Inside the Subreddit That Blew Up GameStop
S1: Heads up before we get started, there is some swearing in today’s episode. Also, this is a fast moving news story where numbers are changing quickly. Well, tell me a little bit about yourself, I guess, as much as you’re comfortable telling me.
S2: Sure. I’m I’m a software engineer in the Southwest.
S1: This guy, we’re going to call him Jason. He’s a 36 year old dad. Jason is not his real name, but we agreed to give him a pseudonym because we’re talking about a sub Reddit he’s on called Wall Street Bets, a sub Reddit that is at the center of the chaotic last few days in the stock market. And he didn’t really want his employer to know about all of this. I asked him what he thought the first time he went on Wall Street.
S2: That’s my impression, was that these guys are absolute doofuses and it’s hilarious. It’s difficult to describe without swearing because they swear about themselves so much.
S1: It’s OK. It’s a podcast. You can swear Wall Street bets is like a lot of credit in that there are a bunch of people with screen names like Dr. Blunt or my mom looks at this, but these people are there to talk about investing, mostly day trading.
S2: OK, well, lately, this deep fucking value guy has been posting really in-depth due diligence, like this guy clearly knows what he’s doing. But also he’s called deep fucking value. Like, you get the weirdest dichotomy on there where there’s it’s incredibly childish and immature and you think, oh, this is this might be a really vile place, but then everybody’s posting their losses and it’s very, you know, upbeat about it.
S3: What Jason saying is it’s a community and this community helped push the stock for GameStop, the video game chain, you might remember, from the mall, which hasn’t even been doing that well. They helped push that stock up more than 600 percent in two weeks. Then it plummeted. All this led to a crazy stock market and a lot of opinions about who should get to trade and why.
S1: But back to Jason, after seeing an argument on Wall Street bets about why this failing company was worth investing in Jason about options, contracts on some GameStop stock, basically a bet where he’d make money if the stock went up. He says he made enough for a few nice dinners, but probably sold too early to make real money. I wanted to know why a dad with a regular daytime job was caught up in this.
S2: Anyway, it’s fun and I’ve been locked in my house for a year. I think, like millennials at this point, are dads with jobs who have been locked in their house for a year. Like we’re still the same people we got through 2008 and we’re just trying to stay entertained and we can’t all find PlayStation five. So this is another good substitute.
S1: They’re also kind of sticking it to the man because in making the price of the stock go up, they cost some very wealthy short sellers, mostly hedge funds, a lot of money.
S2: Nobody likes that guy when you’re playing craps, who’s betting against everybody, like there’s just this natural inclination to be against shorts.
S3: Today on the show, how a foul mouthed group of predators pushed GameStop value up ten million dollars overnight, captured the Internet’s attention and roiled Wall Street. I’m Lizzie O’Leary. And you’re listening to What Next TBD, a show about technology, power and how the future will be determined. And hey, also, GameStop, stick with us.
S1: This whole crazy story starts on Reddit, the Wall Street bet sub Reddit, where Jason got his investment advice. It started in 2012 and now has three point four million members. And as the frenzy around GameStop moved from the fringes to mainstream news, everyone has wanted to talk about it. It even came up in the White House briefing. Our team is, of course, our economic team, including Secretary Yellen and others are monitoring the situation. It’s a good reminder that. But I wanted to go back to the beginning to talk to someone who’s been watching Wall Street bets for a long time.
S4: I probably started noticing in twenty, seventeen, twenty eighteen.
S1: This is Brandon Kuch Kodet. He’s a reporter for Bloomberg News. And he started to notice that in between the trash talk and the meems, people on Wall Street bets were posting sophisticated stuff. Yeah, these were just individual investors, but they were sharp.
S4: People have missed for years and years and years now that there’s good ideas out there and that it was galvanizing this huge user base. And a lot of people want to look at it and say it’s sophomoric and all that. And certainly they’re saying things that you wouldn’t say and play company. Right. But it’s also probably not any worse than a regular banking trading floor for the most part. There’s a lot of interesting kind of cultural sociological things going on here, which is, you know, they have their own language.
S1: Well, let’s talk about some of that language, because there are like these terms that pop up 10, these diamond hands, paper hands, like certain emojis they use.
S4: Yeah. So 10 days is an easy one. That’s gains. And the simplified version of where that came from is the idea that rich people eat chicken tenders. So, yeah, Diamond Hands is basically saying you’re going to hold a stock or an option until you make money. Diamonds are strong diamond hands, the opposite of that being paper hands.
S1: You’re going to sell and cut your losses.
S4: Yeah, exactly. You’re going to sell before you make anything.
S1: A lot of this feels hard to understand because of jargon redit jargon and financial market, and it can make regular people feel like outsiders.
S4: One of the great crimes of finance and financial understanding, at least in this country, is that it has its own language. Right. And it has these complicated terms. The concepts themselves aren’t all that complicated. And so it makes you wonder if, like the reason we talk about finance and markets in these weird terms that don’t have meaning to most people is to keep most people in the dark.
S1: I want to go back to March of 2019, and there’s this post called the GameStop investment thesis, and it sort of lays out some of the reasons why GameStop went on this crazy ride. Can you talk me through some of the reasoning behind this investment thesis?
S4: Yeah, I mean, it was a classic value thesis. And whoever this is left and basically said this, that the company was treated as if it was already going bankrupt. But if you just look and you see how much cash the company had on hand, it wasn’t the case. This person looked and they said, like, now this is overdone, like this, there’s going to be some sort of bounce back.
S1: One of the things I was struck by, and this is kind of some some Wall Street fundamental stuff, right? Like on the one hand, you have the underlying business of the company, but on the other, there’s Reddit user looks at the amount of cash on hand that this company has and says, huh, they’d be able to use that cash to buy back their shares, which would drive up the price of any outstanding stock. So if I read a guy by someone, hang on to it. Yeah, that probably means the stock price is going to go up. Yeah.
S4: And that just shows that there’s a level of sophistication here. If you saw a lot of these arguments laid out the nuts and bolts of it, if you put it on a hedge fund letterhead, you wouldn’t blink twice like you really wouldn’t. I mean, it’s as good as anything that you’d see, like the on conference or someone pitching at Davos while they’re wearing the big ski jacket and yukking it up with TV presenters. I mean, there are smart people on here. There’s a lot of smart people in there. I mean, there’s a lot of people that are just following the herd. But guess what happens with hedge funds? They follow the herd as well. So there’s nothing sort of new or different about what’s going on there.
S1: Let’s stop for a second here and talk about GameStop itself, because we are talking about a company that was founded in 1984, had a pretty basic business model, like, let’s just sell some video games.
S4: Yeah, exactly. It’s a retailer. It’s a brick and mortar retailers. Andrew West said it’s a dying mall based retailer.
S1: Andrew Left is a pretty famous iconoclastic short seller.
S4: Exactly. And so that’s that’s been the perception of GameStop. And you have to wonder if some of that was the narrative got ahead of the facts. You look at the company like these people did, and it’s not good that their earnings have been going down. But they had more runway than anyone expected.
S5: And the other part that these people pieced together was Microsoft and Sony had this new console cycle coming out and the analysts that banks maybe thought they’re not going to have hardware drives for disks. And the people on Wall Street that’s unsurprisingly, are probably there’s probably more gamers on there than there are gamers in the ranks of analysts at investment banks sort of were like, no, that’s not a given. There’s a chance because of the size of these games that there will be physical discs.
S1: So people are going to need to go somewhere and physically buy them.
S5: Exactly. And the other part of that that’s connected is Sony and Microsoft, you would presume, want more retailers than less. They don’t want to just be beholden to only Target, only Wal-Mart to sell these things. And so the idea that maybe there are some ways that Microsoft or Sony could sort of help keep GameStop afloat, not not through direct intervention or anything, but just through their own supply chain, if you will. And these people realize that and they they were correct.
S1: It turned out there were drives for disks when the new systems came out. We know that now. But of course, this conversation was happening in March twenty nineteen. Back then, the original thesis, the GameStop investment thesis, didn’t get too much support on the sub Reddit. The top comments are all pretty much just personal insults about the posters, mom. But about six months later, things got more serious. Sayan Asset Management, a fund run by Michael Burry, revealed that it was pursuing the same strategy. And if that name, Michael Burry, is familiar, that’s because Burri was played by Christian Bale in the Big Short on Wall Street.
S4: They don’t even refer to Barry as most of the time. They just refer to them. Well, if Christian Bale is doing it. Oh, my God. And remember, he started his stock trading career on the Internet, on MSN message boards, and that’s how he got noticed.
S1: And so what starts to happen then?
S4: That wasn’t it was a good thing to know. It gave some people confidence. And it wasn’t until later in in twenty nineteen that this guy with the name Deep Fucking Value showed the goods. He showed he was invested fifty thousand dollars in options that he had already doubled to one hundred and fourteen or something like that thousand. And he was basically saying like you’re not going to lose on this. That started getting more and more and more people and then the stock again went up. Still going sideways, crashed during the pandemic, like everything else, and it’s around then that we clicked with people, that there is also all this short interest in the stock and that if the value thesis is right, there’s also this sort of rocket fuel underneath it.
S6: If the company does survive, which the shorts didn’t think it would, that at some point the shorts were going to have to cover themselves and that was going to send the stock way, way, way, way up. When we come back, the rocket fuel.
S1: Let’s dig into what happened on the Reddit step by step and unpack a little of what Brandon’s been saying, the predators like deep fucking value. We’re all in on GameStop. They made a lot of bets that there was something about GameStop that was more valuable than the market was currently able to see. But at the same time, other people, powerful people were betting against GameStop, hedge funds and big Wall Street investors were shorting the stock. When you short a stock, you borrow shares at one price. Sell them into the market and agree to buy them back if the price goes down. You make money on the difference, but there’s a catch. If the stock goes up, it’s the financial equivalent of getting caught with your pants down because you have to buy the stock back at the high price and lose your money. And the creditors realize that if they bought enough GameStop stock, that is exactly what would happen to the short selling hedge funds. The price would go up. The big guys would lose money and the Internet investors would win. It’s called a short squeeze. If you are a creditor, you were delighted.
S4: It’s the perfect storm. It’s everything that you’re looking for as an investor, if this is if this is the way you invest. You can’t hope for any more than this.
S1: And so the folks on Wall Street bets went for it. In April of twenty twenty, someone named Senior Hedgehog wrote a post called The Biggest Short Squeeze of your entire life, making the case to buy shares. The stock rallied 22 percent the next day, another 26 percent. The short sellers were frantically trying to buy stock to cover their losses. That made things go even higher. Plus, a well-known investor named Brian Cohen had taken a stake in GameStop, lending the play more credibility. It kept going for months, but what was so captivating is that this band of Internet weirdos had driven the stock to the ceiling and cost big investors millions of dollars. You wrote this phrase that I think gets at why this story is so interesting. It was at that point, and I’m quoting that the value trade thesis and the idea of forming an unofficial cooperative to swarm the stock coalesced into what would eventually push the shares to the Promised Land, a chance to inflict pain against Wall Street.
S4: You know, in the full scheme of things, you know, it makes you think back to the financial crisis where everyone that you want to blame for blowing it up walked away almost unscathed. There was the bank bailouts and all of that. But for the most part, the big ones just came right back and went back to business and nobody was harmed. It’s almost like being able to get a little bit of that back. You know, in a sense of Main Street that was killed during the financial crisis is now getting to take their shot at the big boys.
S1: One thing that’s important to note is how a lot of the creditors were able to take their shot at Wall Street trading. Stocks used to be expensive. Only rich people could do it. But now there are apps like Robinhood where you can trade for nothing or next to nothing.
S4: And that made it possible to trade actively without cutting into your capital base. I mean, you’re not going to get eaten up by fees, which is a huge, huge issue if you’re going to trade a lot. The other thing and people have commented on this is the Robinhood app. It looks like a game. It’s this gamification of trading concept, I think, that brought in people who weren’t sophisticated traders for the most part. I don’t think anyone that you see doing like the value thesis is on here needed Robin Hood to look like a game to be drawn in. And to be fair, most of them that are sophisticated aren’t using Robin Hood, but it certainly helped bring in kind of the average person from the street who’d never played in the market before.
S1: When I think about what’s happening now, it feels like. We are close to a cliff. I look at these numbers, a stock up for one hundred and eighty percent in a week, that’s insane.
S4: It’s certainly not normal, but there is the bottom here. What’s also not normal is hedge funds going to one hundred and forty percent short interest. We can look at the Wall Street bets angle and we can look at the stock price and say, oh, that’s crazy. That’s how can people do this? I would say flip it around. How could the hedge funds go one hundred forty percent short like the craziness in this whole thing? It didn’t start with read it. It absolutely didn’t start with read. It started with the hedge funds taking this too far, too many people went in to the straight and the short interest data bears that out.
S1: Before I came in to talk to you, I read an op ed sort of hand-wringing about this from Arthur Levitt, the former chair of the Securities and Exchange Commission, who is basically about as establishment as you can get, saying this is a bad idea. People are getting carried away. They’re treating this like a game. We need to think about regulating or tackling misinformation. Do you think that’s a good idea or do you think that’s something it’s actually going to happen?
S4: Certainly, we’re seeing the people on Wall Street that’s talk about this and talk about the implications and talk about how someone might try to regulate them. And from my understanding, that’s going to be very, very tough. The arguments that they lay out on the forum is that, you know, what could happen here is that the hedge funds and financial industry lobbyists might try to push their weight around. They might try to go and give credit a hard time. If this happens, if people try to cause a stir with read it and try to cause problems for it and call them into litigation, how long will Reddit stick their neck out there for Wall Street that now things have gotten dicey?
S1: GameStop shares fell dramatically. Politicians are muttering concerned things. Robin Hood actually halted investors ability to buy shares. Conspiracy theories are flying around the Internet and fingers are being pointed everywhere. It feels a bit like the last act of a Tarantino movie. How does this end?
S4: Well, I mean, you know, there’s a little bit of a prisoner’s dilemma going on now, like how long do these people stay together in so much as they are together? How long does the crowd stay there, trust each other and not start walking away and taking profits? Because there’s a hell of a lot of profits on the table right now. So it’s going to happen when individuals start deciding, like, OK, I’ve made enough and then you’re going to see everyone rush for the gates.
S3: Brennan could good and thank you so much. Thank you. Brandon Cutch Codan reports for Bloomberg News. All right, that is it for us today. TBD is produced by Ethan Brooks, edited by Allison Benedikt and Tori Bosz. Special thanks to John Fisher for this episode. Alicia Montgomery is our executive producer. TBD is part of a larger what next family. And it’s also part of Future Tense Partnership of Slate, Arizona State University and New America. On Wednesday, I’ll be moderating a Future Tense event on the Biden administration and policymaking for the future. You can learn more at Slate Dotcom live. Also, I want to recommend you go back and listen to Monday’s episode of What Next? Mary talked with journalist Farai Chideya about how the media failed during the Trump years. It’s a really good episode. All right. Have a good weekend. Mary will be back on Monday. I’m Lizzie O’Leary. Thanks for listening.
