January 30, 2021

Reddit or not, here we come.

On June 20, 1789, members of what came to be called the Third Estate, who represented tax paying citizens, gathered on a tennis court in Versailles, France, and took an oath to not disperse until they had obtained equal representation from the elite. The movement led first to the storming of the Bastille, then France’s first written constitution, and eventually rippled into and changed the rest of Europe. This week saw a similar pivotal moment in American capitalism. I don’t mean to hype it, but in the context of everything else that is going on, it is analogous to the Tennis Court Oath at Versailles, a drafting of the death certificate of the old order. The story involves complicated terms like shorting, oversubscription on short interest, etc etc. I’m going to try and tell it without getting too much into the weeds. To be honest, I am an ignoramus when it comes to understanding how stock markets work. In trying to understand stock markets, derivatives and money instruments, I’ve always felt that I have done some vague, incalculable damage to my wellbeing. I don’t mean any disrespect to the financial wizzes amongst us. Forgive me, I speak truly in ignorance. Anyway, here’s what happened.

It is common for large Wall Street firms which control billions of dollars to bet against a stock. It’s called shorting, a bet that someone or something will not succeed. While some of us may recoil at the thought of betting on someone’s failure, it’s common and legal in investing circles. Some justify the ethics of shorting by describing it as the free market’s mechanism to weed out all but the fittest. While I don’t personally believe in such extreme and wanton cannibalism, I’m not the one making the rules here. I’m just the chronicler. So, a few large Wall Street players placed bets against a company called Gamestop, which sells video games. Suffice it to say, these firms (called hedge funds) got a little ahead of themselves and bet too much money in the hope of creating self-fulfilling prophecies. “If I bet heavily against X, then I can make X collapse under the sheer force of the assault.” So far, this story isn’t unusual. Wall Street firms shorting shares has been going on for a long, long time.

Here’s the plot twist. About a month back, I heard about an internet forum (on Reddit) called “wallstreetbets.” Curious, I joined in. It is a group of mostly millennials, a bunch of little guys who banded together and crazily enough, decided to wage war against the hedge funds. The group had less than a million members when I joined. As I watched in amazement, it grew to 7 million, helped by folks like Elon Musk who publicized it. This group of people agreed to buy shares of Gamestop to drive the share price higher, determined to punish every Wall Street firm which had taken short positions. More crucially, they all agreed to not sell the shares and cash out profits and hold out in solidarity. “YOLO. Ride or die.”

The way it works, the more the stock price rises, the more shares the shorters are forced to buy to cover their losses. It is usually the Wall Street firms who create such cycles to benefit themselves. Never has anyone been able to to do it to them. As more and more people joined in, one thing led to another and the stock price went from around $4 to $400+. As a result, at least one hedge fund worth $20B went bankrupt last week.

It was raw capitalistic anarchy unfolding in real time. The Reddit movement used the rules of capitalism against it, and stayed within the bounds of the law. If allowed to become the norm, who knows where it will lead? While the small guys celebrated with gusto, the Wall Street Goliaths, the US Securities and Exchange Commission and even the White House watched in horror.

What was amazing about these rebels was their organization, helped by the internet, and discipline, fueled by a nihilist indifference to their personal well being. I referred to this in last week’s letter. The guy who started the movement bet $53k and was sitting on $20m of uncashed profits, the last I checked. This battle is still going on.

I don’t know where this will lead. I don’t have a crystal ball. None of us do. Maybe Elon Musk does. But, we all know how history happens. It builds and builds relentlessly for decades and suddenly happens overnight. A Tunisian woman slapped a fruit seller, which led to the flight of a dictator. History had been on the brink of happening in Tunisia for 30 years. An innocuous slap tipped it over from possibility into reality. It is a narrative we should be familiar with by now - groups of inconsequential people striking hammers and leaving visible cracks. Growing inequality, the rise of the Tea Party, Bernie and Trump, the Russians hacking the 2016 vote, Chinese and Russian cyber espionage targeting US financial systems, the rise of Bitcoin, the writing of trillion dollar stimulus checks, and now a ragtag bunch of millennials using an app on their phones to drive Wall Street behemoths out of business. Cracks are visible and growing.

What sort of history is building here? What will eventually happen overnight? Should we allow it to happen? What do these people want? Will they succeed? Should they succeed?

The older ones among us are used to seeing the system win. The house always wins, we’ve seen. It’s easy for us to be cynical about the Reddit millennials. We expect to see them crushed like bugs by the system, which is likely how this saga will end. But, the headline here is that yet another hammer has swung into the wall of capitalism.

Capitalism itself has not been the problem in its 300 year history. In fact, it was not a bad idea at all when it started. Charles Darwin himself derived inspiration from Adam Smith when conceiving an invisible hand in nature that propels evolution. What has always been problematic are those things that have been justified in the name of capitalism over the centuries. At first, capitalism was used to justify slavery and the imperialist ambitions of Europe. “The savages need our money and modern methods.” Through modern science, it was used to justify the idea that man must dominate the world. This has led to an un-winnable race against nature. Covid-19 is merely nature’s latest salvo in the arms race. Most painfully, capitalism is used to justify the harmful idea that the individual is paramount and society exists only to make a few successful. The rest are encouraged to look beyond their misfortune. “Think positively. You too can make it if you try harder.” There was a time when it was possible to see the truth in capitalism. These days, it is becoming impossible to ignore its lies.

It is almost certain that capitalism’s finest days are behind it. It is the same system which propelled a kid like me from nothing to something incredibly amazing. I have a sense of regret in watching it disintegrate but it is becoming increasingly difficult to take comfort in anecdotes, as personal and powerful as they are. There is no joy in leaving others behind. The Buddhists say that we start dying the moment we are born. Capitalism started its march to death when it was born. Whether it fades in 40 or 400 years, time will tell. In the meanwhile, it is worth noting the stories of the hammer swingers. Revolution is in the air. Davids are getting better at taking on the Goliaths. Anarchy is on the rise. Capitalism is under siege. One of these days, someone or something will punch through and history will be made overnight. Reddit or not, here we come.

Pop quiz: What’s the best television comedy show you’ve watched and why is it Schitt’s Creek?