A couple weeks ago one of my brother-in-laws asked me about investing in Bitcoin (he knows I’m gearing up a newsletter specifically about crypto equities) and it made me wonder if we were near the top of this cycle. Sure enough, BTC has come off a good 25% off the peak, Ethereum is still holding up near all-time-highs. But it was that everyman-talking-Bitcoin dynamic that is almost a trope now. Starting with the possibly apocryphal story of Joseph Kennedy top-ticking the stock market in 1929 upon receiving hot tips from the shoe-shine boy ,the idea that when “normal people are getting rich, something has to be off” was almost conventional wisdom.
Until now.
Now it’s not conventional wisdom, it’s Establishment Canon.
I trust you already know the story of /r/WallStreetBets because even more everyday people are talking to me about Gamestop over the last 72 hours than Bitcoin (cryptos skyrocketing a mere 50% or 100% is quaint now. The slow lane).
Gamestop (et al) is where the action is now. At least until this morning.
The epic short squeezes had some hedge funds being carried out because their naked shorts have blown up. Reddit clamped down on WallStreetBets, briefly making the subreddit private and then re-opening it. I actually expect Reddit to suspend them, any second now. WallStreetBet’s Discord was shut down (for “hate speech” – get used to hearing that one from now on) and as of this morning, Robinhood has suspended new long positions in Gamestop, AMC and a few other garbage stocks that hedge funds were shorting the hell out of.
As many are quick to comment…
The hypocrisy at work this week is manyfold
Barstool Dave Portnoy is roasting RobinHood on Twitter while another noted
Funny to see @RobinhoodApp promoting Finance Democracy whilst blocking people who are exactly exercising finance democracy from buying $GME, $AMC and $NOK. pic.twitter.com/fjkDcupZxT
— Derek ???????????????????? (@derekhkwok) January 28, 2021
And in his letter this morning Tom Woods called it “The Gamestop Rebellion”, observing:
If the average American suffers a loss, that’s a darn shame. If big players suffer a loss, shut everything down!
Mike Swanson at WallStreetWindow assembled a truly dizzying set of charts of the issues affected and noted the juxtaposition:
These are all epic short squeezes and the traders on the internet, many of whom are apparently Robinhood traders, are celebrating and going wild, but on CNBC and much of the mainstream media there is outrage and a call for regulation as the short squeezes are crushing big money hedge funds short these stocks.
This is all indicative of a creeping two-tier system I’ve been writing about for years, and talk about on my mailing list. Thanks to The Great Reset this now looks to be veritably enshrined in law under this asymmetrical governance structure euphemistically called The New Normal.
The New Normal means the Fed will print up money to buy the bonds of worlds largest companies, career politicians (or their spouses) will make millions buying up call options of those very same companies.
The New Normal means that big box stores get to stay open while small and independent businesses are declared non-essential and ordered closed, indefinitely.
And then when the people on the wrong end of this stick get paid a pittance that amounts to asswipe money, and they push it into the stock market and end up making a killing, what happens?
The ref throws a penalty flag from the sidelines and the rules get changed.
Here’s Jim Cramer talking with Pacific Capital’s Herb Greenberg who vehemently calls what is happening “manipulation” and “illegal”, going so far to trot out the “this could be the work of foreign powers” card. Uh huh.
Cramer, for his part is being a bit more stoic about it, perhaps because he knows he’s on record and on film describing how he routinely manipulated stocks back in his hedge fund days:
“You know a lot of times when I was short at my hedge fund and I was positioned short meaning I needed it to open up, I would create a level of activity beforehand that could drive the futures. It doesn’t take much money.
Similarly if I were long and I would want to make things a little bit rosy I would go in and take a bunch of stocks and make sure that they are higher, you know maybe commit five million in capital do it.
And I could affect it. What you’re seeing now is maybe it probably is bigger market now, maybe any ten million capital and knock the stuff down but it’s a fun game and it’s a lucrative game “
No better example exists of The Great Bifurcation between Wall Street and Main Street than CNBC and Jim Cramer:
When Main Street companies lay off workers, it’s the way of the world but the stock could be a buy, but when a bunch of bankers and hedge funds blow themselves up because they levered up on bullshit derivatives that unceremoniously imploded, as Cramer’s now legendary meltdown during the GFC illustrates: that’s a crime against humanity.
This clip never gets old. It bears noting that in the opening seconds of Cramer’s meltdown were the words “forget the investors”. He’s beside himself with anxiety and rage because it’s the bankers that are going down.
You don’t have to be reminded of this anymore, because WallStreetBets has forced it out into the open.
The system is structured so that Joe Public loses, and the Establishment always wins, even if they have to change the rules or endlessly move the goalposts to do it.
Will WSB Be The Tipping Point that Changes Investor Psychology?
I wonder if this entire chapter could be the tipping point toward a larger change in investor psychology. Not necessarily warning of an impending crash, but we are trading up here at heights that make nosebleed levels look rather tame.
How are the stunts pulled by WallStreetBets any different from money-losing unicorn pumps, SPACs, ETFs of SPACs?
Until now, investors were happy to go along with all this and pretend it was normal and sustainable. One of things WSB has done is shine a light on the insanity and manic euphoria. If what they’re doing is somehow offside or crazy, so is everything else.Â
In the 2008 GFC I was amazed at how fast the overall sentiment flipped over from greed to fear. What if one of the unexpected side effects of all this that investor sentiment shifts ever so slightly, as enough people think about getting more defensive, maybe taking some profits off the table, and looking sidelong toward the exits….?
So the little people joining up to smash HF shorts is now considered Hate Speech. I like your forward-looking view great article thanks!
Mark, thank you for your posts. I take your point that "The system is structured so that Joe Public loses, and the Establishment always wins…" But, having said that, "What is the end game of the grow-the-government deal makers movement since Teddy Rosevelt and the copy cat Hoi polloi buying into the resulting intellectual toilet water of Mister John Maynard Keynes? Cecil R. Williams
I actually am supportive of the intervention here. 'Mob rule' / crowd mentality is not healthy in any sphere of society (as we've observed throughout 2020 during BLM riots, Antifa CHOP/CHAZ, Capitol mob, etc.). This is price manipulation, pretty simple–except where the guilty party n > 10,000.
It's not a stunt by WSB, they just like the stock, to the moon. Hold GME crush the hedgies.
So Mark I generally love your stuff because I'm similarly oriented in my outlook. (Maybe we listen to the same media?….Who knows). I'm a pleb and not an insider and I have watched both inspired and horrified by the WSB movement blowing themselves up (financially) against the street and giving it to a few suits – and some suits are smarting. But, like most things, its way more involved and nuanced than "bailing out the hedgefunds".
There is no doubt that the markets resemble a casino, and the house always takes more than it gives. But unlike a casino there are a lot of cogs in the wheel that the casino doesn't own, and much of what happened with Robinhood is because of the inefficiency of the cogs, financialization, and the great western USD hegemony (more on that below). The worst case scenario is Robinhood going insolvent and taking all the shares of the clients assets (shares/cash) they have in custody. That was a very real possibility, and there would have been nothing illegal about it. Every Robinhood customer would have nothing but an IOU and the courts to go after their assets as the company wound its way through bankruptcy. Robinhood did what they had to do to survive something they didn't foresee was ever a possibility. GO WSB!!! But the users all signed up for Robinhood knowing that if something is free then they are the product. No fee trading, awesome, but Robinhood isn't actually like Robinhood of old. It isn't a charity, its a well marketed data gathering entity that sells its "stock flow" information to someone else, who then uses that in ways that could fill a lot of blogs…. I have learnt more about the inner workings of this casino in the last week than in decades. For that I can only thank the WSB peeps that sacrificed their $ and are going to be left holding the bag.
So, that whole USD hegemony thing. We have crony capitalism, corporate welfare, inside deals, etc. etc. The system is the absolute worst….except for all the others. For the life of me I cannot imagine what replaces the USD global hegemony that would be better. But hey, I am irresponsibly long in crypto……