The Reddit mob's misplaced anger will end with more people in tears...
The populists' logic is "as long as the people also get a share, then it’s all good." But just getting more people involved in the system won’t solve the problem – it just leads to a bigger crash...
The populist anger towards Wall Street has been exhibiting itself with slogans like “the system is broken” and “all hedge funds are evil and screwing us.” We seem to be finally seeing a long overdue reckoning, but are we?
I truly wish that this “proleriat revolution” could lead to some meaningful changes to the power dynamic between legacy institutions and retail investors. But much like what happened in 2016 with the rise of Trumpism, I worry that the grievances today will eventually devolve into mob anger that will not lead us to the kinds of solutions needed to address the disease (if this hasn’t happened already).
Worse, because we haven’t actually solved the problem but have simply gotten more people involved in the game, only more people will get hurt eventually.
Populism: legitimate grievances, suboptimal solutions
Populist policies often have the narrative “the elites/establishment have been doing this problematic thing for so long, so now the people will take over and we’re all gonna do it…” This has a tendency to play into the existing problem that it attacks.
In response to the 1999 dot com bubble, the 2008 financial crisis, and Covid, the government decided to take on a great amount of debt and dramatically lower the interest rate, which only inflated asset prices and transferred more wealth to the rich. But the populist solution like Modern Monetary Theory (MMT) proposes to further blow up government debt and simply “print our problems away.”
We’ve recognized that the secular trend of ever greater financialization of our economy. But the populist solution is to “democratize finance” and for more retail traders to jump in the markets that supposedly “can only go up.”
I’m not critiquing whether MMT or today’s Reddit movement will lead to something good/correct/sound (who am I to define what’s good and correct?). But what I’m observing is that today’s populist movements have identified many urgent problems, but their way of solving them is often “as long as the people also get a share, then it’s all good.” But the underlying nature of the problem never changed, and just by getting more people involved won’t make things better – it will only lead to an even greater crash down the line, with the common people in tears.
This is how I see how things are currently unfolding, at least for now: the further exacerbation of financialization but only this time with a populist bend. Instead of taxing the rich or breaking up the powerful, we’re just getting more people into the game. The people may seem to be winning today, but the system/establishment/house will eventually find a way to come back on top, and by then more people will get hurt than the status quo.
Is this the kind of victory the Reddit traders really wanted?
The famoust short-seller Citron Research, which uncovered more frauds than any governmental agencies during its 20+ year existence according to its founder Andrew Left, announced last Friday that they would no longer publish short-selling research anymore.
Left had been bearish on the GameStop prior to the epic surge, calling for the stock to fall 50% when it was trading near the $40 level. The share price went up to above $400 at one point this week. Ultimately, Left closed out his short position at a loss of 100% in the stock and alleged that an “angry mob” of GameStop investors harassed him and targeted his family.
You may not have heard of Citron before, but it is one of the most aggressive and scary short-sellers for fraudulent Chinese companies listed in the U.S. I got to know Citron because whenever it publishes a short-selling report on a Chinese stock, all the major Chinese financial news outlets would report it, and the stock would usually tank.
Citron Research, Muddy Water Research, and activist short-sellers like them have played an almost surely positive role in exposing frauds and calling out market excesses for U.S. investors in the past few years.
Muddy Water Research was featured in the famous documentary The China Hustle – the story of how activist short-sellers discovered systematic and formulaic decades-long securities fraud by Chinese companies listed on the U.S. stock market.
These are the good fundamentalist investors
Citron and Muddy Water are activist short-sellers who are fundmanetally different from hedge funds like Melvin Capital that are getting burned by Reddit traders. Melvin Capital does all kinds of trading and just happened to be shorting GameStop, and they mostly operate quietly but just happened to get caught by the Reddit traders this time.
In constract, activist short-sellers publish long reports that are primarily developed to denounce fraud, corporate malpractices, financial misreporting and flawed business models. They really do care about the fundamentals – whether the public compay is reporting its numbers correctly, whether the management is corrupt, whether the business model is sound or a Ponzi scheme, like Herbalife in the case of Bill Ackman’s reasoning for shorting it.
Activist short-sellers are having an increasingly harder time in today’s market environment that is becoming more technical (see chart below). Nobody is really asking which companies can use invested capital most efficiently, and everyone is thinking about how to chase the high waves as a momentum investor.
I don’t know what the long-run or even medium-term impact of this may be. Sure, the Reddit traders are making some bad hedge funds go out of business, but they’re also making some really good and rare ones die. When there are 5 good guys and 20 bad guys in a room, eliminating 3 people from each team means that the bad team will have a substantial edge later (2 vs. 17).
The all-emcompassing term of “Wall Street establishment”
In the video above annoucing Citron’s discontinuation of short-selling research, Andrew Left said “When we started Citron, it was to be against the establishment, but now we've actually become the establishment.” This is when things started to get weird.
Because first of all, what does the word “establishment” even mean?! Does it mean you have to be rich in your personal wealth, big in the size of your fund, powerful in your market manipulative power, ingrained in the belief that the rich should stay rich, simply just a hedge fund, or what? What actually makes something “the establishment?” This is a genuine question – can someone tell me?
For one, I don’t really consider Citron or Muddy Water to be part of the establishment, and I think powerful leaders of the populist movement likely have much more in common with the establishment in comparison.
We have to see where people’s true incentives are – I don’t care where your mouth is; I care where you put your money.
Chamath is one of the biggest pandemic winners with his SPACs riding the irrational exuberance. He slams the “establishment” but likely engages in the same set of (albeit legal) tax avoidance schemes for his own investments like any major financial institution that has benefitted from the globalized tax haven system.
The Winklevoss twins publicly supported the Reddit traders, but that’s only because they want everyone to go to their Gemini exchange to buy cryptocurrencies.
Dave Portnoy runs a media company that is ultimately about getting clicks from his base – mostly young people like the ones who would trade Gamestop.
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In an interview with Bloomberg (see below), Carson Block, founder of Muddy Water, calls Chamath the “SPAC Jesus” who has weekly meetings with Goldman Sachs and Credit Suisse, two banks that refused to provide sales coverage for activist short-sellers like Muddy Water because that would piss off the banks’ Asian clients.
The reddit traders have been slinging broad accusations at “the system,” but again, what is the system they’re really hoping to take down? It seems to me that they’re all jumping into the system, and what’s guiding them is a collective subconsciousness influenced by populist leaders that are in fact very much the establishment themselves.
I’ve been writing about this Reddit/GameStop/Robinhood saga for more than a week now, and some of my friends have accused me for being “complicit to the Wall Street establishment” and for “defending the bad guys.” Setting aside these hollow and over-generalized attacks aside, I want to stress that my emails are for the purpose of providing an alternative perspective for you to think about things. If you disagree or have other ideas/facts/information to supplement, please let me know, and I’d really be more than happy to update my still very naive understanding on these issues accordingly.
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