Note: This is an expanded version of an email that I sent to my mailing list subscribers the other day. If you have not already signed up for that list, do so here so that you can receive these more direct communications from me to you.
Have you ever read Ayn Rand’s masterpiece, Atlas Shrugged? It is a phenomenal, but deeply flawed, book. In fact it is actually THREE books kind of glued into one massive door-stopper. The first third is, hands down, one of the very best books ever written on the subject of the human spirit and its ability to persevere through setbacks and overcome obstacles. The scene toward the end of it with Dagny Taggart and Hank Rearden riding the Taggart Comet on a record-setting run to Colorado is, in my personal opinion, one of the greatest scenes ever written in modern literature.
The Fable of Robin Hood
The latter two parts of the book are… mixed, at best. But, in Part II of that book, you will find the following words from an industrialist, a character going by the name of Ragnar Danneskjold. He trashes the idea that “Robin Hood” was a model of human behaviour:
He is remembered, not as a champion of property, but as a champion of need, not as a defender of the robbed, but as a provider of the poor. He is held to be the first man who assumed a halo of virtue by practicing charity with wealth which he did not own, by giving away goods which he had not produced, by making others pay for the luxury of his pity. He is the man who became the symbol of the idea that need, not achievement, is the source of rights, that we don’t have to produce, only to want, that the earned does not belong to us, but the unearned does. He became a justification for every mediocrity who, unable to make his own living, has demanded the power to dispose of the property of his betters, by proclaiming his willingness to devote his life to his inferiors at the price of robbing his superiors. It is this foulest of creatures — the double-parasite who lives on the sores of the poor and the blood of the rich — whom men have come to regard as a moral ideal.
— Ragnar Danneskjold, Atlas Shrugged, Pt II, Ch VII
In my personal opinion, you could not come up with a better summary than this to describe the events of the past week.
Meanwhile, in Nottingham…
In case you don’t keep up much with the news – I don’t, because there is only so much spontaneous rage-vomiting that I can tolerate in a given day – recent events have been WILD. We saw a mass of individual investors successfully take on and destroy a group of hedge funds that had shorted the shares of video game chain store Gamestop.
The whole thing is a bit complicated to figure out. You can get a brief description of the details here at Simon Black’s blog. If you prefer to watch a video, watch this from #BasedTucker below:
Finance for Non-Geeks
In very condensed form, here’s what happened:
- A number of big hedge funds took up significant short positions against video game retailer Gamestop;
- That is to say, they bet using N shares of Gamestop that the price of the stock would go down;
- They planned to sell at Y and buy them back at X < Y, thereby pocketing N * (Y – X) as the profit;
- That, in and of itself, IS NOT illegal – but the fact that those hedge funds sold more shares of Gamestop than actually even EXIST IN THE STOCK MARKET, indicates collusion and market manipulation at the very minimum;
- A Merrye Olde Bande of individual investors on a subreddit called r/wallstreetbets found out that Gamestop and other stocks were under massive pressure due to short-selling, and decided to cock a snook at the hedgies;
- They then bought up shares of Gamestop using discount or zero-commission brokerages – and let the huge directional bias present in financial markets do the rest;
- Because so much of stock trading is directional and algorithmic these days, the algorithms and day-traders picked up on the fact that Gamestop prices were going up, and all piled in to avoid missing out on the rally;
- Within a week, the company’s stock had shot up by – and I’m not making this up – 406%, and GameSTONK stock rose over 8,000% from Feb 1 2020 to Jan 29 2021;
If you had invested $100 in GameSTONK on the first trading day of February 2020, exactly one year later, your investment would be worth over $8,000. (Annoyingly, we JUST missed out on a hilarious Dragonball Z reference there.)
So you can see why so many of the Reddit bandits were so happy. Some of those individual investors made an absolute killing – apparently one of them walked away with $22 MILLION.
The Gambler’s Ruin
Now, you’d think that the hedgies would learn something from being beaten black-and-blue with a clue-bat after the first swing last year – GME stock was storming upwards back in August. Judging by their behaviour, though, evidently not they didn’t learn one damned thing.
See, the major problem with short-selling is that, if you sell at Y > X, and you do so without any kinds of loss-mitigation (e.g. stop-loss orders), you MUST, by law, buy back those shares at the end of the short period at whatever price they trade. If you make the wrong bet, your profits are limited in a short sell – but your losses are limitless.
And if you’re dumb enough to double or triple or quadruple down on a short position that is losing money, then you will go bankrupt in a very big hurry.
That is pretty much exactly what happened. The hedge funds who took up unlimited short positions against Gamestop and other stocks saw to their horror that the share prices kept going up, and up, and up – and then decided to band together and attack the share price as hard as they could.
But they failed. The ordinary investors simply kept buying more and more shares of Gamestop. And Wall Street’s algorithmic trading machines, along with actively managed mutual funds and bigger hedge funds, piled on because that is what trading is all about.
(The idea of the maverick trader taking risky bets in volatile markets is more myth than reality. It does happen, but most traders simply buy and sell based on market momentum. I know – I worked in that world for 10 years.)
And in the process, these individual investors literally broke Wall Street. One of the hedgies involved in taking those huge short positions had to eat such massive losses that it had to be bailed out by two other hedge funds – to the tune of roughly $1.5 BILLION.
Ooda-lally, What a Day…
And that is where Robin Hood comes in – somewhat literally.
The individual investors who did this to the hedge funds did so through low-commission deep discount online brokerages, like eToro and Robinhood. But, when the whiny little bitches in the hedge funds went crying to the regulators because they were losing at their own game, Robinhood stopped individual investors from selling their shares – while permitting hedge funds to do so.
That is complete corruption of the financial markets. There is no doubt whatsoever about this. When you have one set of rules that apply to one group of privileged elite players, and another set that apply to everyone else, you have a two-tiered market with the balance of power very clearly tilted toward the elites.
In other words, Robinhood, the zero-fee brokerage, literally took from the poor to give to the rich.
If you ever needed any more evidence that the markets are rigged in the West, you cannot find a clearer example than this. And it gets worse, too. It turns out that Robinhood makes its money by selling data about transactions to the very hedge funds that investors were betting against.
To put this in terms that the non-geek can understand… That would be like the actual Robin Hood of legend stealing Prince John’s gold, giving it to the poor – and then turning around and telling the Sheriff of Nottingham exactly what those peasants bought with the gold, and where, and in what quantities, so that the Sheriff could then figure out how to divert grain and beer supplies to the rebellious areas of the county.
Now, NOTHING that I have described above is technically illegal. But it bloody well ought to be – remember what I wrote about a two-tiered market system. And, as I’ve constantly been trying to hammer home to you for weeks now, this tells you a few very important things:
1. The Cult of Free will Kill You
If you are using a free service like Robinhood, make no mistake and have no doubt – YOU ARE THE PRODUCT. Your trade data will be sold to institutional investors, who have FAR lower transaction costs than you do, and far more market power, to bet against you. I’m telling you this as someone with two degrees in mathematics and over a decade’s experience in finance – they are using asymmetric information to beat you like a drum. This means that…
2. You MUST Protect Your Online Identity
If you haven’t already taken advantage of the amazingly low prices for VPNs these days, do so now. You must ensure that your internet usage is anonymous to the greatest extent possible. Subscribe to Surfshark now to get a MASSIVE 81% DISCOUNT on a 2yr VPN contract with the absolute best value-for-money in the entire industry.
If you do not protect your identity, then you will find yourself truly and horribly exposed once you realise that…
3. It’s an Empire of Lies
The banks and hedge funds view you, the average, ordinary man or woman, with utter contempt. There are plenty of good people in the industry who just want to do a good job, get paid, and go home. But the financial services industry wields a level of power totally out of proportion with its size. It employs just 6% or so of the US labour force – but accounts for roughly 20% of its GDP. And most of that “output” is just funny money – derivatives linked to derivatives linked to nothing of real substance underneath. I do not go so far as to argue that the stock market is just a giant casino, because in the long run it categorically is not, and the data prove this – but in the short run, at least, it definitely is. That being said…
4 You CAN Beat the Beast
The plucky people at r/wallstreetbets defeated some of the most powerful, wealthy, and influential people in the world. They did it by having the courage and the decency to stand up for themselves. And now Robinhood has gone and made an incredibly dumb strategic blunder that has exposed it to, potentially, ONE HUNDRED THOUSAND arbitration filings for tortious interference.
Imagine, if you can, a company like Robinhood having to pay $25 MILLION in arbitration fees – because that’s how much it would cost them if 100,000 users banded together and filed individual arbitrations at the same time. If that sounds like a lot, remember that this is a company with 13 million users back in October of 2020.
Think about that carefully, my friend – less than 1% of the user base could wipe out the very company that changed the rules on them AND sold their financial data to the very people whom they offended.
Conclusion – Rebellion in Dreamland
The Robinhood/Gamestop saga is ultimately about an investor revolt against the titans who dominate the financial services sector. It is GLORIOUS To behold. And like the Glorious Revolution of 1688 that led to a significant devolution of power away from the King and back toward Parliament, we are watching a seismic shift in the markets back toward individual investors.
So be of good cheer, my friend. Stand firm with a smile on your face and joy in your heart. “We few, we happy, we band of brothers” – we are lucky enough not only to watch the revolution, but fight in it.
This is, indeed, a good time to be alive.