My column from the March 2021 issue of the Greater Sturbridge Town & Country Living Magazine
By Richard Morchoe
Occasionally, the Matrix opens up and there is a glimpse of the reality that has been hidden from sight and we see our place in the world.
Okay, it has been years since I've seen the movies and they are only imperfectly remembered, so I don't know if an analogy of the Matrix opening makes sense. A better example might be the Wizard of Oz when Toto pulls aside the curtain to reveal who the wizard really is.
We had a similar incident last month when something that was not supposed to happen did. In the financial world, some connected people had their slam dunk of a deal upended and the business news channels were caught wondering how to view the event.
It looked like the usual short play. A company whose raison d'être was not a money maker had caught the attention of some people who saw that the price of the company's stock should go down. They would be more than happy to assist in the decline and make a few bucks doing it.
Now in buying stocks, one hopes the price will increase to sell at a profit. How can one make money doing that with a stock that is a dog?
To do it with a loser issue, it is sold short. That is the stock is borrowed and the borrowed stock is sold. The short seller waits for the price to go down and then buys back the stock and returns it to the owner.
The difference between what it was sold for and what it is bought back for is the profit.
The hedge fund cool kids had every reason to believe this would work well, except it didn't.
The company that was to be the victim, GameStop (symbol GME), sold physical copies of computer games when gaming had gone mostly digital.
Some hedge funds saw the opportunity and piled on, selling short more shares than actually existed. Selling short shares of stock that do not exist is called "naked" short selling. One may ask how is this legal? Well, it isn't, and was outlawed during the Great Recession when the financial industry learned its lessons and bad things were never to happen again.
Naked shorting continues to happen, but the jails are not full of the connected practitioners. As George Orwell had it, some animals are more equal than others.
The GameStop play looked good for the raiders, but as Scots poet, Bobby Burns noted, “The best laid schemes o' mice an' men / Gang aft a-gley.”
The internet has changed the world. Whether it has been for the better is a matter for debate,
Back in the Dark Ages, brokerages, charged hefty fees to execute stock trades. For the average person to become knowledgeable about a company's shares demanded, at the least, a trip to the library and the information there was probably incomplete. Thus, the number of people who invested who were not employees of financial businesses, was limited to those with resources and sufficient time to gain some expertise.
Now, in these latter days, all knowledge is online. Couple that with enterprises such as Robinhood that will execute customers' stock trades sans commission and the democratization of the market seems complete.
A multitude of people who follow WallStreetBets on the discussion site, Reddit noticed the shorting of the stock and like a hive swarm started buying GameStop. When that happened, the short sellers faced having to buy back the stock.
A huge fly in the ointment is, if there are enough buyers, theoretically the stock could keep going up forever. The hedge funds would go bust long before that. As the financial lumpen proletariat grabbed their digital pitchforks to storm the castle, it looked like it was going to happen.
The peasant army bought enough shares such that Melvin Capital, one of the biggest short sellers had to be bailed out to the tune of three billion dollars. The Bastille had fallen, Vive la révolution.
It was at this point that the curtain was pulled aside and not by Toto, or if you must, Agent Smith of the Matrix.
The establishment was not amused. On business news channel, CNBC, host of the midday show Halftime Report, Scott Wapner, had as a guest Chamath Palihapitiya, CEO of the venture capital firm Social Capital.
Wapner had a problem with the young billionaire. Palihapitiya was standing up for the insurgents and Scott came off as a valiant defender of elite capital, but Scott kind of tried to do it in a roundabout way of seeming to sympathize with the poor little guys.
Wapner suggested that GameStop was primed to fall and the little guy would need to be protected by regulation. Chamath did not say Scott was crying crocodile tears but responded, “Don’t all of a sudden look at a short squeeze, where money is being made by retail, and say, ‘Hey. they could be and may be the bag holder in the future, so let’s make sure they can never participate in the future,” Palihapitiya said. “That’s crazy.”
Scott denied that was what he was saying and Chamath replied: “You are saying that!” ... “That’s the implication of what you’re saying.”
“I’m not saying they shouldn’t be able to participate,” Wapner countered.
“You’re saying they should participate on your terms—” Palihapitiya said.
“No!” Wapner shot back.
Palihapitiya countered, “On Wall Street’s terms, in a way where — when Wall Street can have the best of it, they can maybe participate on the side.”
Scott claimed all he was looking for was a "hazard sign." It was weak and not at all convincing.
Wapner was clearly annoyed as if his young billionaire guest didn't know the team he was supposed to be on.
CNBC was not done. They would have as an interview, Leon Cooperman, another member of the aggrieved rich. "People are sitting at home getting their checks from the government, okay, and this fair share is a ######## (see note at the end*) concept. It's just a way of attacking wealthy people. I think it's inappropriate. We all got to work together and pull together." Of course, the previous sentence is certainly a ######## concept as no one expects Leon to be down in the trenches with the plebs.
It was not just business TV; other respectable figures spoke out. Former SEC Commissioner Laura Unger was concerned. She compared the GameStop uprising to January 6th at the Capitol, "If you don’t have the police in there at the right time, things go a little crazy.” She did admit it was to a "lesser degree,” but was the same “platform-created frenzy that people are operating under,” and added Wall Street was living through “trying times.”
Of course, the "trying times" are hardly caused by the GameStop events. They are, at most, a symptom.
CNN's Chris Cillizza penned "How Trumpism explains the GameStop stock surge." At least he didn't blame Putin. His idea was that it was anti-elitism as the driver. Maybe so, but Chris' words could only be considered a defense of team elite.
Your columnist admits to cheering for the insurgency. He tends to be a Carlinist as he agrees with the late George Carlin's famous quote about the distribution of power in this country, "It's a big club, and you ain’t in it."
I am not proud of the feeling, it is a bit of a churlish sentiment, but there it is. Carlin's dictum may not be completely justified, but a heck of a lot of it is.
In the end, the revolt failed. Robinhood, the firm that executes most of the trades for the GameStop buys stopped any further trading in the stock.
Not unreasonably, there were thoughts that someone big had had a mafia style sitdown with Vlad Tenev (not to be confused with Vlad Tepes) head of Robinhood, who was told that something bad could happen.
Citadel Capital executes Robinhood's trades and thus receives information from the order flow. It also ended up bailing out Melvin Capital's short position. That could not have made them happy.
It turned out that was probably not the case and Robinhood had severe cash problems due to the huge volume of trades they had been called on to execute. Tenev testified to that before Congress.
So, the glorious putsch was over. Robinhood as a get rich quick avenue is as valuable as three card monte. Still, for the occasional investor, there are worse things than commission free trades. Just remember that the Citadel Capitals are harvesting your information and as they say, for social media, you are not the customer, you are the product.
Also, remember the sage investing advice of Mark Twain, who was probably the nation's greatest humorist: "OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February."
*As this is a family magazine, we on Long Hill wish to spare our readers any vulgarity. Thus ######## represents the end product of bovine digestion.
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