WallStreetBets, GameStop & devil take the hindmost

Watching the WallStreetBets/GameStop saga unfold is like watching a movie like “Lone Survivor” where you already know that the characters are doomed to a tragic death, you just don’t know how it’s going to happen.

In many ways, it is all-too apt exclamation point for an era where so many have decided that truth is irrelevant, and that like the Dreamstone in the underwhelming Wonder Woman 1984, all you have to do to get what you dream of is to want it badly enough.

Here are my thoughts on the different layers of this excrement sandwich:

1) This madness does not disprove the efficiency of capital markets. In the long run, stock prices do reflect the ability of companies to earn profits. But in the short run, massive anomalies can and do occur. In 2008, Porsche triggered a short squeeze on Volkswagen stock that added nearly $200 billion to VW’s market cap in a single day, making the GameStop caper small potatoes.

2) Stock prices reflect supply and demand. Stock prices go up as long as there are more people who want to buy than are willing to sell. This results in the “greater fool” theory, which says that investors can make money on an irrationally exuberant stock as long as they can find a greater fool to whom they can sell their shares. Every single person who buys GME right now needs to ask themselves when they are going to sell; a crash is inevitable, because at some point there will not be enough additional demand to prop up the price, especially as holders increasingly look to sell.

3) This story always ends the same way–devil take the hindmost. At some point, someone will be left holding the bag, and that someone is likely to be a large group of retail investors. There will be bankruptcies, suicides, divorces, and Congressional hearings. And very little will change.

4) This is not a story about Reddit beating Wall Street. The small investors who think they are taking revenge on the one percent are going to lose their shirts. A few very lucky or very cynical people will make a lot of money, but this is a zero-sum game. Every trade funnels more money into the wallet of Citadel, which is the market maker Robinhood uses; it’s death by a jillion cuts, since each trade lets Citadel collect the bid-ask spread. No matter who wins or loses, Citadel wins (as does Robinhood).

5) There’s an old saying–don’t try to con a con artist. Wall Street has spent hundreds of years developing its cons; how gullible do people have to be to think that they can beat Wall Street at its own game by reading a few posts? Sure enough, Wall Street struck back by convincing brokerages to stop accepting “Buy” orders for GME; the iron law of supply and demand says there is only one possible outcome–a massive crash.

6) That being said, Robinhood placing stock trading restrictions isn’t “censorship”; it’s an attempt to protect its users from themselves. The more the bubble inflates, the more Robinhood users will end up losing in the end. This may be the one time Robinhood actually did something to benefit its customers.

7) If Redditors move on to other stocks, Wall Street will be ready to profit from similar meme trades. You can surprise Wall Street once; by the second time, it will already have figured out how to profit from you.

8) The whole affair reflects and illustrates the despair and nihilism of our times. A) Individuals believe the system is rigged against them. B) They think they can’t possibly win. C) Then they find what they think is a way to smash the system. D) They eagerly jump on the bandwagon, claiming that they believe it will make thing better, but deep down knowing that it won’t, and not caring because they are already full of despair. E) When wiser people try to save them from themselves, they respond with vituperation and threats of violence. F) After everything falls apart, a few people repent and regret their actions, but most of the survivors dive deeper into another, possibly crazier hole.

Whether it’s GameStop, Donald Trump, or Covid-19 denial, the pattern is the same.

Here in the real world, we don’t have an immortal Amazon demigod to convince people to renounce their wishes. We have to be our own heroes, and fight for the principle that truth and hard work are more powerful than wishful thinking and mobs.

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