A group of retail investors is waging war on the “Wall Street elite” … how they’re driving up prices … another sign of the Technochasm
We’re watching a war …
The battle raging between the Reddit “WallStreetBets” crowd and their enemy, the perceived “Wall Street fat-cats” is astonishing.
If you’re less familiar with what’s going on, in today’s Digest, we’ll get you up to speed.
If you have been following, you may have read articles suggesting this “retail bros versus pros” is a sign of the top of this bull market. The idea is that this craziness is illustrative of the irrational behavior that accompanies the final days of a booming stock market before the bottom drops out.
While that may certainly be true, any news outlet that makes a short-squeeze and wild investor behavior the focus of its narrative is missing the far bigger story …
We’re seeing a class war playing out in the stock market.
It’s evidence of a sharp anger that’s been simmering for years.
In 2020, we saw mass social protests over perceived social and economic injustice. What we’re watching right now is the investment manifestation of this outrage.
It’s all tied to something that regular Digest readers know well — the Technochasm. In other words, the wide and growing economic divide between the “haves” and “have nots” in today’s society.
Let’s jump in.
***The backlash of the Reddit retail investor
Reddit is an online platform where users find communities centered around a shared interest.
One of these sub-communities is called WallStreetBets. It’s generally comprised of small-account retail investors who have used the site as a central posting board for stock tips and stories of market success and failure.
In recent weeks, this group has begun acting/investing in unison. They’ve been targeting a handful of down-and-out stocks, driving up their market prices in extraordinary fashion.
Their main target has been GameStop (GME) — a troubled videogame retailer that has faced headwinds over the last few years.
For most of 2020, GME’s stock traded for under $5 per share. But in September, it began climbing as the Reddit-investors began their campaign.
This focused investment really began snowballing here in 2021, and the stock has gone vertical.
Below, you can see GME exploding nearly 9,000% since July 1 of last year.
So, what’s actually happening here?
***We’re witnessing an angry attack on the perceived “Wall Street elite”
First, it’s impossible to ascribe the same motivation to thousands of small investors. Many are simply “me too” investors, looking to make a quick buck.
And, by the way, don’t confuse a “quick” buck with just a “few” bucks. Some of these small investors have made hundreds of thousands, even millions of dollars, in only weeks.
Here’s one such screenshot from the Reddit forum:
Though quick, big money is the draw for many, if we zero in on the original purpose of this group mobilization, we find a different motivator — anger at the system.
The apparent leaders on the posting board have been picking their stocks based on one commonality …
Each one is the target of a large short-position held mostly by professional fund managers.
To make sure we’re on the same page, a “short position” is basically a bet against a stock. The individual or fund shorting the stock believes it’s going to drop in value. So, the shorting party in effect borrows shares to “sell” the stock at today’s price, with the idea that it will cover (buy) their short in the future when the stock has fallen to a lower price.
A successful short-trade makes money in the traditional “buy low/sell high” fashion; it’s just that the order of those transactions is reversed.
Back to the Reddit-investors …
They’ve been trying to inflict financial pain on investment shops that have taken large short positions in certain stocks — and two such groups stand out …
Melvin Capital and Citron Capital (with backing by Citadel Capital and Point72).
Melvin and Citron are seen by the Reddit crew as Wall Street fat cats — unscrupulous, money-hungry multi-millionaires who are betting against struggling companies purely to grow even wealthier as a company’s stock price crumbles.
The result has been anger from the Reddit-investors, and a desire to fight back.
With swarms of Reddit-investors pouring money into these stocks, it drives up stock prices, leading to huge paper-losses for the institutions that have been shorting the stock. At a certain point, the losses are too great, so the shorting party has to buy to close their position — this further inflates the stock price.
It appears to be working …
It’s reported that both Melvin and Citron have closed out of their GameStop short position, taking extraordinary losses. However, many Reddit-users feel this is a false, coordinated effort from the investment shops and the financial media and that the short positions still exist.
As such, the GME-buying has continued through Thursday morning as I write with the Reddit forum filled with cries of “HOLD!”
***Why are these Reddit-investors so angry?
This post from Reddit-user u/consygiere sums up the mindset well:
Retail does not want to be manipulated anymore.
For decades Wall Street was manipulating securities, getting away with it, and blaming it on others.
Through the media, bullshit target prices, naked short selling, or other forms of manipulation mentioned here (Kenneth, this one’s for you). Citadel and many other MMs – don’t misinterpret with Market Makers, we’re talking about Market Manipulators here — got away with their dirty tactics to make shitload of money and screw people over.
They finally got caught in their own game and tried everything to turn it around, but Shitron didn’t work, the media didn’t work, more aggressive selling didn’t work. Now they’re calling through some random crooks for regulations.
Regulation for what? Exchange of ideas? Our own Due Diligence? Winning against you in your own game?
Yeah, in most cases your buddies at the SEC would gladly do so if you tell them anyway. This time though? People finally came to the realisation what the fuck you guys are doing over there.
It was known by many since 2008 but people forgot quickly, and now is the time to remind them that you are no one else’s friend but your crooked buddies …
Hence, dear Market Manipulators:
Do not mislead again. Do not manipulate again. Get your facts straight. Retail matters, and you will see it.
The following graphic taken from the Reddit page sums up everything a tad more succinctly …
It’s important to understand that these Reddit-investors don’t see themselves as inflating a stock price only to leave a fellow retail investor who buys later holding the bag.
Rather, they believe that their profits are coming from these professional investment shops, like Melvin, when the shops are forced to cover their short positions.
The anger isn’t limited to short-sellers. Anything that feels too “fat cat” is on the receiving end.
Here’s an example …
***What we’re witnessing is much bigger than a group of small investors clambering into the same stock in a coordinated effort to make a buck
As noted at the top of this Digest, this is just the latest manifestation of the division that’s widening in our nation.
It’s not just about stock market gains — it’s about people who are raging against what they perceive as a system that’s rigged to make the elite wealthier, while keeping everyone else on the outside.
The below post from Anthony Scaramucci sums it up:
If you browse the Reddit forum, you’re not seeing braggart stories about blowing investment gains on, say, a Ferrari or a Rolex.
Instead, you’ll see many users thanking the forum because the profits they’ve generated have enabled them to pay off onerous student loans, or fund medical bills for family members, or simply pay their own bills since they’ve been laid off.
***Regular Digest readers know the real story here — it’s the Technochasm
In short, this is Eric Fry’s term to describe the sharp, and growing, wealth divide in our world.
For newer Digest readers, Eric is our macro specialist, and the analyst behind Investment Report. He’s also a thought-leader on the investment implications of the Technochasm.
Though the foundation of this wealth-divide is complex and multivariate, in recent years, the divide has grown even wider thanks to one thing …
On one hand, cutting-edge tech products are simplifying our lives, making them far more convenient, and enabling some semblance of normalcy during this pandemic.
This is why Americans are happy to continue opening their wallets for tech, even those who aren’t necessarily earning high incomes.
On the other hand, all of these consumer dollars flowing toward tech companies reduces to one thing …
A wealth transfer.
It’s from the masses … to a select group of technology business owners, key employees, and investors …
And it’s a key factor in creating today’s sharp wealth divide.
Here’s Eric with more on the severity of the situation:
In 1980, the richest 1% of Americans owned about 30% of all household wealth in the country … and the bottom 90% owned about 24% of all household wealth.
But by 2012, the share of all household financial wealth owned by the top 1% had skyrocketed to more than 60% … and the share owned by the bottom 90% had plummeted below 10%.
In other words, the middle class is shrinking as rich families and big businesses accumulate fortunes and others sink below the poverty line.
And recent data is showing that gap … that Technochasm … is getting wider.
We’re seeing this wealth gap everywhere.
***Take Venice, California, where I live
A short walk from where I live is the Venice campus for tech giant, Google. A steel fence, wooden walls, and security guards protect a beautiful inner courtyard in front of Google’s buildings.
Outside these walls — quite literally on the sidewalk directly in front of Google’s fences — is a “tent city.” It’s a string of tents, tarps, and makeshift shelters that serve as home to some of the 40,000+ homeless in Los Angeles.
On Tuesday, I snapped this photo …
Source: Jeff Remsburg
This is a Lamborghini, priced well over $200,000 … parked in front of an endless line of the homeless tents … which abut the offices of the most valuable company in the world.
This is the Technochasm.
The Reddit-drama is simply another manifestation of this societal imbalance.
By the way, if you haven’t watched Eric’s entire research video on the Technochasm and what it could mean for your portfolio, I encourage you to view it by clicking here.
This Digest is running long so we’ll wrap up …
This GameStop drama is fascinating to watch. But make sure you understand what’s really going on. Even after the madness dies down, the underlying dynamic of the Technochasm will remain … and will continue to shape our world and the investment markets.
Have a good evening,