're probably going to be the real winners.
- [46:11]
A
There has been a little bit of confusion about two different Citadels, their Citadel investments and their Citadel Securities. And one of them is like the high frequency trader that Robinhood sends its order flow to. And the other one is basically the hedge fund that invested in Melvin Capital. And there's a lot of conspiracy theories. They're both largely owned by Ken Griffin, but it's kind of important not to confuse the two too much. It is probably a safe assumption that the HFTs have made an absolute fortune in the past couple of weeks.
- [46:44]
D
And thank you for clarifying that because that was. I conflated that as well. I mean, well, you have one name and it's two different companies. It's obviously going to. But that's also where the conspiracy theories are coming from. And it's also a symptom of all the misinformation that's out there around what's happening and why people are. Are so angry. And you know, Anna, I mean, these investors also understand that this is how again, Robinhood makes money. And so even if they could stick it to the man and you know, one trade just for a little while, it's almost worth it for them.
- [47:16]
B
Yeah. The one thing I do find interesting in the response yesterday was that there seems to be this glee that a lot of the smaller traders had in taking advantage of certain weaknesses in market structure. The things like the way buying options can force the market maker to have to buy shares and all of that.
- [47:35]
A
Gamma squeezes and all that.
- [47:36]
B
Gamma squeezes, yeah. But then when it was the other side and then when it was this like, boring part of markets, which is that, well, you have to clear your trades and you have net capital requirements. And then when that reality was there, they were like, what we have our constitutional right to, you know, and there's a of lot part of me that had to Laugh at that. It's like there's this idea that there are no consequences. It's like, no, no, no. Yes. This may have been a loophole, but market structure gets you every time.
- [48:05]
A
I mean, I do want to just mention the market structure thing because it's a fun little nerdy point. One of the things that happened after the financial crisis is we had a lot of deep regulatory reforms to the way that markets were structured because people didn't want banks blowing up and financial institutions blowing up and bringing the entire financial system down with Lehman Brothers. And so what you wound up with was a lot of the risk getting transferred to what's known as these central clearing counterparties, things like dtcc, basically the stock markets where you do the trading. Because we still have a surprisingly old fashioned system where when you buy a stock, you don't actually pay for it until two days later. And so there's a risk there that you buy the stock on one day and then you won't actually pay for it when you have to settle that trade two days later. And that risk is a real risk, which is all concentrated in this company that no one's ever heard of, called dtcc. And DTCC requires all of the brokers and the broker dealers, people like Apex Clearing and Robinhood, to deposit a bunch of money with them to make sure that these things will always settle. And that was the thing that wound up causing the trading halts and that kind of stuff. It's the market working in exactly the way that it was supposed to work under Dodd Frank after the financial crisis. It's these institutions which no one's ever heard of, like DTCC saying there is too much risk going on here. So we are going to require higher capital requirements and we are going to de risk the system. It was not regulators, it was not the White House, it was not Citadel. It was the one entity in the middle of it all, in the middle of the spider web, just making sure that they were staying on top of the risk situation.
- [49:55]
C
Which is funny. Then for Elizabeth Warren to be like, this is terrible. When it's kind of the thing she's railing against. It's kind of what she wanted.
- [50:05]
A
If you ask what she wanted back in 2008 and 2009, this is kind of what she wanted. Anyway, I think we could talk about this for at least another four hours, but we don't want to do that because we have day jobs. So I think maybe we should just have a numbers round. Hope, since you're the guest, did you bring a Number this week I brought a number.
- [50:27]
D
It's not a great number, but it's a number. This number doesn't tell a great story. I should say. My number is 48% of the Asian men who are unemployed, 48% have been out of work for 27 weeks or longer. If you're breaking it down by race ethnicity, folks who are in the Asian diaspora, most of them have been out of work longer than any other. So 48% is Asian men and Asian women second to that 44%. And it's important because the unemployment story is obviously not going away. And the longer that you are unemployed, the harder it will be for you to get back into the workforce. So this is, I don't think often talked about that. The Asian community is actually really hard hit. They have been the slowest to recover from the unemployment crisis.
- [51:20]
A
Wow.
- [51:20]
C
Why do you think that is?
- [51:22]
D
I think many of them work in potentially Asian restaurants. You know, I mean, around the country, that business has been decimated by the pandemic. And I think that is one large group of the unemployment story for them. And it could also be, if you look at the quote unquote, model minority myth, you know, if they're performing high enough, maybe they got caught up in the layoffs. And if you're almost too senior, you can't find jobs that may now be filled by people who can do this at an entry level position. So I think it's being squeezed by. By that as well.
- [52:02]
C
Wow.
- [52:02]
A
Emily, do you have a number?
- [52:03]
C
I have a number.
- [52:04]
A
What's your number?
- [52:05]
C
My number? Okay, well, my number is 2%, and it's going to require a little bit of unpacking. Okay. The 2% is how much United Way Worldwide wants to charge its local branches in dues now, and it's doubled.
- [52:19]
A
Is this because of legal fees? Because you've been all over them and you're making them like. It's all your fault, isn't it?
- [52:25]
C
It's not my fault, Felix, but I'm sure they would like to blame me for it. I talk about this today. I have a story out. So I'm shamelessly plugging my story. But basically, United Way Worldwide is squeezing its locals at a time of great need in the US And I feel like this exposes a little bit more of what we talked about when I brought up the story the last time, which is that this is this big, sprawling nonprofit that's spending too much money on administrative overhead. And when I dug into why did they do this to their locals, it was because they're trying to update their business model. They made this deal with Salesforce to create an Apple. Like so many people, they thought an app could solve all their problems, but it hasn't.
- [53:06]
A
At least this time it's Salesforce's fault, not McKinsey. Normally it's McKinsey.
- [53:10]
D
Yes.
- [53:11]
C
Yeah. And I don't even know if it's Salesforce's fault or United Way's fault. It just seems like it's again, and this is something I've been thinking about a lot. It's like because I cover sexual harassment so much but often sexual harassment is a red flag for just bad management overall. Like if you dig a little deeper and I'm not saying there's bad management. That is what my reporting has found so far. If you dig a little deeper into these stories, these like me too. Stories that only women are supposed to care about. Underneath that there is financial mismanagement. There's people being put in charge of things they're not as good at as they should be. So I think there's kind of like this ripe area now where people can go look back at some of the sexual harassment stories and see some other kind of bad stuff happening or crisis.
- [53:57]
A
Anna, what is your number?
- [54:00]
B
My number is $115.23 billion. And that is the amount of merging market, sovereign and corporate debt that was issued in the first 27 days of this year. And that is a new all time record. The previous all time record was last year. But it's something that's grown significantly. So, you know, partly I'm saying this because I like to talk about emerging markets, but also because I think it speaks a little bit to what we've been saying that things seem a little off in capital markets and we have a lot of countries that are really struggling and able to sometimes issue very cheap debt. It suggests that this zero interest world may create some problems down the line.
- [54:50]
A
So my number is $10 billion, which is along those lines.
- [54:56]
B
Do I think I know this is the we works back.
- [54:59]
A
It's the we work spec.
- [55:00]
B
That was my second number. I literally haven't written down. I had to.
- [55:05]
A
It's hope. Do you know the WeWork spec story?
- [55:09]
D
I saw it come through yesterday and I just, I shook my head. I can't believe that this has been being brought back from the dead.
- [55:18]
A
WeWork is back from the dead people. They're doing a spec and everyone is saying they're gonna be valued at $10 billion.
- [55:27]
B
I'm not unsure if that includes debt though.
- [55:30]
C
Nothing you could do but shake your head.
- [55:31]
A
I really wish that all of you guys listening could see Emily's face and the way she's just holding in her hands and saying, what?
- [55:38]
B
What?
- [55:39]
A
What?
- [55:40]
D
Have you done a podcast on spacs yet?
- [55:43]
A
Have we? Have we done a big SPAC thing? Maybe next week we'll talk about spacs.
- [55:48]
B
Yeah, early on we had a very, very brief discussion of them, but we should do a SPAC spectacular.
- [55:53]
A
We should revisit the spac. They're spectacular.
- [55:57]
B
See what I did there?
- [55:59]
A
Sofi is going public via SPAC. It now looks like WeWork is going public via SPAC. Yeah. This is end HuffPost. It's end. Time to post group nine.
- [56:07]
C
Group nine, Buzzfeed, HuffPost. There are rumors. I don't know anything insider y about this, but there are rumors that I'm monitoring.
- [56:15]
A
Pretty soon Slate Money will go public via spac, so you can all buy stock in Slate Money. But until that point, we're just going to have to leave it here for this week. Hope King, thank you so much for joining us. It's been awesome having you on the show.
- [56:29]
D
Thank you for having me. It was really, really fun.
- [56:31]
A
Thanks all of you guys for listening and for writing in and telling us to talk about GameStop. I hope that we covered a bunch of it. Oh, my God. I can't believe we didn't even talk about amc. There's so much more to this story.
- [56:43]
B
No, there's so much.
- [56:44]
A
Should we do AMC in the plus?
- [56:45]
C
We could do it.
- [56:46]
A
So I think we should talk about this on the Slate Plus. Thank you, Jessamyn Molly, for producing this here show. Thank you for giving us all of the lovely ratings that you give us on Apple podcasts. We will be back next week on Slate Money, but do hang around if you're a Slate plus member because we have more of Hope King for you. Sam.