The Meme Stock Cult [TEASER]

Michael. Peter.
How familiar are you with meme stocks? Not super familiar, but I do know that

if you want to get rich, it's very obvious that you should start with the place you also go to,

to buy a used copy of Banjo-Kazooie.

We purposefully refuse to commit to any particular subject matter for our bonus episodes. But I think we've largely stayed to this point within the framework of like media critique.
And this is the first episode where the primary justification is that I just want to talk about this. I've been in a Reddit rabbit hole on this for two years on my own.
I'm so excited. Losing my mind.
And now I have a platform and I'm just going to dump it all on you and our listeners. The only reason I'm doing this is because this opens the door for me to eventually do an episode about Eurovision.
I'm glad we made it. So this is basically the story of how a widely publicized breakout in the stock of the video game retailer GameStop in January 2021 grew into a full blown cult predicated around an elaborate conspiracy theory.
I love this shit. So did you follow the original sort of GameStop stock run-up in 2021? All of this financial stuff, I treat like sports.
People clearly care a lot about it, but like I don't get it. So it was one of those stories that I just looked at and was like, no, I'm just not, I'm just not going to investigate what's actually going on here.
My understanding was it was like there were some subreddits and it was like some dumbasses who were basically shorting the stock of GameStop, I guess. Yeah, that is the basics.
I am going to start from the beginning here, which is a little bit before the events that sort of entered the media spotlight.

In 2019, a man named Keith Gill, a financial analyst under the social media handles Roaring Kitty and Deep Fucking Value, started to publicize on investing forums and on his YouTube channel a thesis that GameStop, the video game retailer, was not headed for bankruptcy, as many investors expected, but would show surprising resilience and in fact be successful moving forward. So this whole thing starts with someone thinking that like a video game store is going to make it? That's right.
GameStop had brought in a new chairman, Ryan Cohen, who founded the online pet store Chewy. According to Gil and I think some others, there was like a coherent plan to turn the company around, shift away from brick and mortar retail, move it into e-commerce.
This is something that's like relatively common in investing spaces where there are companies that are sort of on the surface just going down, right? Yeah. But there are people that believe in the turnaround story and some of them turn around and some don't.
Right. But you can often make a lot of money by getting these right because when everyone believes one thing and you believe the other thing and you're right, that's a good way to make money.
It seemed like the fundamental fact was that like GameStop is pretty doomed because the vast majority of people now buy video games online. So the idea of like going to a store to like browse video games, nothing about a video game store makes any sense to me.
So it just seemed from my distance, obviously, any video game store is going to go the way of Blockbuster. I think that their response to that, just to give it like a high level, is twofold.
One, there was some like loose plans to do digital sales. You would buy your like digital token for a game through GameStop and then you download it to your console.
That sort of adds a middleman to the whole process that you don't need. Yeah, I don't know why I would do that, but whatever.
The other part of it, which I think is a bigger part of it, is that they were going to pivot away from games themselves and towards things like accessories. They're selling like Funko Pop.
OK. They're doing like video game adjacent things, selling things that are part of nerd culture, stuff like that.
Right. Fidget spinners, 20-sided dice.
Yes. Yeah.
So Keith Gill is posting about this in a couple of places. One is his YouTube channel again.
The other is the subreddit WallStreetBets. Yes.
Do you know what WallStreetBets is? No, I only know it from this absurd controversy. WallStreetBets is a subreddit, a Reddit community that's basically just a place where people gamble, but with stocks.
Okay. It's not really a community of investors.
It's like an investment-themed gambling community. The main attraction has always been that every now and then someone will post screenshots of their extremely high risk, high reward investment plays and the community will follow

along as they either make or lose a small fortune.

Oh my God.

A big key feature of the community is that sort of like classically online ironic detachment

and self-awareness, right?

Like they know that this is all degenerate. They know that it's stupid.
They lean into that. They have fun with it.
Okay. They call themselves the R word.
Nice. That's like how they refer to themselves.
Great. Good sign.
We're on good firm ground already. Well, you have to keep in mind, this is a different time.
This is two years ago. So the community does not actually particularly give a shit about Keith Gill's investment thesis because that's not really what they care about.
They care for a couple of reasons. One is that he invests $53,000 into call options on the stock.
You don't need to understand call options, but they are essentially a high risk, high reward way to invest in a stock. Is that the thing where if it reaches a certain point, then you automatically buy it? Not automatically, but yes, it's a right to buy shares at a certain price.
So it's just sort of a volatile way to invest. It's like part of an aggressive portfolio strategy, shall we say.
And you can readily lose and win a fortune, which means that options tend to be the focus of a lot of these communities. This is why I put all my money in baseball cards.
To understand the conspiracy theory that I'm about to explain, you need to understand the basics of shorting stocks and short squeezes. So when you buy a stock, you're just buying equity in the company, right? If the value of the company goes up, your stock goes up, you've made money.
But if you want to bet that the price of a stock goes down, there's no security you can just buy on the market that reflects that. So you do a little trick.
You borrow shares from a third party with the promise that you will return them. You sell those shares on the open market.
When the price goes down, you buy the shares back from the market and return them to the person you borrowed from. Right.
That allows you to pocket the difference between what the price was when you first borrowed and what it is now. That I kind of understand because you're basically making money if the stock goes down, essentially.
That is the bottom line, right? You are making money when the stock goes down. You just need to do a little bit of trickery, borrowing from one person and selling and then buying it back to do it.
Now, this whole dynamic presents the possibility of what's called a short squeeze. If you are shorting a stock and the price goes up rapidly, you might want to close your position to minimize your losses.
And again, that just means you buy the shares back on the open market and you return them to the lender. But if other people are shorting the stock, they will be looking to close their positions too.
Meaning that they would also need to buy the shares to return to their respective borrowers. That creates demand for the stock, which drives the price up.
And that creates a bit of a spiral, right? Prices going up, which causes short sellers to close their positions, which drives the price up further. You lose money once the stock starts to go up.
And then you try, you're like scrambling to buy shares. But there's all these other people scrambling to buy shares too.
And then the stock goes up even more. And then there's even more people who are like, oh, fuck, I have to buy this back.
Yes. And then just gets worse and worse.
That is the essence of a short squeeze. Prices going up, short sellers are trying to close their positions out, and that's driving the price up further.
So Keith Gill and others noticed that GameStop was very heavily shorted. Many major institutions thought the company was going to fail for the reasons that you outlined as relatively common sense, right? So they're taking short positions.
At the peak, it was reported that the short interest in GameStop was 140%, meaning that for every share of GameStop, there were 1.4 shares sold short. That can happen because the same shares are being borrowed more than once.
Investors on WallStreetBets and similar forums realize that there's an opportunity here, right? If they all start buying shares of GameStop, the price goes up and triggers a short squeeze. They can cash out their shares for tons of money after the squeeze occurs and they're driving the price up and the institutions that are short are trying to cover their positions.
They see that as a money-making opportunity. And more than that, a sort of David versus Goliath narrative angle develops, right? The people who are shorting GameStop are large institutions, hedge funds, etc.
So not only are casual investors potentially going to get rich, but they'd be making the profit off of like these huge financial institutions, right? Right. This is like when the K-pop stands made it impossible to get tickets to like some Trump rally in like Nevada by like spamming all of the links to get tickets.
Yeah, it's it's the the power of the social media mob, right? All all singularly focused on one objective. Yeah, this idea picks up steam in January 2021.
At the turn of the new year, the price for GameStop stock is about five dollars a share. A few weeks later, it's up to $10.
And then it doubles

to $20 in one day. And that gets the attention of mainstream media.
So people start reporting on it. People on Reddit are starting to spread the word across Reddit and other social media.
More people start buying in. Culminates during the last week of January when internet users of all types are just

aggressively buying up the stock. The price gets driven up to nearly at $1.500.
No fucking way. It went up that much? Yes.
Very briefly, but it was in the very high 400s. No way.
And then comes the event that will spawn the web of conspiracy theories that we are going to discuss. The app that most individual investors were using to trade their stocks on was Robinhood, a little iOS mostly app that has like a cool stock interface.
And so young people liked it. Yeah, I know it from the ads on Planet Money.
That's right. The only place I've ever heard it.
Yes. In the app, the buy button disappears for GameStop stock.
You can not buy the stock anymore. You can only sell it.
Okay. Several other brokerages either did the same or otherwise restricted trading in the stock.
Okay. At least partially as a result, the price plummets.
I didn't know they could do that. You just can't buy a stock? This is something that they are within their rights to do.
It's like, you know, deep in the terms of service. The primary reason that the brokerages provide is that they restricted trading in order to meet collateral requirements with the clearinghouses they use.
Without getting into the mechanics, brokerages work with clearinghouses to fulfill stock orders. And those clearinghouses require them to maintain collateral capital to ensure that the brokerages can handle all of the trades that the clearinghouses are dealing with.
In other words, to ensure that they will have the money at the end of the day. As the number of trades shoots up, and you're getting an enormous volume of trades because this is so widely publicized, so do their collateral requirements.
And so in order to maintain their requirements, they restricted trading. They basically said, we can't put up the collateral, but we can restrict trading.
So basically, they have to be able to put up some sort of upfront fee to buy stocks. But then if everyone is buying a stock and it is super expensive, they just can't put up up the collateral anymore.
Yeah, there are. So there are middlemen in this operation.
If you're Robin Hood, you route your stock orders through clearinghouses. When they are handling these trades, they are absorbing a little bit of risk each time.
So when there are tons of trades, there is a lot of risk. So in terms of the amount of trading that was happening here, unprecedented in like the history of the stock market nearly.
Oh, yeah. To give you a sense, the Wall Street bets community on Reddit had like 2 million members before this started, and it ends with 9 million.
Holy shit. Even 2 million is a lot.
Damn. Right.
So the number of people that are in on this is massive. I mean, just huge.
Dude. Every now and then exchanges and brokers will halt trading in certain securities for like certain periods of time based on volume, based on volatility, things like that.
But something like this is pretty unprecedented. We're just like, you can sell, but you can't buy.
It's very unusual. And because of that, a narrative emerges, right? Yeah.
A bunch of powerful financial players appear to have colluded to protect the interests of other powerful financial players. Right.
At the expense of the common investor. We're trying to stick it to the man.
And all of a sudden the man is like, oh, technically, I can't buy these stocks. Right.
And this is not just a fringe conspiracy theory. Prominent politicians are tweeting about it.
Right. Oh, yeah.
There are eventually hearings and investigations. Oh, wow.
To date, there's no clear evidence that anyone violated the law here. But I want to say, if you were investing in GameStop stock at this

time, legality aside, you got screwed. They had a coherent plan, one that perhaps verges into

market manipulation, but we won't go in there. But they had a coherent plan.
They bought a stock

with the hopes that it would go up and then it went down because

the brokerages decided to basically click a button that would in every single case make

it go down.

Right.

You might not have gotten screwed by illegal behind the scenes collusion, but you were

at the very least screwed by the like abstruse technicalities of modern markets. Yeah.
If I bought it at 500 and then the button disappears, I would be livid. Right.
Yes. You know, it's essentially these brokerages digging deep into their terms of service to be like, yeah, we can technically do this.
Right. No matter what you think of the legality, et cetera, it was deeply unfair.
There's no other way to look at it. And when it was happening, I think almost everyone recognized that.
Also, laws are fake. It's never that important to me whether something is illegal or not.
That's true. Also true.
That's the thing is sometimes we have these discussions about whether something's legal. And as a lawyer, I'm like, it doesn't really matter.
Yeah, it's all people wrote it, people interpret it, whatever. It's just people doing people stuff.
So when the dust had settled, hedge funds who were short GameStop lost billions. OK.
Most prominent among them, Melvin Capital, which lost over half of its total assets that January. Holy shit.
It was two billion and change, I believe. The price of the stock had skyrocketed again near 500 at one point, collapsed back down to $40 or so.
Okay. If you had gotten in early, you were still way, way up, especially if you cashed out somewhere on the way up.
Yeah. Keith Gill's $53,000 investment turned into tens of millions.
Yeah, because you said it started at $5. So even just going from $ bucks to 40 bucks is great.
Right. But the thing is, it started at five bucks with a small number of investors in the Wall Street bets community who were aware of this.
By the time the mainstream was aware of it, it was when the price was already shooting up. Oh, okay.
When the price had hit, you know, 80, 100, that's when it was being talked about on like CNBC. Right.
Most people did not get in early. Most people got in once the hype about all of this had gone viral.
And as a result, they were down money. Yeah.
They were, as we say in the biz, bag holders. Okay.
People left holding the bag after a big stock run. 99% of the people in an MLM.
That's right. Just most people.
A lot of the sort of online pump and dump kind of communities that form among young investors are predicated on this basic concept. If you get in early enough, you'll be the rich one.

But if you're chasing, if you're just a little behind the curve on the virality

of what the pump and dump is or whatever, you get left holding the bag.

That's kind of like the fortune favors, the brave

bullshit that they were peddling with NFTs. Is it like you have to be the one to get in early?

Because if you wait until like the normies are in, you're going to be the one left holding the bag. But it's like you want to be one of the savvy people who gets in early.
But of course, they use that to market to normies who ultimately will end up losing a bunch of fucking money. Not to mention, it's easy to say, oh, you need to get in early.
But when there are a thousand possible things you can get in early on, it's basically a lottery ticket. Right.
Yeah. So to add insult to injury, Melvin Capital, the hedge fund that got devastated, gets an infusion of cash from a couple of other big hedge funds, Citadel and Point72.
To be clear, not entirely charity here. The funds eventually redeem their investment.
But it formed a sense that like the big guys, as we suspected, are all in it together against the little guys. Right.
Right. It gets a little bit worse.
The Citadel hedge fund is merely the hedge fund arm of Citadel Securities, a much larger financial institution that serves as a market maker, meaning it handles orders for brokerages, including Robinhood. They're all connected.

Dun, dun, dun.

Even worse, conspiracy goes all the way to the top.

Janet Yellen, who in her role as Treasury Secretary plays a part in investigating the matter,

has collected hundreds of thousands of dollars

in speaking fees at Citadel events.

There are other loose connections.

Jeff Psaki, a Citadel employee, is a distant cousin of White House Press Secretary Jen Psaki. Hell yeah.
You can see people going through like Facebook profiles and LinkedIn profiles and like connecting the dots. This is always like the first thing that happens when like Internet sleuths get involved.
100 percent. And initially it was suspected that they were married.
OK. Turns out they're like second cousins or something.
So you can see this coming together, right? Like we have this weird, difficult to understand market tomfoolery. We have thousands of rightfully disgruntled investors all hanging out in online communities.
And we have a fuzzy web of connections amongst powerful institutions that are all involved you can see

the kindling yeah like for like a big dumb conspiracy and i'm here to tell you that it

is bigger and dumber fuck yes than you could ever imagine