Matt Levine recaps the GameStop saga...

Interview w/ the king of financial newsletter. Bitcoin foregrounded the value of sheer social coordination, and you can do it as many times as you want. GameStop is the new Dogecoin!

Jun 30, 2021

Here’s a theory. You run a bank, and a smallish public company comes to you and asks you to lend it, say, $500 million. You say “okay I will need to know more about your revenue and expenses and assets,” and the company says “no no no never mind that […]”

These are the opening lines of Matt Levine’s Money Stuff newsletter on 6/17, the day I interviewed him for this podcast. You can read from the lines above that Matt does NOT write like a traditional financial columnist, which he said in our interview that he doesn’t consider himself to be one.

Matt is widely regarded as one of the most iconic, witty, and sophisticated financial writers of our age – a status that gradually solidified over the years and well-explained in a NYTimes profile last October titled “A Columnist Makes Sense of Wall Street Like None Other (See Footnote).”

It is not an exaggeration to say that Matt has built a “cult-like” following on Wall Street and beyond, and even many of the distinguished guests of this podcast proudly proclaim to closely follow his work. Forget about Bridgewater CEO David McCormick – you should’ve seen how my friends’ faces lit up when they heard that *the* Matt Levine is coming on this podcast…

Matt and I talked about his journey starting out as a high school Latin teacher after Harvard, how he decided to go to law school and ended up a Goldman Sachs banker, recent market events like GameStop & crypto, ESG, why everything is securities fraud, and how his newsletter could fail in 5 years…

The ideas explored in that interview will take many posts to articulate, so today I’ll just recap the parts related to GameStop. The few highlights below do NOT do justice to Matt’s many more brilliant arguments and nuances, and I’d highly encourage you to just listen to the original conversation. There were many hilarious moments in the interview; you could hear me laughing all the time and even catch me roasting Matt at the very end.

What actually happened to GameStop?

When the GameStop saga unfolded in late January, I was quarantining in Princeton to get ready for the in-person spring semester. I didn’t have much to do, so I wrote these very long Substack posts1 explaining the GameStop saga. (Princeton Professor Steven Kelts even used them as class readings for his political theory seminar on money… a small highlight of my writing career…) Well, a lot of my knowledge on the GameStop saga actually came from Matt’s writings at the time, so I asked him to revisit that dramatic period.

Tiger: [00:20:25] What happened to GameStop? And how did you piece things together when nobody seemed to know what was going on? All quotes are lightly edited for clarity:

Matt: [00:21:23] I'm like a dork who's had like a couple of stupid niche interests as a financial writer. I used to build equity derivatives, and I know a little bit about options gamma – no one cares and ever reads about that. I, for a while, was also writing about market structure, payment flow, order flow money, market internalization and market making – and nobody cares about that.
So these are two bizarre niches that I write about sometimes. And then GameStop became like the biggest story in the world – like Good Morning America was talking about it every day – it was the biggest story in the world for like three days. I mean, it's not really a story about the payment order flows and options gamma, but it's a little bit of a story about those things… So all of these nightly news anchors were like, "what do I need to know about options gamma?" And I'm like, "oh, lemme tell you about options gamma..." I don't know. Like it just so happens that this incredibly stupid, incredibly huge story touched on some of my interests.
I should say – it didn't touch on all my interests, and I still don't feel like I have a good handle on the social dynamics of Reddit, which is like really it was about, not options gamma. But I can certainly write about it and try to understand something about it.
What really happened? I don't know, man. I think it is still a deeply mysterious situation. I guess a shallow level of mystery is like "who pushed up the prices?" One thing that I did write about was like there is evidence that it was not a one-sided retail order flow buying GameStop options. There's evidence that would suggest that a lot of basic narratives were not that true. So did retail people buy all the shares? Well, some retail were selling; some were buying; on net it's hard to know.
Retail retail investors bought call options that were out-of-the-money, and that causes options market makers to buy stock and then to buy more stock as the stock goes up. Did that move the price a lot? I think there's evidence that the answer is not so much, but yeah who knows...
And then on the other hand, did a bunch of hedge funds buy GameStop stock to bet on a short squeeze or to sort of ride the retail momentum? The answer is yes. But what was the motivating factor in the stock moving? I think you have to say it was people on Reddit getting really excited about it all at once in a social way. But it's hard to sort of point to hard evidence of that because like, again, retail order flows weren't one sided.
The way the stock market works is that some fundamental thing happens, and there is a sort of ripple effect where some person buys stock for that fundamental reason and then a bunch of algorithms really move the stock. So I think there are a lot of knock-on effects with fundamental or non-fundamental things (like emotional things). I think clearly that played a role here as it plays a role in every day of trading for every stock. But it doesn't explain why the GameStop price went from $4 to $400.
I don't know, but the sort of shallow surface explanation of why the Reddit people liked the stock and decided to buy it seems to be more correct than some shadowy conspiracy theory explanation.

GameStop was new and weird…

Tiger: [00:25:20] Did you feel that the GameStop situation was an inflection point for Wall Street, that the anti-neoliberal, anti-establishment, populist sentiment really culminated to such an eruption point?

Matt: [00:27:00] I will say two things. One is that you can have a distributed phenomena where a bunch of people all get excited about a stock and buy it and it goes up a lot. I think that's a pretty old story. And you can have a coordinated phenomena where some whale (like a big hedge fund) buys a lot of stock, pushes it up, and manipulates it somewhere.
GameStop was kind of new in that it was both of those things at once. Instead of being a hedge fund being a whale, it was like thousands of individual retail traders who found a way to coordinate.
And I don't say that in a derogatory way. People say coordinated like it's illegal or some sort of market manipulation. People thought that a lot in January, and I think that talk has faded because it seems pretty clear that nobody did anything particularly illegal. So I think the fact that retail traders can coordinate in such a powerful way does seem new.
The other thing I'll say is that if you ask me by early February, I would say “yeah stocks go up; stocks go down; there are bubbles; there are pumps; and this felt like a pump,” right? Now, months later, the stock is still really high! The whole thing just seems more enduring, and I think it’s weirder.

GameStop’s stock price is still high because Bitcoin was invented…

Tiger: So why is the GameStop stock price still so high [more than $200 at the time of interview]? Are we just in a structurally different era with all the Federal Reserve liquidity? Are we in a bubble?

Matt: [00:30:49] I think one thing that is different is that Bitcoin was invented a decade ago. There's a lot going on, but a basic thing about Bitcoin is that it was a thing that was worth zero dollars. A guy wrote a paper about it, and then people coordinated around it, and the sheer social impact of them coordinating around it made it worth $4, and then $40,000, then $60,000… And people saw that.
Obviously, a part of why Bitcoin is valuable is for technological reasons, but a part of it is that the sheer social coordination ability turned out to be valuable. That is not exactly a new thing – we have U.S. dollar because of a social coordination mechanism, but it’s old and complicated..
But Bitcoin was like “we're going to put it on the web, and we’re going to attribute value to this thing.” And then people were like “well, if you do that, you can do it like this as many times as you want!”
So people immediately invented Dogecoin and stuff like that. All these things have high value because some community on the Internet coordinated around them, and the value is going to be sheerly dependent on our continued, durable willingness to exchange them for value rather than anything to do with underlying cash flows.
Once you've established that – you can buy the GameStop stock, why not?! GameStop is the new Dogecoin, right? I don't think that people consciously articulate it as they're buying it, but I think the proof of concept of you can like create value purely socially – that is something Bitcoin really foregrounded. I think that proof mattered a lot in ways that are novel and we're really still figuring out.

Tiger: [00:29:00] Do you still believe in the Efficient Market Hypothesis after seeing GameStop’s stock price today ?

Matt: [00:29:05] Well, I've never believed in the form of the theory that is like companies’ stock prices accurately reflect their future cash flows. I believe in the part of the theory that you will have a hard time picking stocks that go up. Supposedly, Eugene Fama [who devised the theory] would say to his students “the market is efficient... for you,” which I think is a good way of putting it.

The saga of Money Stuff (and GameStop) is to be continued…

Disclaimer: Needless to say, my emails are just casual commentaries. I try my best to write them thoughtfully and with care to provide some alternative perspectives on various issues, but please do not treat them in any way as financial advice for your own investment.

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