Gamestop – everyone’s favorite videogame retailer and NFT marketplace is back in the news due to the reemergence of Keith Gill – known online as “Roaring Kitty” whose reappearance on social media caused a huge rally in the stock.
The GameStop story captured the public imagination in 2021 as a David and Goliath story where an online army of retail investors managed to push the stock price so high, and so fast, that hedge funds betting against them, not only lost, but ended up shutting down due to their losses.
People who were bored at home during the pandemic, stuck on social media with no sports to watch or events to attend got caught up in the drama. Online celebrities like Dave Portnoy, Chamath and Elon Musk cheered the retail investors on.
Matt Levine wrote about “the boredom markets hypothesis,” the idea that stocks were driven not by rational calculations about their expected future cash flows but by the fact that people were bored at home due to the pandemic and had nothing better to do than trade stocks with their buddies on Reddit.
In the aftermath of the retail driven short squeezes, many large hedge funds had to reassess the wisdom of short selling stocks once they recognized that the risks of that strategy had drastically changed.
While many retail investors moved on, others stuck around with the belief that new management would turn GameStop around with a new ecommerce strategy. Since then, GameStop’s ecommerce strategy has been struggling, its store count is shrinking, and its sales are in a multiyear decline.
Last week the company rushed out its fiscal first quarter results a few days early, reporting that net sales had dropped 29%, which was worse than expected. The adjusted loss of twelve cents per share was worse than the expected nine cent per share loss. No one really cared about the losses however, as numbers are not what drives the stock price of companies like Gamestop.
Over the weekend I met up with my favorite financial podcaster Demetri Kofinas, who coined the term “Financial Nihilism” in 2019 on his podcast “Hidden Forces.” Which I would strongly recommend you check out. I’ll put a link in the description.
Demetri describes Financial Nihilism as a philosophy that treats the objects of speculation as though they are all intrinsically worthless. He argues that while Soros’s theory of reflexivity sees prices affecting fundamentals (and vice-versa), financial nihilists see price as "the thing" in and of itself, completely unmoored from any relationship to underlying reality. He describes this as a post-modern investment framework where price becomes self-referential.
A lot of the financial products that young people put their money into today are explained by this concept of financial nihilism, things like cryptocurrencies, NFT’s and Meme Stocks whose price is entirely divorced from any fundamental underpinning.
Whenever I have discussed meme stocks in the past on this channel I usually get a storm of angry comments asking me to define “meme stocks” along with the obligatory “we like the stock” comments.
For the purposes of this discussion, I think we can define Meme stocks as stocks that attain viral popularity on social media platforms which leads to soaring prices and trading volume that bear no relationship to the underlying company’s financial performance.
Demetri argues that a related idea of “narrative investing” goes hand in hand with the concept of financial nihilism and is informed by a belief system that he first noticed developing in crypto circles: that “everything is ‘just’ a narrative.” He feels that while we have seen financial bubbles in the past, a recent example being the dot com bubble in the late 1990’s. This period of financial nihilism feels very different to prior bubbles, which were driven by optimism rather than by anger and a sense of hopelessness.
So, back to the GameStop story, In May GameStop sold 45 million shares, raising $933 million dollars. After announcing an earnings miss last Friday, they were able to sell even more shares. The company sold an additional 75 million shares raising $2.1 billion dollars, putting the company’s overall net cash at around $4 billion dollars. So, while all other financial metrics look decidedly unimpressive for GameStop, the amount of cash on its balance sheet does make the company a picture of good health.
We can’t know why GameStop preannounced their earnings while announcing a massive at-the-market stock offering just two weeks after finishing one, but it may have had something to do with Keith Gill (or Mr. Kitty) having scheduled a YouTube livestream and company management hoping that they could sell stock into the retail buying frenzy.
According to Bloomberg some market watchers characterized GameStop’s efforts to raise cash during another meme-stock frenzy as savvy, while others viewed it as exploitative of existing shareholders.
Demetri Kofinas argues that the phenomenon of Financial Nihilism is something that started with the Millennial generation and was possibly caused by 1) seeing how financial rules were quickly changed in reaction to the Global Financial Crisis and 2) seeing the invasion of Iraq, the lies that supported it, and the way it undermined the rules-based international order that the United States supposedly championed.
He argues that the Global Financial Crisis left the entire Millennial generation disenfranchised and locked out from economic gains.
The Millennial generation struggled to find jobs when they graduated and saw house prices rise faster than they could save for a downpayment. The idea of investing as their parents and grandparents had done to achieve returns of 7 -10% per year seemed pointless. Returns didn’t mean much anymore unless they were huge as huge returns were needed to make a dent in debt, house payments and so on.
Social media had a huge impact on Financial Nihilism too. Joe Wiesenthal joked on twitter a few days ago that the dividing line between GenX and Millennials is not a specific year. It's "did you have Facebook in college"? People used to compare themselves to their neighbors in the past, but with social media we went from “keeping up with the Jones’s to Keeping up with the Kardashians”. Young people follow the super-rich on social media and think that’s how their life is supposed to be, a really unrealistic expectation.
If you think you are supposed to own a Lamborghini in your twenties, you are not going to get there by getting a job and saving for retirement like your parents did, you have to make a really big bet and win.
Dimitri ties social media and the larger phenomenon of living our lives online to the concept of hyperreality proposed by the French postmodernist philosopher Jean Baudrillard, as a state where we can no longer distinguish between reality and mere representations of reality in the world we live in.
This idea deeply influenced the Wachowski brothers in their development of the Matrix movies. The idea that we are increasingly living in a simulation, and in such a world, ‘reality’ (if there is such a thing) takes on a more tenuous hold.
The term selfie was first coined in 2002, and at the time it would have been seen as shameful to be seen taking photos of yourself in a way that is totally normal today. I remember being on a beach around ten years ago and seeing a young girl arrive at the beach who spent maybe fifteen minutes posing for the perfect selfie – probably for Instagram. She then left without spending any time enjoying herself. It was possibly more important to look like you had spent a fun day at the beach than to actually do it. Today people don’t even have to travel to the beach to pretend they are having fun, there are photo sets where they can take a selfie looking like they are on a private jet.
I have a friend who describes certain restaurants as serving “Instagram food” where it is all about novelty and presentation, and the customers don’t seem to care what the food actually tastes like as long as they get a good photo.
Is it surprising that a generation who is happy to look like they are having fun even when they are not, or to eat food which looks better than it tastes is also happy to put their savings in fake investments that make them look modern and part of an online phenomenon.
To quote Demetri once more, Boomers had sex drugs and rock and roll while millennials have bitcoin.
In the zero-interest rate environment that came in the wake of the global financial crisis we have seen huge wealth generated in silicon valley from firms that are often unprofitable or barely profitable. Some of the CEO’s have been paid massive amounts that sometimes exceed the entire cumulative net profit of the firms they run. These people have become thought leaders on LinkedIn telling regular people how meditation and a growth mindset are all you need to achieve extraordinary wealth.
Is financial nihilism that surprising when people see generational wealth accruing to the founders of companies that never earned back the amount of money that was invested in them to begin with.
A key idea from some of these thought leaders has been the idea that money – and money alone is the solution to every problem. The solution to losing your job is Universal Basic income, which seems to forget that people get much more out of work than just a paycheck. It forgets that people have a strong desire to feel useful, they want to make friends; to do something productive with their time and they get a sense of accomplishment from work and the feeling of being part of something bigger. People want to feel that their efforts are valuable and that their work contributes to society.
In 2021 during the initial GameStop rally, John Authers wrote an article on Bloomberg saying that instead of greed, this latest bout of speculation, and especially the extraordinary excitement at GameStop, has a different emotional driver: anger. The people investing today - he said - are driven by righteous anger, about generational injustice, about what they see as the corruption and unfairness of the way banks were bailed out in 2008 without having to pay legal penalties later, and about lacerating poverty and inequality. This he claims, makes it unlike any of the speculative rallies and crashes that have preceded it.
Bitcoin too, was born in the depths of the global financial crisis as a backlash against the failings of the conventional financial system. In a 2009 blog post justifying the need for cryptocurrency, Satoshi Nakamoto wrote ‘The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.’
While cryptocurrencies may have been driven by an urge to improve the financial system and provide an alternative to government issued currency, it has not really been a success on that front. Jemima Kelly of the FT argues that the problem is that Crypto is not just a zero-sum game, in which one person only gains if another person loses; its many moral deficiencies make it a negative-sum game. The idea that a shop like FTX — and crypto businesses in general — could be an improvement on the existing financial system only makes sense if we are to value that system simply on the basis of how much money is being creamed off at the top.
She argues that this is a deeply nihilistic view of the role that financial markets are meant to serve, that forgets about crucial functions such as price discovery, or facilitating the supply and demand of commodities needed to keep the economy functioning.
Financial nihilism represents an ideological standpoint that questions the value and legitimacy of financial systems, markets, and even the concept of money itself. It doesn’t involve a simple disregard for fundamental reality but a contempt for all fundamentals. The point of view is that the entire system is a scam, and you should thus only view financial markets and prices as a casino.
Is it any surprise in a world where people look up to people like Jordan Belfort and Andrew Tate and even sign up to take courses from them that this point of view has become pervasive. The only thing surprising about Andrew Tate’s recent announcement on Twitter that he was selling six million dollars of crypto to buy GameStop stock was that he made the announcement while wearing a shirt. – Well done Andrew [clip]
It is easier to pump and dump a stock or other financial investment if there is no tangible link between the investment and reality. A conman would struggle to pitch the idea that a steadily profitable company will double in value over the next few days, as something really unusual would have to happen to cause profits (and thus the value of the company) to jump that much.
It’s not that long ago that conmen pitched foreign exchange trading as the source of great wealth, because foreign exchange is lightly regulated and more importantly doesn’t have an expected return like the stock market does. Inexperienced investors wouldn’t be able to quickly work out what a reasonable expected return is.
Cryptocurrencies and unprofitable companies, where you can tack on a story about an impending short squeeze are untethered to economic fundamentals, tangible cash flows, visible expected returns streams (with historical precedents). These are the perfect financial products for a pump and dump scheme. If nothing about the price makes any sense on day one, any future price prediction is as reasonable as today’s price.
If investors are going to focus on profits – cashflows , things like that, it’s a lot harder to make outrageous price predictions.
While a few years ago Crypto advocates were making all sorts of claims about the utility of the various tokens, you’ll note that in this bull run, they have left all of those claims behind and just argue that the price will go up as ETF money finds its way into crypto.
They used to hate traditional finance but are OK with it when it’s funneling money in to pump up the price of their tokens – because if they are honest, that is all that ever mattered.
GameStop’s early announcement of an earnings miss last week, had no real effect on the price of the stock as the people buying have no interest in what the earnings are, they just care about the pump from Keith Gill.
The recent action in GameStop strikes me as significantly more cynical than what happened in 2021 as there’s a much weaker argument that evil hedge funds or the smooth jazz saxophonist Kenny G – who GME apes rightfully hate are being burned this time around. At this point, it’s a fairly obvious pump and dump scheme – a zero sum game where one trader makes money and another is left holding the bag.
GameStop’s stock fell almost 40% during the highly anticipated Roaring Kitty livestream. The video was both weird and boring, starting out with a long legal disclaimer before Mr. Kitty appeared on screen, in a sling, covered in band aids talking mostly nonsense (for which a legal disclaimer didn’t seem necessary.) He drank a beer, reiterated his views on the stock, confirmed that the stock and option positions posted on his Reddit account are actually his. He praised GameStop’s CEO expressing faith in the management team’s ability to grow the business and said that there was no real gameplan.
Matt Levine of Bloomberg tweeted “Imagine having this thesis - "I think maybe one day this team can transform the company and it could work out well in the long term" - and expressing it with two-week call options…
One of the red flags that is easy to spot with these investments is that investing is often pitched as joining a community. You might have a meme stock investment if you feel the need to include the ticker symbol or the company logo on your social media profiles. If you wear corporate merch the way you used to wear band t shirts, you might be a meme stock investor. People who invest in Proctor & Gamble, Merck, Chevron or 3M just buy the stock, they don’t livestream about it or join a Reddit board to discuss it. It doesn’t become a part of their personality. It is rare for someone to invest in Johnson & Johnson and put a photo of a bottle of shampoo in their social media profile picture, or to bore their friends with stories of how much they love the CEO – whatever his name is…
When an investor decides to sell a normal investment, all that they are giving up is the future returns of that stock, but, if you think of yourself as being part of a community, selling involves giving up some of your identity and possibly walking away from the friends that you made. Now that you have sold your bored ape, you have to buy a new t shirt – you can’t dress entirely in ape merch anymore.
Some of the attraction of these nihilistic investments is possibly a reaction against what people see as the woke media establishment. They question the accuracy of the news they read, they are tired of being pitched ESG investments and things like that.
There is a bit of a feeling that expertise no longer matters as you can’t trust anything you are told, so instead of looking for expertise, people look to online communities of like minded people.
I’m most likely preaching to the choir with this video. I don’t think I have attracted a nihilistic audience to my channel. One of the worries of the effects of financial nihilism is that it takes money from the people in society who can least afford to lose it which could eventually lead to social disorder and unrest.
Malinvestment in bad businesses or negative sum games can also damage an economy. John Maynard Keynes wrote in 1936, “When the capital development of a country becomes a byproduct of a casino, the job is likely to be ill done.”
Some of the nihilism we have seen in financial markets can also be seen in politics, where people don’t really care about elections, terrible candidates are put forth, voter turnout is low and people vote for controversial candidates just to troll the other side.
If you found today’s video interesting, you should watch my interview with Nathaniel Popper – the author of The Trolls of Wall Street next. Have a great day and talk to you in the next video, bye
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