- [Announcer] This video is brought to you by Sheath.
(smooth music)
- What's up, Wisecrack?
Michael here to prove that we are living
in the weirdest and stupidest reality in the multiverse.
Let me set the stage for you.
The year is 2021.
A message board that's been on our radar
as the place where dumb-dumbs accidentally lose $50,000
on a $3,000 investment
has managed to make hedge fund managers
and the top 1% lose it on national TV.
- This fair share is a (beep) concept.
- [Michael] That angry man is billionaire Leon Cooperman,
and he's crying because a subreddit called WallStreetBets
has cost his hedge fund friends billions of dollars,
primarily through buying one key stock: GameStop.
In fact,
these intrepid Redditors have been
on such a buying frenzy that they sent
GameStop's share price soaring,
from a little over $18 a month ago
to an all time high of $483.
Now lots of people have, rightly,
asked questions about what this means,
for the stock market, for regulators,
and for sad angry billionaires.
But we think it's interesting because it poses
a fundamental question.
Is the stock market what people think it is?
So join me for this Wisecrack Quicktake on Gamestonks.
And before we continue,
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Now, back to the show.
And now a very quick rundown.
Why are Cooperman and co so outraged?
Isn't its good for Wall Street
when stocks go up?
Well, to simplify things a bit,
hedge funds don't only buy stock hoping it goes up,
they also place bets if they think a stock will go down.
That's called a short.
In reality, what investors are doing is borrowing a share,
then selling it for what's it's worth at the time.
Then, when it's time to return the share,
they go out and buy it back, hopefully at a lower price,
and pocket the difference.
So if the stock goes down, I make a buck.
But if it goes up, I lose a buck.
And this is what hedge funds like Melvin Capital
were banking on.
- These stocks, these companies,
they're like crappy companies.
- Well, yeah. Yeah, they're terrible.
- [Michael] GameStop's share price plummeting.
Because, let's be honest,
GameStop is a brick and mortar store
in the age of the internet,
in the middle of a pandemic, and everyone is still mad
about their crappy trade-in policy.
But when lots of people short a stock,
it gives a weird opportunity
for other people to make money.
Enter WallStreetBets.
Realizing that there was so much shorting
going on with GameStonk, this plucky band of redditors
tried to create a short squeeze.
While that might sound like a new cocktail,
it's actually a lot more delicious
because it's made with billionaire tears.
Oh yeah.
Essentially, as the price of a stock goes up,
all these short-sellers need to buy more stock,
even at insanely high prices.
Or worse, your prospective losses are so high
on your short position that your brokerage firm
is saying you've got to close your position now.
Essentially, bite the bullet,
buy and return the stock or get the (beep) out.
All of this just drives the share price up even further,
screwing over even more short sellers,
and continuing the cycle all over again.
And in the case
of hedge fund Melvin Capital,
they had to borrow nearly 3 billion dollars
from their fellow plutocrats to cover their losses.
Which explains why so much of the one percent
are frothing at the mouth.
- Just a way of attacking wealthy people!
- [Michael] God, he really can't help himself.
Of course, beyond Cooperman,
a lot of establishment players
are none too happy about this.
- This is populism coming for capitalism.
- [Michael] The app Robinhood, for example,
has temporarily stopped users from buying Gamestonk,
and brokerage firms like TD Ameritrade have followed suit.
Now, according to Robinhood,
this isn't about defending the huge investment firms
that they're in business with,
it's about the company not having enough money.
It would go on to limit trading on other stocks
of interest to Reddit, like AMC and now even AMD.
Meanwhile, our Redditors have gained the attention
of the SEC and Congress alike,
but under current SEC guidance,
it's pretty hard to say what, if any,
regulations WallStreetBets has violated.
While coordinating a buying effort
to raise the price of a stock
sure seems like illegal market manipulation,
as Bloomberg's Matt Levine explains,
investors aren't being misled here.
It's definitely illegal when you lie about a stock
to drive up its price,
it's probably not illegal when you buy Times Square ads
that say, "GME go brrr."
But we'll leave that to the lawyers.
Anyway, how did we get here, Wisecrack?
How is it possible that a subreddit can seemingly break
hedge funds, especially as a global pandemic
and massive unemployment seems to only make them richer?
Well, the answer isn't complicated,
it just requires us to shift our understanding
of what the stock market really is.
Many people talk about the stock market
as an efficient market.
To put it briefly, an efficient market
is one where prices are exactly where they should be
based on lots of people having
little bits of information about different things.
An efficient market assumes that human beings
are ultimately rational creatures
who buy and sell things, you know, rationally.
Sure, we might make a few mistakes here and there,
but on average,
I'll try to maximize my gains and minimize my losses.
For example, think about the marshmallow test given to kids.
An experimenter will give me a marshmallow,
telling me that if I wait a whole minute before I eat it,
I can get another.
Given that information,
and the fact that I'm not a 5 year old child,
the rational choice would be to wait
a whole minute and maximize my marshmallows.
Let's go.
(tense music)
See? It's not hard at all.
This is what an efficient market assumes.
That given all the relevant information, on average,
human beings are going to make rational choices.
This means, for instance,
that they'll also buy and sell stocks
at so-called rational prices.
Given this assumption,
it's not crazy for hedge funds to assume
GameStop's share price is going to go down.
After all, it's pretty smart to assume
that the Borders Books of video games
is going to fare poorly
in a world dominated by Amazon and digital downloads.
But what hedge funds seemingly forgot
is that stock markets aren't actually as efficient
as they think, largely because people
really aren't all that rational.
As Nobel Prize winning economist Robert Shiller explains,
the idea that people are emotionless,
calculating Borgs is patently ridiculous.
- The idea that people are so optimizing, so calculating,
and so ready to update their information,
you know, that's true
for maybe a tiny fraction of 1% of people,
but it's not going to explain the whole market.
- [Michael] And this especially true when we consider
how many Redditors are investing in GameStop
not because they believe it's a strong, underpriced company,
but rather because they feel a sense of moral outrage
against Wall Street.
- [Chamath] I think that what you're seeing
is essentially a pushback against the establishment.
- [Michael] But it's not just WallStreetBets
that's coming in and messing up the rational market
with their memes.
The big banks, hedge funds, alternate asset managers,
they're all irrational as well,
even if they say they're not.
- This belief that it's emotions and people making decisions
is quite frankly not true.
There's a lot of pressures and flows in this market
that aren't ruled by human emotion.
- I mean sure, they can program trading bots
and do a lot of math which is a little more rational
than sipping billionaire tears.
Ah.
But there's a whole field called behavioral economics
dedicated to proving how just fundamentally irrational
our whole financial system is.
For example, in traditional economics,
there's no reason why the day of the week
should affect how the market performs.
The market isn't a human being
working a nine to five job looking forward to the weekend.
But behavioral economics shows us that this isn't true,
with stock markets consistently closing higher
on Fridays and opening lower on Mondays.
Likewise, if I made tens of thousands of dollars
on Gamestonks, a traditional economist
wouldn't think I'd take that money
and put it in a riskier investment.
But according to behavioral economists like Richard Thaler,
that's exactly what I'd do.
Which is why I'm putting all of my money into Moviepass.
Guys, this is a joke, please don't do this.
And in case the dotcom bubble taught you nothing,
there's no rational reason to buy shares
in pets.com when the company pulled in 600k in revenue,
but spent 11 million in advertising.
But hey, at least they made some sweet ads.
- Oh yeah, this is my kind of party.
- [Michael] And sure, GameStop probably isn't worth
the billions of dollars the market values it at right now,
but that's what an irrational market
powered by human stupidity does.
And it's not like the Wall Street elite
haven't made just as big, if not bigger, mistakes.
These are the same people who decided to sell and repackage
subprime mortgages in 2008, precipitating
one of the largest financial catastrophes in history.
You know, that event that essentially doomed millennials
entering the job market to live in their parents' basement.
Guess at least we got "The Big Short" though.
- Big bank, small bank, I like to make money.
- [Michael] But you might be asking,
where do we go from here?
Is GameStop's share price eventually going to crater?
Most definitely.
In the future, are we going to see wild swings
in the market powered by Wall Street Bets?
Probably.
But more importantly: should we be upset?
And this is where I'm not so sure.
If this saga has taught us nothing else,
it's that the market isn't this magical rational entity
the finance industry has told us it is.
Their fortunes aren't necessarily derived from being smarter
or harder working than the rest of us.
Instead, the stock market is a lot closer
to a casino powered by faulty human psychology,
and the one percent have been gambling away,
sometimes to disastrous results.
Just because a bunch of Redditors
are now playing the game too, and winning,
doesn't mean we should have sympathy
for the other people at the table.
But what do you think, Wisecrack?
Is Reddit ruining the fair and honest stock market?
Let us know what you think in the comments.
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And as always, thanks for watching. Later.
(upbeat music)