The Real Story Behind the Reddit Backlash

On Saturday, we took a look at the battle raging between the Reddit “WallStreetBets” crowd and “Wall Street fat cats.”

Reddit Wallstreetbets

Source: Shutterstock

In that report, I told you that the GameStop Corp. (NYSE:GME) short squeeze and other retail trader-led “rebellions” like it are probably not the future of the stock market … but they are likely to become a part of the stock market.

And so, we should become more familiar with what’s going on.

Why are these Reddit traders 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 …

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.

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 from both the Left and the Right over perceived socioeconomic injustice. What we’re watching right now is the investment manifestation of this outrage.

It’s all tied to something that regular Smart Money readers know well — the wide and growing economic divide between the “haves” and “have nots” in today’s society.

That’s what we call the Technochasm

A Rage Against the System

To review, Reddit is an online platform where users find communities or forums centered around a shared interest.

One of these sub-communities is called “WallStreetBets.” It’s generally full of small-account retail traders (these folks aren’t generally “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 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, a troubled video game retailer that has faced headwinds over the last few years. For most of 2020, GME’s stock traded for less than $5 per share. But in September, it began climbing as the Reddit Army began their campaign.

This focused trade really began skyrocketing here in 2021, and the stock has gone vertical.

Below, you can see GameStop exploding nearly 9,000% since July 1 of last year.

So, what’s actually happening here?

First, it’s impossible to ascribe an identical motivation to thousands of small investors. Many are simply “me too” traders, looking to make a quick buck or simply join the crowd.

And, by the way, don’t confuse a “quick” buck with just a “few” bucks. Some of these folks have made hundreds of thousands, even millions, of dollars in only weeks.

Though quick, big money is the draw for many, if we look more closely, we find another motivator: anger at “the system.”

The apparent leaders on the WallStreetBets 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.

Many Reddit traders say they are trying to inflict financial pain on hedge funds and other investment shops that have taken large short positions in certain stocks. Two such groups stand out: Melvin Capital and Citron Capital (with backing by Citadel Capital and Point72).

The Reddit crew see Melvin and Citron as unscrupulous, money-hungry multimillionaires who are betting against struggling companies purely to grow even wealthier as a company’s stock price crumbles.

The result has been a desire to fight back.

With swarms of Reddit traders pouring money into these stocks, it drives up stock prices, leading to huge paper losses for the short sellers. At a certain point, the losses are too great, so the shorting parties must buy to close their position, further inflating the stock price.

It appears to be working. Melvin and Citron have taken extraordinary losses.

What you’re seeing here is bigger than a group of small traders clambering into the same stock in a coordinated effort to make a buck.

As noted at the top of this Smart Money, this is a new manifestation of the division that’s widening in our nation.

It’s a backlash against the Technochasm.

How the Technochasm Fits In

In addition to going after big gains, the Reddit traders are raging against a system that they perceive as rigged to make the elite wealthier, while keeping everyone else on the outside.

If you browse the Reddit forum, you’re not only seeing stories about blowing investment gains on, say, a Ferrari or a Rolex. You’re also seeing many users saying the profits they’ve generated have enabled them to pay off onerous student loans or medical bills … or simply to pay the bills they’ve amassed since being laid off.

That’s the Technochasm … the term we use here to describe the sharp, and growing, wealth divide in our world.

Though the foundation of this wealth gap is complex, in recent years, the divide has grown even wider thanks to one thing … technology.

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 promotes a subtle wealth transfer from the masses to a select group of technology business owners, key employees, and investors.

That is the key factor in creating today’s sharp wealth gap … in creating the Technochasm.

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 wealth gap is getting wider.

The Reddit drama is simply another manifestation of the Technochasm.

If you haven’t watched my entire research video on the Technochasm and what it could mean for your portfolio, I encourage you to view it by clicking here.

This GameStop/Reddit 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.

Make sure you’re prepared.

On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends … before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south.

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