Good Morning John I wasn’t going to do this!
But then I saw a former head of the SEC on CNBC
comparing the freaking Gamestop shortsqueeze to the SIEGE OF
THE CAPITOL and I got too mad. And so now I’m here.
I think it’s fairly easy to pull back the curtain here and talk about why
this happened, why it doesn’t mean that you shouldn’t have faith in
the stock market, and why it is nothing like the siege on the capitol.
Gamestop is a mall retailer that
sells video games. And so it’s been struggling. Its current business model
is not well suited to a pandemic, or the future in general. A bunch of
finance people noticed this, it’s not a complicated thing to notice.
And they want to make money off of that. They might not own
gamestop stock, they didn’t buy it when it was high so they can’t really
sell it when it’s low. They can buy it low and sell it lower but the way
to really make money off of this is to make a bet. To bet that it will go down
a certain amount in a certain amount of time. And just like in Vegas, when your bet
gets more specific you payout when you win will be higher. They then make
these bets public, the rest of the market sees it and it actually drives the price of
the stock down. But then someone notices that Gamestop isn’t actually
doing that poorly. They’re sitting on a fair amount of cash, people are
coming in and buying PS5s, they’re not doing well, but they’re not going
bankrupt. So those people start to buy Gamestop stock. And then it stops
crashing. The people who made the bets get worried, so they make more bets,
so the market will see that and they will lower the price again. And this
works for an amount of time. They do it so much that they actually,
it turns out, have made promises to buy more gamestop stock than
exists on the market. Someone notices this and they say a fairly simple sentence,
“the finance guys have promised to buy so much Gamestop stock that if it
doesn’t go bankrupt or get purchased by a private equity fund, in the next
like 3 months, they’re going to have to buy Gamestop stock at whatever
the price is. And we can be the ones selling it to them. At whatever the price is.
Other people hear that and they’re like, you know what? You’re right.
So they do that. They start to push the price of the stock up probably
closer to what it actually should be worth considering that the company’s
not going bankrupt. And then the stock starts to increase in value a lot,
and that becomes news, and that brings more people in whether
they understand what’s going on or not. And at some point this starts to
transition to squeezing value out of hedge funds to just a little
mini pyramid scheme. Buying the stock because people were buying
the stock and then trying to get more people to buy the
stock so you can sell the stock so it’s higher. Because eventually
the price of Gamestop is going to go back down to a rational number.
From even the most optimistic perspective, Gamestop is worth
ten times less than what it’s trading at right now. As long as you’re
still squeezing the hedge funds its about that not about the price,
but eventually those squeezes run out and it has to go back
to a normal price. That is eventually going to happen
and on the way down people are going to lose a lot of money.
For everyone involved in this, this was a gamble. This was not
an investment. If you go into the discords where these things are
organized it’s just a bunch of people bullying each other not to sell while
slowly selling in the background to lock their profits in. Also, it’s very
exciting. And for certain brains, mine included, that kind of feedback
is dangerous and addictive. And we’ve seen the exuberance
of this sort of explode out into other places. Like there wasn’t a fundamental,
weird reason why dogecoin was suddenly worth more. The thing
here is that this instability was not created by Reddit. It was created
by hedge funds who promised to buy more stock than existed.
There are some real, terrible, arcane systems for manipulating our
world for the benefit of, like, the worst people. And it’s just
people. It’s not magic, it’s decipherable. And none of it has much to do
with how the market actually works, which is that people buy shares in
companies that they think are doing well and will do better, and
sell shares in companies they think will not do well. Now these
manipulating agencies should be regulated out of existence.
They shouldn’t be able to do what they do. But instead, at least in this one way,
they got memed out of existence. That door has been slammed
in their face by a few hundred people who figured something out, and a few
million people who were mobilized in a financial action unlike anyone
has ever seen ever in the world. Eventually people are
going to figure out how powerful they are. It will be interesting to see
what we do with that. John, I’ll see you on Tuesday.