Welcome To The Churn 🏹
(I write at trevorboyson.net)
Apple continues to get larger and Tesla is starting to finally make money. I think I used to believe any form of big business was a kind of boogeyman. But after reading Conspiracy I realized how stagnant so many things in the world are. Part of that being a lot of the cultural belief that all big business is not only bad but boring. Apple is a good example of taking what everyone thought was a stagnant business and literally creating an entirely new category out of something as “boring” as headphones. I can attest, they are transcendental. As a result, they continue to blow even their own standards out of the water.
Tesla too, had good financial news.
As wild as Elon Musk is, he’s the only person trying to create the impossible — a new car company that ends fossil fuels and literally saves the planet in the process.
Oh and they have a $20 Billion war chest.
Ok so maybe you don’t like Elon, and/or just think his business fundamentally won’t work. Would you root against trying to save the world? Unfortunately many are literally doing that with their dollars. They are shorting Tesla stock.
What is a short? You don’t only have to think a stock will go up to be involved in the market. Effectively if you think the value of a stock will go down, you’ll “borrow” some shares from a broker at the current price and sell them. Down the road you purchase the same stocks and give them back to the broker. If the price dropped? You pocket the difference and the broker doesn’t mind, they still have their original stocks and a fee. If it goes up? Well you’re going to have to pay more for it and just stomach the loss.
If you want a solid movie highly recommend you put on The Big Short which shows Michael Burry and others correctly predicting the ’08 Housing Crisis.
So because of Tesla’s success, those who are literally rooting against the person most ambitiously trying to save the planet really lost a lot of money this last year.
Why the heck are we talking about headphones, and Tesla, and shorts you might ask? An uncanny number of my many avidly amateur interests converged this week in one of the most bizarre events in financial history, including a big short.
To begin I want you to think back on the calendar year that has been January 2021 (still work in progress mind you). Stomach queasy yet?
If not let me remind you:
Riots? Oh yeah that was depressing.
Impeachment round two? Ugh, he’s still dominating the news.
New President? Progress I guess but our problems didn’t exactly magically disappear yet did they.
Gamestop? That’s right the place I buy video games….wait what???
The Rules of the Game Have Changed
During this pandemic we talk about what comes next in a few ways:
- When things return to “normal.”
- When we get past this to a “new normal.”
- Maybe even what’s been called “The Great Reset”.(Side note this is the tip of an iceberg that I really hope isn’t what I think it is. Maybe a topic for another time.)
But as has so often been the case, sometimes Science Fiction does not only have the ability to put language to the future, but often the present as well. James S.A. Corey’s The Expanse has been adapted into a brilliant show on Amazon. In it, Amos Burton has an uncanny way to put what a period of change is like.
Ladies and Gentlemen, the rules of the game have changed. The jungle is tearing itself down and building itself into something new.
But wait! Before you are consumed by a feeling of existential dread and close out this tab, please bear with me for at least one more moment.
Sure, COVID-19, the peaceful transfer of Presidential power, etc. etc. are happening, but zoom out a click. You see it? The Internet. We are living through a transformational time in human history. The Guttenberg Printing Press 100x. It’s pretty weird to live through. I didn’t even have a smartphone until college. Being so close to it, it’s hard to see the forest from the trees.
Everything. And I mean everything is being dumped on the table to be resorted, rebuilt, and reconfigured.
Politics? — big Orange checkmark. You know what I’m talking about.
Economics? — the adoption of shopping online, logistics, Bitcoin.
Religion? — just ask basically all of the generations that are simultaneously dissatisfied within and outside of Christianity.
Culture? — social media, Netflix, sports, I could go on and on.
COVID-19 has only accelerated the change. But it’s not an overnight process. The Gutenberg Printing Press didn’t instantly put Dan Brown Novels in everyone’s hands the next day.
Let me try to oversimplify the stages of the web’s evolution so far.
Web 1.0 — getting the web up and running for everyday people. Very simple, static, and slow.
Web 2.0 — dynamic, user generated content, social media, advertising. While it’s been a revolution, much of it is just like X but online. For example our banking system is pretty much just a web version of in person banking including the delays to even just transfer money.
Web 3.0 is what we’re starting to dip into finally. Overly simplified it is “what can we do here that we couldn’t do before the internet?” It’s the version of things unconstrained by previous paradigms. For example, democratization and decentralization.
And quite possibly no one has represented the democratization power of the Internet more than Robinhood.
Let the people trade.
We’re not here for a comprehensive history of Robinhood. But quickly, it was founded 2013 under the idea of making stock trading accessible for everyone. No fees and trading from your phone in an app has been an electric combination. Their namesake was a perfect fit. It enabled individuals to go toe to toe with the heavyweights in the market. The suits and the Internet playing the same game. Institutional investors (hedge funds) in the same market as Retail investors (individuals).
This enabled a community called Wall Street Bets on reddit where a pretty entertaining crowd talks stocks.
I was shocked when just recently GameStop was all over social media. I did a double take. It’s a goofy retail store that sells video games and consoles in a market that is moving increasingly online. It turns out Wall Street Bets had targeted the stock to buy as a community.
If you want a thorough breakdown in what played out, I’d recommend watching this breakdown by Chamath and better yet watch the entire podcast.
Here’s my attempt at a high level summary:
-Reddit user/RoaringKitty identify Gamestop as an undervalued company in a decent cash position, posting about it in Wall Street Bets. And, they realized Michael Burry, genius of The Big Short, was in on it as well.
Btw is this not hilarious that a guy named RoaringKitty wearing kitten apparel is doing deep market analysis on YouTube. You gotta love it.
-Founder and former CEO of Chewy Ryan Cohen invested in Gamestop and got board seats for him and buddies. Remember, Chewy basically went toe to toe for online pet retail with Amazon and arguably won.
-Wall Street Bets realized Hedge funds, especially Melvin Capital were massively shorting the stock.
-A rallying cry went up on Wall Street Bets and they started a “Squeeze” on the shorts. Here’s a good rundown of what a Squeeze is. If you’re shorting a stock but it’s going up, you’re going to be forced to put up more money to stay in the game. The community knew that if they could raise the price enough, the Hedge funds would feel the hurt.
-Hedge funds are notorious for shorting stocks and looking to crush companies for their own profit. Now Wall Street Bets was sticking it to the man. In the understatement of the century, they succeeded. It had become a meme. Everyone was talking about and many were getting involved.
-Short Selling Hedge Funds lost Billions. Melvin Capital had to take an investment of $2.75 billion from other Hedge funds just to avoid going under because they were getting squeezed so hard.
-Ok great. Wall Street Bets used Robinhood to get one over on the bad guys. Game over, right? Wrong.
-Volume is so high that Wall Street faithful are freaking out. They’re crying foul.
-Robinhood stops trading GameStop shares. Let me repeat that: Robinhood stopped the ability to trade the shares the Joes were battling the Pros over. As far as I can tell, this has simply never ever happened. The reaction on the internet was seismic, and admittedly pretty funny. The very retail investors who had driven the price up could now only sell shares and lower the price, not buy.
-Users were furious with Robinhood, reviewbombing them with 1 star reviews on the app stores, which all got scrubbed out after the fact. Leaving the review scores immaculate.
-Discord, a platform for communities to chat conveniently banned their community at the same time.
So now we’re in some pretty weird water. Legal trades and legal communities were getting shut down. If you want another rundown, Sahil Bloom and Josh Gross have some good ones.
The internet’s reaction to this was perfect.
Even Billionaire Chamath Palihapitiya was on fire about defending the retail investors.
Dave Portnoy had maybe the best analogy.
The founder of Reddit, where Wall Street Bets lives, talked about what a massive shift this is in culture.
GaryVee, who I interned for back in the day, has the perfect thesis for the Internet transforming everything. I’ve heard him say it for a decade now and here he is applying it again.
David Sacks really summarized the mess this is well.
-So Robinhood responded. Check out CEO Vlad Tenev fall on his face trying to go through his notes and talking points.
Did that sound convincing to you? He swore up and down it wasn’t a liquidity issue. Later they responded with this blog post.
https://blog.robinhood.com/news/2021/1/29/what-happened-this-week
“The amount required by clearinghouses to cover the settlement period of some securities rose tremendously this week. How much? To put it in perspective, this week alone, our clearinghouse-mandated deposit requirements related to equities increased ten-fold. And that’s what led us to put temporary buying restrictions in place on a small number of securities that the clearinghouses had raised their deposit requirements on.”
….that sounds like a liquidity issue. Why didn’t they just out and say it? This made them look infinitely worse.
If you want to learn more about Robinhood’s business model, this is a fascinating take.
Which, I might note, was so misleading just in DECEMBER, they had to pay a $65 million dollar fine.
https://www.washingtonpost.com/business/2020/12/17/robinhood-sec-investigation/
-But if we want Robinhood to be held accountable, it might be hard. don’t want to rant so I’ll just let you take these in for yourself.
-Unsurprisingly, the pros absolutely have freaked out over being the ones pushed around for once.
But I gotta say, a lot of what many Hedge funds do feel pretty bad, even if they’re wearing suits. The response is very strong.
We’ve been here before with the Hedge fund short nonsense.
- Long-Term Capital Management overleveraged themselves in the late 90s on the Asian market crisis and required a bailout in ’98. Their thinking didn’t exactly appear… long term.
- A hilarious squeeze happened a decade ago, involving VW and Porsche. No one cried foul then because it was all institutions involved, not retail investors.
So where do we go from here?
-Wall Street Bets seems stronger than ever.
-Michael Burry has made some insane money off of this.
-There are still shorts on the stock! But regulators require zero disclosure on short positions so we don’t know who. 🤔
-It’s still a meme.
Robinhood presumably had the intention of going public one day for their investors as a startup. That should be interesting…
Wall Street Bets has taken to twitter if you want some great memes.
At the end of the day, even if Wall Street thinks Gamestop is now overvalued:
- It seems pretty silly to claim anything illegal happened. But they will probably try to.
- As the old saying goes, the markets can remain irrational longer than you can remain solvent. Those still shorting could be in for even more hurt.
We should require shorts to be disclosed daily or weekly by these funds so the market doesn’t just blindly run into these issues over and over.
And beyond that, who gets to tell you the right way to value a stock? Anyone can do whatever they want. We allow gambling, smoking, and drinking in our society for example. Who cares what individuals do with their money? To pretend that we should protect retail investors from damaging themselves is a joke when Wall Street keeps sprinting headlong into a wall every few years and require a bailout so our economy doesn’t… collapse. Just think about that.
The final interview I want you to look at is this. Where Thomas Peterffy effectively says the market didn’t have enough money to pay out the retail investors so they changed the rules of the game. He called the squeeze illegal as justification. Last I checked he isn’t judge and jury. And last I checked this squeeze is literally anything but illegal.
This is far from over. I bet we’ll see a lot of court cases over this, especially against Robinhood and many of these exchanges.
All in all, this has just been another example of what The Churn looks like. We’re living through it. Change opens the door for opportunity, and it sure is entertaining to watch.
