The Gamestop, Robinhood, Citadel, Reddit, Ryan Cohen, WallStreetBets, DeepFuckingValue saga is some seriously monumental shit. It represents major shifts in the world. It highlights one of the largest problems we face today, inequality, and will serve us well to pay close attention as this situation plays out and to look to history for how it will affect us.
The market and the economy, while related concepts, bifurcated long ago. This accelerated in the late ’90s or early ’00s with the rise of the mega-bank and continued with the “bailouts” of the ’08 Great Recession. JPMorgan, BlackRock, and others like them took such large positions in public markets that the everyday person, the individual, the “retail investor,” just doesn’t carry the weight they used to.
When unemployment rose to historic levels in the past, lower aggregate earnings meant retail investors needed to extract cash from the market for use in everyday life, thus deflating the market. Economy gets worse, market suffers. Seems clear, right? No longer the case. “Stock ownership among the middle class is pretty minimal,” said Ed Wolff, an economist at New York University, to The New York Times. While a recent Gallup poll shows that 55% of Americans own some stock, the Federal Reserve shows that less than 14% own stock directly.
As the general store closes because covid nation can’t even leave the house, Amazon rakes in the new customers and a surging share of wallet. This drives further separation between market and economy. Nir Kiassar said this on Bloomberg: “The market is not the economy. Its job is to tabulate investors’ consensus views about the future of publicly traded companies. It pays no attention to private businesses or government or other important parts of the economy.”
Small, private businesses create nearly 50% of jobs in the U.S. But even with unemployment at historic levels, peaking at over 14% in May 2020 before falling back down to about 7% just before the new year**,** we’ve seen no correlation to market growth. The poor get poorer, and the rich get richer is what we’re hearing. The market pays no mind to these changes.
So what specifically is the problem? Is it that the markets are broken, or is something larger showing itself through the functioning markets? The problem underlying all of this is inequality. Inequality leading to income inequality, rules inequality, opportunity inequality, the establishment vs the people. Inequality is the gravest challenge we face today (right there with climate) and could represent the most prescient issue we can address to preserve the well-being of society.
Inequality has been the driver of the demise of countless societies throughout history. Take this excerpt from The Lessons of History, by Will and Ariel Durant,* *one of my all-time favorite reads for its concise summary of the most critical teachings from the past:
We conclude that the concentration of wealth is natural and inevitable, and it’s periodically alleviated by violent or peaceable partial redistribution. In this view, all economic history is the slow heartbeat of the social organism, a vast systole, and diastole of concentrating wealth and compulsive recirculation.
While that’s a difficult pill to swallow, like Neo, we don’t have more than two choices here. The red pill, peacefully redistribute wealth, or the blue pill, in Durant’s words, violent redistribution.
They provide another example through history: “In the Athens of 594 B.C., according to Plutarch, ‘the disparity of fortune between the rich and the poor had reached its height so that the city seemed to be in a dangerous condition, and no other means for freeing it from disturbances… seemed possible but despotic power. The poor, finding their status worsened with each year — the government in the hand of their masters, and the corrupt courts deciding every issue against them began to talk of violent revolt.”
And another, “The French Revolution came not because Voltaire wrote brilliant satires and Rousseau sentimental romances, but because the middle classes had risen to economic leadership, needed legislative freedom for their enterprise and trade, and it’s for social acceptance and political power.”
The scary summary, of their much more eloquent compendium, is that this will lead to some sort of revolution. This is going to happen again, it always does. We need to pay attention to history.
It may sound like a dramatic or pessimistic view, but this is an already enormous problem rapidly increasing before our eyes. This data from Pew Research sums it well: “In 1989, the richest 5% of families had 114 times as much wealth as families in the second quintile (one tier above the lowest), at the median $2.3 million compared with $20,300. By 2016, the top 5% held 248 times as much wealth as the median. (The median wealth of the poorest 20% is either zero or negative in most years we examined.)” If that’s not enough, the pandemic has exacerbated this reality.
So, inequality starting with income always happens, and always will because of this little devil of a concept called human nature. It’s an evolutionary inevitability that we, humans, will optimize for our own outcomes. It starts with keeping our families safe, a cave to live in, a fire to keep us warm, and a plant or animal to eat. The problem is human nature rarely stops there. We will, collectively and on average, always over-optimize. As a hero of mine Ben Franklin says, “Our necessities never equal our wants.” Some will outperform at delivering on that self-interested nature, and, in Durant’s words, “the concentration of wealth is a natural result of this concentration of ability, and regularly recurs in history. The rate of concentration varies (other factors being equal) with the economic freedom permitted by morals and the laws.”
So what’s an intelligent and empathetic person to do? Do what you can to slow down the cycle. I was asked recently how a capitalistic entrepreneur could be so supportive of the
The most self-interested thing that a wealthy person can do is increase taxes and make sure basic human rights are delivered. It just so happens to be the right thing to do, that is if you care about anyone less fortunate than yourself. How about an education that doesn’t put you in lifelong debt, a job, if you want to work, and a basic healthcare infrastructure such that getting sick doesn’t unwind your whole economic life. None of these should be too much to ask, and these basics are step one in preventing a revolution.
So, back to Gamestop. What the hell is happening? The rules are being written, broken, changed, manipulated, and even controlled by “the establishment,” the .001%. But first, understanding shorts.
“Shorting”, for those who don’t know, is when you borrow a stock (from someone) and sell it on the market expecting the price to go down. You eventually buy back the stock at a lower price, return the borrowed shares, and pocket the diff. — @EndTwist, Twitter
We have the big banks making up the rules as they go. They are literally called market makers, and they are certainly not concerned with the well-being of the retail investor. The problem for them is that their shortsighted view, driven by the optimization of earnings, their legal obligation to shareholders, is what will eventually break them. A hedge fund called Melvin Capital had a huge short position against $GME. With all the short positions there were over ~140% shorts. More shares borrowed to sell now and buy lower when it dropped than were actually available in the world, i.e. 100% of shares. Those holding short positions were effectively forced to buy the stock as it goes up to “limit downside.”
The wonderful internet, lead by the now legendary /DeepFuckingValue a Reddit moderator, saw this (btw, they realized it over a year ago) and exposed this reality to the masses. He convinces this group /WallstreetBets to start buying. It all started with the investment from a recently made famous e-commerce entrepreneur Ryan Cohen. Cohen’s original position in $GME was 9M shares, at $8/sh. If $GME trades at $375 (1/28/21 it’s at $325/sh) it will be worth $3.3B, exactly what he sold Chewey.com to PetSmart for in 2017. He is a hyper-concentrated, value-oriented investor which is what drew him to GameStop in the first place. In fact, he only holds 3 stocks, $AAPL, $WFC, and now a metric shit ton of $GME. Anyway, as this mob of Reddit coordinated, investors bought and drove up the stock Melvin was then required to buy more “loss-limiting shares,” and all this energy does nothing more than skyrocket $GME shares, a now self-perpetuating cycle. **(Update: $GME down to $63/sh on 2/5 Cohen’s position at ****only ****$550M)*
The messed up part is that Citadel, the bank that funded a huge part of Melvin Capital Mgmt, also is the primary “trade processor” of Robinhood. Robinhood is the consumer trading app with “free trades” that use Citadel to book the majority of their trades. So in reality Robinhood the app takes trade orders from the poor and books the trade through the rich, the opposite of the fairy tale Robinhood… I’m being very loose with the terms here, but you get the point.
The really messed up part, Citadel, likely to protect their exposure in Melvin, called Robinhood and asked, or told, Robinhood to stop the ability to trade $GME. This is the rules to the game being rewritten in favor of the big guy, hurting the small guy, and aside from this being likely, and hopefully provably illegal, it is a PERFECT representation of the inequality that exists in the world.
I believe we’re seeing an economic and societal problem playing out in the markets, but not a market problem itself. After all, why would this phenomenal situation with Citadel, Robinhood, and Gamestop have anything to do with say Apple, whose quarterly earnings just topped $100B in a single quarter, or the fact that Amazon is building one of the most societally embedded, consequential, and long-term focused companies of all time? Why do the power of the masses on Reddit and the internet broadly affect the earnings of “blue chip” stocks like McDonald’s or Costco? Hint: They don’t. If the market’s job is to “tabulate investors’ consensus view about the future” this may change trading practices, it may inform where we are on the timeline of inequality fundamentally disrupting our society, but I’d argue it doesn’t change market fundamentals.
All that said, this doesn’t mean there aren’t reasons to be concerned with the market, or that there is no bubble happening. While this may not represent a market bubble it doesn’t mean we don’t have a problem. We most certainly do. We need to look at inequality with a sense of empathy and a sense of urgency. Humanity is at risk. And some of our biggest issues may first play out in how money is managed. We need an inquisitive, informed, and action-oriented posture and heed this final insight from The Lessons of History, which I obviously recommend.
History reports that the men who can manage men manage the men who can manage only things, and the men who can manage money manage all.