While money doesn’t talk, it swears. Obscenity, who really cares? (Bob Dylan)
Move over Warren Buffet, forget Howard Marks’ copious memos, and who the f**k are Graham & Dodd? The new oracle of the investment universe goes by the delightfully ironic Reddit moniker DeepFuckingValue, and in place of Buffet’s peculiar fascination with Dairy Queen, he seems to have a juvenile penchant for “tendies” dipped in champagne, while celebrating his latest “stomp” on his Roaring Kitty YouTube channel. He trades from his basement and favors a bandana. I have no clue why, it sounds cool I guess? For him and this new breed of “diamond hand” investors, “fundamentals do not matter” and “we have different ways of making money that they don’t understand”. Jaime Rogozinski (creator of the WallStreetBets forum) describes it as follows: The boomer says to the millennial, ‘what are you, growth or value?’ and he goes ‘I’m a meme investor, and I’m kicking your ass.’
As The Dude so memorably proclaimed, new shit has indeed come to light. Some of it is perhaps as profound as the possibility of Maude Lebowski kidnapping herself, but, regrettably, much of it is total crap.
Lets start with the schadenfreude, with all its underlying political undertones, around hedge funds and short sellers getting their just deserts, and the equally misplaced David vs Goliath narrative promoted by the media. Here’s a news flash – short sellers across the board have already had their butts kicked, lately by Jerome Powell and consistently by Elon Musk, no comeuppance required. As renowned short seller Jim Chanos points out, “we’ve been beat up and left for dead”. Besides, short sellers play an essential role in financial markets, cleaning up corporate carcasses in the same way hyenas sanitize the savannah. Reflect also on the collateral beneficiaries of last week’s frenzied market dislocations. Controversial Chinese billionaire Wang Jianlin, the controlling shareholder in struggling AMC Entertainment, rejoiced as his holding ticked up 300% on Wednesday as the Reddit crowd piled in, while PE firm Silver Lake cleverly cashed in a tidy $113mm gain on a $600mm investment it had certainly written down, if not written off. As for Stanley Plotkin, whose Melvin Capital lost 53% being on the wrong side of the GME trade, he is currently occupied knocking down a neighbour’s Miami waterfront mansion to build a tennis court, and his downsized $8bn hedge fund corpus still pays him $160mm in fees just to show up to work. Or not – perhaps trading poolside in Miami Beach, sporting sunglasses instead of a bandana?
Some – like the always provocative Chamath Palihipitiya – have promoted the notion that the collective wisdom of crowds and the sophisticated analysis of many among the Reddit crowd are superior to the the best and brightest of Wall Street. If so, consider the following: Elon Musk bought a hand knit sweater for his dog, prompting a “I kinda love Etsy” Tweet – and an immediate 8% pop in Etsy stock. On the same asinine canine theme, Dogecoin – a cryptocurrency or a joke or maybe both – started on Reddit with “lets make Dogecoin a thing“, but plunged 46% in 24 hours as Elon clarified that his Tweet featuring a whippet on the cover of an apocryphal Dogue Magazine was meant as a joke. Or the morons who bought the wrong AMC (AMC Networks rather than AMC Entertainment) and the other Zoom (Zoom Info rather than Zoom Video). Or the 800% run up – in ludicrous mode – in the shares of the bankrupt Hertz Corporation, which, but for SEC intervention, may well have unloaded $500mm of worthless paper on the Robinhood crowd. As Michael Burry (of The Big Short fame and an early GameStop advocate) says, this is “unnatural, insane and dangerous”.
There is obviously a macro and an environmental overlay to the Reddit trading phenomenon. With interest rates near zero and trillions of dollars looking for a home, inevitably narratives rather than numbers will drive valuations. But some stories are more compelling than others. While I cannot wrap my mind around the Tesla valuation, I get the vision and the drive of Elon Musk, and the massive opportunity around electric and autonomous cars, solar power and energy storage. And the math around the present value of a dollar 10-years from today being worth 50% more at a 1% discount rate rather than at a 5% discount rate is likewise undeniable. As for the so-called meme stocks, perhaps, as Scott Galloway says in a much vilified tweet, “arm young men in a basement, not at work, not having sex, not forming connections, with a Robinhood account, a phone and a stimulus check, and you have the perfect storm of volatility”. Or maybe its just the age old YOLO/FOMO that is the hallmark of all bull market climaxes. All bubbles need a source of hot air, and we might have found it on Reddit.
A word also on Robinhood, now much maligned by the Reddit crowd, but perhaps for all the wrong reasons. Robinhood’s decision to impose restrictions on fresh trades on heavily shorted stocks was – as explained belatedly – purely a function of capital requirements by the clearing houses. Had this been announced upfront, it may well have prevented near universal opprobrium, including from the impossibly unlikely pairing of AOC and Ted Cruz. However, as will emerge over time, when a financial institution is forced to max out on its bank lines and raise $1bn in equity overnight, the issues are usually existential – an uncomfortable disclosure for a securities firm given the self-fulfilling nature of such pronouncements. What perhaps deserves to be highlighted is the inherent hypocrisy in its name and its business model. As Tim Cook says, when an online service is free, you are not the customer, you are the product. Robinhood’s real “customers” are the likes of Citadel Securities, which pay Robinhood for order flow, rather than the merry men of Reddit forest, in exactly the same way as Facebook monetizes our presence on its platform with advertisers. And the implication of this addictive gamification of investing on young minds is every bit as profound as the now apparent hacking of our minds by the Facebook algorithms. Consider, for example, the case of a 20-year old Robinhood customer who committed suicide after seeing a $730K negative balance on his account related to options trading. The notion that ensuring young Americans are given enough rope to hang themselves has become a cause celebre strikes me a monumental blind spot on the part of the media, the twitterati, and the powers that be.
If its not obvious where I’m headed with this, it all ends in tears for the little guy. Just like it did for the Miami stripper in The Big Short, who owned five houses and a condo all bought with 95% leverage and became a symbol for the madness of the times. For all you guys on WallStreetBets – and it seems to be mostly guys – time to declare victory and move on. The algorithmic traders have already electronically trolled your chat groups, and whether its Dip Alpha (buying the dip faster) or Flip Alpha (getting the f**k out faster), will always be a jump ahead of you. Yes it sounds cool to be in the headlines as the guys “who broke Wall Street”, but you didn’t, and you don’t stand a chance when the market turns. And if you’re sore about bailouts in 2008, as I believe you are, remember that Goldman Sachs is still too big to fail. You, on the other hand, are not. And if it all blows up – well, as Dylan says, It’s Alright Ma, I’m Only Bleeding.