Front Burner - The GameStop stock saga, explained

Episode Date: January 29, 2021

Shares of the video game retailer GameStop soared by 1,000 per cent in less than two weeks, thanks in part to a popular subreddit called r/WallStreetBets. This, at the expense of several Wall Street investment funds that bet against GameStop and lost billions of dollars. Today on Front Burner, business reporter Pete Evans is here to explain the GameStop saga, and what it reveals about the stock market writ large.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hey everyone, Jamie here. Today on FrontBurner, how Reddit took Wall Street for a ride, driving the shares of a video game retailer up by a thousand percent, with individual investors making so-called dumb money plays, some of them getting rich,

while hedge fund short sellers lost billions of dollars. My colleague business reporter Pete Evans is here to explain the GameStop saga and what it reveals about the stock market writ large. Hey, Pete, thanks so much for making the time today. Thanks for having me. So I want to talk to you today about how this random video game store stock blew up the internet and what that tells us about the stock market. But first, let's start at the very beginning here. So GameStop is this video game store.

It's kind of like EB Games here in Canada. And as a retail outlet that's largely based in shopping malls, what was going on with GameStop stock at the beginning of the pandemic? So in sort of early 2020, GameStop, like a bunch of retailers, had been coming off kind of a rough couple of years. Then sort of March 2020 came around and just like sped that process up. Instead of having, you know, like slumping sales, it got wiped out because their stores were closed. No one was coming in. And then also at some point, this stock starts getting shorted, right? And can you tell me about that? Sure. So since all those pre-existing things were there, like it was sort of a bad run for this company, a bunch of Wall Street investors known as shortstellers started betting against

the company, betting that their stock was going to go down even lower than it already had done. Right. Okay, so maybe we could pause here for a second and talk about what shorting is. I think I probably first learned about shorting during the 2008 financial crisis. And then, of course, connected to that, the movie The Big Short, when like Ryan Gosling and Brad Pitt and Steve Carell shorted America's housing market, you know, like Margot Robbie talking to the camera.

So now he's going to short the bonds, which means to bet against. Got it? Okay. And Pete, can you expand on what she means there? What does that mean that the stock was getting shorted? So it sounds complicated, but it's actually pretty simple. When you short a stock, you basically borrow the stock that's owned by someone else, sell it, and then you plan to buy it back later at a lower price so that you can replace it. Right. So to use some numbers, let's say you own a stock that costs $10 and I want to short it.

I would borrow your stock, probably without your knowledge from your brokerage, sell it for $10, wait for my plan to come to fruition because the stocks can go down to $9 or $8 or $7 or $6 if I'm right. And whenever I feel that the slide has gone down long enough, I then buy the share and replace the one that I sold from you. So I sold for 10, I bought at six, I made four bucks, and you kind of lost four bucks, but only on paper. And I know that we could do an entire podcast just on this alone, but shorting is super controversial, right? Like even more so during the pandemic, criticisms that this is manipulating the market, that it's trying to destroy companies that may be down on their luck. Like, there are lots of people like Elon Musk, for example, who think that it should be illegal. Yeah, I mean, it's definitely

not a very sort of popular practice. The shorts would say they provide a service because like, what they're doing is like finding fraud, and they're exposing sort of malfeasance on the market or like overvaluation now it's hard to buy that completely because they are like making huge amounts of money from it it's it's you know they could go out and they could expose fraud and not make any money from it if they wanted to be altruistic about it but like they are they're profiting from this sort of side service which they do and so getting back to gam GameStop, do we know who was doing this shorting? So it's not typically a thing that the average investor is going to do. It's not something that like you're doing in your RRSP or your TFSA. It's typically something that like sophisticated Wall

Street traders are doing. And they're doing it on a sort of a large scale, like they're doing it with enough sort of, you know, thousands and millions of shares and enough money to make it worth their while. So we've got this stock that's been sort of heavily shorted by these massive hedge funds. And now enter this Reddit, specifically this subreddit, WallStreetBets. And this guy, our producer Imogen, talked to from the page. His name is Alex. He explained it like this. It's like, it's so refreshing.

There's a level of respect, but at the same time, we can kind of like make fun of each other. He explained it like this. things, you know, too seriously. And yeah, it's just the culture and the, you know, the, I guess the community is just something that you just, it's so unique and you, there's just nothing like it. Pete, can you tell me a little bit more about this subreddit? So I think this is probably like just the largest and most influential of a lot of these online trading communities. I mean, like these ones exist on like different websites. I think this one's probably a little more flamboyant and like profane than most, but like fundamentally, I don't say that as a bad thing. Like, you know, these are just people who are sharing their opinions, some of which are there for a joke and it's all about the memes. Some of which you can tell from their posts, like know their way

around a spreadsheet and have done their homework. A community on Reddit called WallStreetBets, followed by more than 3 million readers who spend 24-7 talking stocks. It's just this sort of like this very online, very sort of casual back and forth. It's just about stocks as opposed to anything else you'd be chatting about online. Right, right. And I just want to pick up on that for a minute, just how online this is. You know, you mentioned memes. They've also got their own lingo, right? Like here's Alex describing this term that you would see a lot on this thread, tendies, which I've read is from chicken tenders. Yeah. So tendies is your big profits,

like tendies, like if you win big, 50%, 30, 50%, 100%, you know, those are tendies. And this subreddit, at least some prominent people on it, they actually decided at some point that they like the GameStop stock, right? Like that it doesn't look so bad as a stock. This is really interesting to me. Yeah, I mean, it started off pretty innocently enough. There's a bunch of people on that board who were saying, yes, this company's had a rough go and yeah, they probably shouldn't be so reliant on sort of bricks and mortar stores, but fundamentally they sell a thing that has value. They sell video games like PlayStation 5 came out and that's the thing you

can't get your hands on. So they looked at the books and they said, this is a company that's been beaten down too hard. I think it's prime for a bounce back. I'm going to put some money in because I think long term, this company is going to figure it out and get back and do what they do best. Right. Unlike the short sellers, they actually think that the fundamentals are good in this company. The other thing that I find really interesting, because this is such an online forum, this is also a place that these guys like to go, right? Like, as one Redditor, Ben, told Imogen, they've traded their games in there.

They know this store. Really, it was because everyone else was going into it. But then I kind of started thinking about it. Well, normally, I would go into anything that I'm interested in. And GameStop was, I'd seen it before, but I never really took it too seriously. But then once I was in it, I kind of started thinking about it. This is a pretty interesting way to get back the trade-in value that you got for other video games before.

Like, trading in seven video games for $20 and it wasn't fair. So now this is kind of like a very, very late way to get that money back and multiply it about 180%. So they start to buy up the stock and they start to drive the price up, right? And can you just paint a picture for me of what that's looked like? Like what has happened here? It just, it started to shoot up like a rocket ship. Right. So it starts off kind of slow as all things do. But if, you

know, let's say you're a member of this board and you like read this post from someone saying, you know, here's my case in favor of GameStop. The shares are beaten down. They're about 10 bucks. I think they're going to go up to 20. And you're like, huh, that's interesting. And then you see the next week it's now at 15. You're thinking like, oh, maybe that guy's honest. I mean, yeah, he does make a good point. Maybe he's right. I'm going to get in now while I can, basically. And that just creates the sort of buying pressure, which ordinarily, you know, that happens all the time. Like, you know, like your cousin like gives you a stock tip and maybe you buy it and maybe it goes up and maybe it goes down. That's fine. This was just different because it had the sort of

the power of all these members who were like putting their money where their mouth is. And it happened against the backdrop of a company which happened to be extremely, extremely heavily shorted at the time. Right. And so, you know, it's crazy. People on the subreddit have made a ton of money here, right? Like at least on paper right now. here's how that redditor that imogen talked to ben um described it tuesday morning is where that thing just absolutely erupted from 80 to i believe closing out of 150 and then the next morning waking up to a price of 270 i was like oh my god and my broke colorless self was like, oh, my God, this is actually going to turn my life around.

And Ben even got his mom on board. And as soon as that happened, funnily enough, I asked my mom. I was like, hey, this is it. This is actually happening. Here's the proof. You want to hop on? And, you know, talk to me about just how much the stock ballooned. So it's hard to keep track of the numbers.

I mean, you and I have been chatting about this for a few days. And like, I feel every few hours, there's some new eye-popping number that's happened. The one that sort of stood out to me is, like I said, after the pandemic last March, it was about four bucks. And there were like trades happening today at nearly $500. Wow. Yeah. So that in the span of like less than a year is insane no matter what asset you're talking about. I don't care if these guys have invented like a perpetual motion machine or a better mousetrap.

That is an astounding run. Some investors said they gained tens of thousands of dollars. One said it would help pay for medical treatments. $50,000 to over 22 million. Okay. This is, this is absolutely nuts. All right. All right. So, so what does this mean though, for the big hedge fund investors who we were talking about earlier, who were shorting GameStop and who were counting on its value to keep going down, not to keep going up. So the thing about short selling is it can work for a while until it doesn't.

You know, let's use our example that we said before. So the stock's 10 and I short it. I think I'll buy it back at 8. Once stock starts going up, it's at 15 or it's 20 or it's 25 or it's 30 or it's 500. I still have to go buy in to cover my short to pay you back. And then once that starts happening, everyone just sort of piles on. And like this momentum just builds on itself because all the buyers are saying, buy, buy, buy, buy, buy, keeps going up.

All the shorters are saying, oh man, I'm getting squeezed here, but I have to buy. And sometimes they like can't even find shares to buy because like one of the inside jokes of this forum is like, you know, people saying like, hey, like don't sell, don't sell ever. Don't let them get out of this. Like they screwed up. Let's make them pay. And I want to talk about that dynamic a little bit more in just one minute. But but, you know, basically, these hedge funds that were shorting GameStop, they're seeing serious losses now, right? Like I even keep seeing people talk about one of them, like possibly going bankrupt. Yeah, I mean,

the last number I saw on this, there's a company on Wall Street that sort of covers all these short bets. On Tuesday, I think it was, they had calculated that in 2021 alone, the shorts had lost $5 billion. Now that number is at least three days out of date now. So it's way more now. But like $5 billion in losses for a company that not that long ago wasn't even worth $1 billion is astounding.

Wow. And, you know, Pete, one question I have for you is like whose money is this that the hedge funds are losing here? It's hard to tell exactly. I mean, I doubt very much that it's like your grandmother's pension. Generally speaking, short selling is a very sophisticated strategy. These funds tend to have a fairly high barrier of entry, like fairly high minimum investment. So I actually haven't seen a list of who has their money. But generally speaking, it's safe to assume they are large pools of money. Some large pools of money are things

like pension funds. It's going to be hard to tell. But I think the point there is that a pension fund shouldn't have all of its money in one of anything. Right. Never mind shorting a video game company. Right, right. Okay, so I want to go back now to this dynamic that you were talking about, how on the Reddit forum people are saying, like, don't sell, don't sell, don't let these hedge funds out of this. It is not going unnoticed, right, That they're sticking this essentially to the hedge fund.

They are relishing in it, right? Talk to me about this. Yeah, I mean, ultimately people getting in on this, we're just trying to make money. The same reason why anyone would buy a stock or join an investing forum. It is like hard to ignore, however, the fact that there is a sort of like a game to this, right?

I mean, like this is a sort of gamer meme culture. It's like GameStop. They are enjoying the fact that like for once they can have that feeling of they are basically sticking it to the big boys. They're basically saying, you know, like you guys have been gatekeeping the system for so long. You do this all the time. You do this thing called shorting, which provides no benefit to anyone but you. So now we've caught you and we're going to really, really enjoy making you sweat. Right, right. Here's how Alex described it. It's like we're taking, you know, I guess something back, right?

It's some kind of power that we're taking back. It's just good to take, you know, just to have one back, one win, one W. Ben, he went even further. He said it was like Robin Hood stealing from the rich to give to the poor. Kind of ironically, a lot of people are, well, not ironically, but it's kind of funny how people are using the app Robin Hood to take from the rich and give back to the poor. It does seem like there is a change of kind of a bit of power. Like there is a change of kind of a bit of power.

It seems like they really are holding on to something of old with trying to keep the power that they had before. And now they're losing it. I'm not upset that they're losing this money because, I mean, so many other people need it as well, even more so. And also, it sounds like the money can make a real difference in their lives. Ben's mom, who he got to buy into the stock too, she's in her 50s. She cleans houses. We just kind of both decided, well, this may be a ticket to making a little bit more money. Not exactly an entire life changing money, but definitely a good help and definitely seeing the bills. I'll be honest right there. You know, a little bit of a head start to start, you know, life after college.

But things like that. Other people are saying they need to take their parents to the hospital. Other people need help, want to help after the disaster that happened last year and COVID and all that kind of stuff. So it's life-changing for a lot of people in, I mean, very different ways. In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization,

empowering Canada's entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people, and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income? That's not a typo.

50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. When I hear Ben talking about this, what this money could do for him and his mom, I also can't help but worry about him too, Pete. He's the first to admit that he's not an experienced investor. And you and I are talking on Thursday afternoon, and now this stock has taken a major dive today, right? I mean, yeah. And let's not be glib here. Some people

have and are going to lose money on this. I have no idea if it's Ben and Ben's mother, or if it's going to be some faceless Wall Street hedge fund. But generally speaking, say what you will about the stocks going up or down. The volatility of this is a thing to be very, very, very wary of because this is basically convincing an entire generation of investors who've never done this before. Robinhood is this trading app that many of them use because they have no fee investing. Most of these guys, it's their first time investing and they live in this world where, you know, like stocks can only go up and they go up by like a lot. So it's fair to worry about the bends of this world once things start going down, even temporarily. I mean, I have no

idea. In 10 years, GameStop could be the next Apple. I have no idea. But it's fair to say at some point in the next week or so, he's going to be looking at some red ink on a screen and I don't know what he's going to do about that. Right. And talking about the Robinhood app, there have been these deliberate efforts to cool it down. Besides like the more traditional analyst types on TV calling this crazy, calling it a pyramid scheme. There are a lot of people freaking out over this. The reason the market is doing what it's doing is people are sitting at home getting checks from the government.

And this fair share is a bullshit concept. It's just a way of attacking wealthy people. And I think it's inappropriate. We've all got to work together and pull together. But Robinhood has actually put restrictions on trading GameStop shares today, Thursday. And some people were really angry about this. So, for example, Alexandria or Casio Cortez tweeted, this is unacceptable. We need to know more about Robinhood's app's decision to block retail investors from purchasing the stock while hedge funds are freely able to trade

the stock as they see fit, right? So people see this as hypocrisy, right? Well, yeah. I mean, an AOC's best friend, Ted Cruz, agrees, yeah. I mean, AOC's best friend, Ted Cruz, agrees with her. I mean, that's how crazy things are right now. They've gotten people on the right and the left to agree that something wacky and dangerous and admittedly kind of funny, but also sort of concerning is happening right now. Right, right. Although, total sidebar, I saw that she tweeted back at Ted Cruz and was like, thanks, but you tried to have me murdered three weeks ago, so I don't want to work with you. But you're right. It has definitely connected people across the political spectrum.

And, you know, this isn't just Robinhood that has restricted this. Other apps like TD are restricting this. And also, we're not just talking about GameStop here. I want to be clear about that. The subreddit WallStreetBets had their site set on other companies too, right? Yeah. I mean, that's the other thing. The thing that first sort of tweaked me, I was sort of pitching, I was looking into the story about a week or two ago. And it's, you know, kind of inside baseball, kind of complicated. And then on Monday, the thing that really made it blew up for me was this started happening to BlackBerry.

Now, BlackBerry's company, we're all aware of, Canadian champion. Fell on tough times, but, you know, still around making money. Now, they don't have the same sort of short side interest in this. Like there's no sort of concentrated move against the stock. But basically, for reasons that I haven't had anyone explain to me, and I've talked to analysts about this, in the last sort of month or so, BlackBerry has gone up by like 500% because some of these retail firms have said BlackBerry's good. They have this software. They've signed a few deals about sort of like AI technology for cars, which I'm sure that's great, but nothing that would explain

the stock going up 400% in a month. Right, right. And the Reddit also seems to be rooting for like AMC, the movie theater chain, which has definitely not seen its profits go up in the last several months because of the pandemic. Right, Bed Bath & Beyond, Tootsie Roll. I mean, like these are all... Tootsie Roll, Nokia. Exactly.

All right, so this all sort of brings me to how I want to end today, by talking a bit about what this whole saga tells us about the stock market. So look, Pete, like I've watched these two sides duke it out over the last week. People who are saying what's happened to GameStop is crazy, it's wrong, it's out of control. There was this quote that I read from an analyst who said, if you want to gamble, go to casinos. This is not what the markets are for. But then there's this other side of this, like another person, and I saw another tweet to this effect, that what that analyst actually means is get out of my casino. That all this uproar is just because of quote unquote, the wrong people playing.

And I wonder what you make of that. I mean, he's definitely not the only person saying that. There's definitely on this Reddit board and on like Twitter threads, there's this sense of like, okay, so Wall Street games system for their own sake, why is it the end of the world? Now they're being given taste of their own medicine. I'm of two minds on what's happening here. It's not hard for me to accept that the system was unfairly balanced in favor of Wall Street trading firms over the average person. I mean, one of the things that I really liked when

I started getting into business journalism is the sort of like the empowerment that it gives. That I can sort of see that like our financial system is basically built up on these complicated things and the gatekeepers who control them. They basically have a vested interest in making sure that you work with them to make money and save and invest. It doesn't mean they're out to get you, but it means like they're the ones saying we can help you. Only we know how to play this game. they're out to get you, but it means like they're the ones saying, we can help you, only we know how to play this game. What this whole saga says is like, you know, people are saying there's other ways to play this game. Like, you know, like we've played this game better than you can for yourself. So instead of basically saying, well, that old system sucked, let's do

this new way where it's just a free for all and let's just screw over the hedge funds. Like maybe the best result there is to sort of like look at our system as a whole and say, you know, what value do the short sellers give? I don't know if there's any value there, but you know, let's just say, is there a way of making these things equal? Right. You know, essentially trying to find a way to make it so that it's not so easy to manipulate the market here, the system here, you know, you hear people talking about what's happened here, like you can take it all the way down, right? Like Robinhood is now being accused of manipulating the market by putting restrictions on these

guys. And these guys, the Redditor guys, were being accused of manipulating the market in a quest to stop the hedge funds. manipulating the market in a quest to stop the hedge funds. And the hedge funds were being accused of manipulating the market for their own gains at the beginning. All of which are like valid criticisms that I'm sure those conversations are happening and, you know, securities regulators and securities lawyers are having those conversations now. I mean, I guess I would say like, you know know to put on my sort of capitalist hat for a second here like the point of the market is supposed to be it's a way of allocating capital

or money to companies that can like make the best use of them it's like i should be able to take my money out of blockbuster and put it into netflix because like netflix is like a good service that we all use and like you know provides us with streaming and people get rich and they employ people. So it's good for everyone. It's not just some game that I won and everyone else lost. That's supposed to be what markets do. They help companies to grow and expand and thrive. And the rising tide raises all boats.

I haven't seen much of that happening in the last week or so from what I've been reading. Right. I mean, what you're explaining is sort of the way the market is supposed to work in a rational way. But I guess this does bring me to this even bigger question that I have, which is that it just all seems so irrational, regardless of who is playing. And do you think that this is a good example of the stock market writ large, right?

Like, I can't help but think to myself, we're in a massive economic recession right now, and the stock market is like fine. None of this seems rational. It's better than fine. It's doing great. I mean, like, it is certainly, you know, I'm not going to tell you whether this is good or bad, but it is certainly like fine to suggest that like this whole story has shined a light onto the fact that there are problems in the system. Like you might

have like thought the system was one way and maybe you thought there was a bias or it was like tilted in one way or the other, but all these loopholes are being sort of like brought to the light. And that's not good. Like the solution to saying like the market's unfair, let's just cheat this way. That's not the system we want to have in anything in our politics or economy or anything like that. Why do you think people are so drawn to this story? Like everybody I know is talking about this story. My social media feeds are just filled with people totally gripped by this saga. I mean, I think it speaks to a lot of things. It's extremely online, as we were saying earlier.

It's got all the recipes with sort of memes and GIFs and that sort of stuff. It's got your Wall Street hedge fund villains, whether that's a fair comment or not. That's what they can come across as in the story. It's got that sort of Robin Hood angle to it where it sort of, at first blush, feels it's sort of, you know, at first blush feels like the big boys, the Sheriff of Nottingham is being bad. And like those plucky underdogs found a way to win one back. So yeah, the recipe is all there. I just think it's also interesting

that, you know, the stock market, and this is not a good thing, but the stock market is generally a very intimidating place for a lot of people. And so anytime like something can burst through in a way that makes you pay attention to it and just underline just like some of the wackiness of it. I mean, if you knew nothing about, if you knew nothing else about it, you know, this week you learned about things like short selling and like maybe the phrase naked shorts came into your life. I mean, like what an insane thing that is a wall street invention, but like call options, put options, all these things, these terms and practices that are like designed to be obtuse. And I think whenever the average person is like,

what is going on in that crazy market? It just sort of gives us a bit of a giggle because, you know, we don't feel like we've lost here. Like they weren't taking my money or your money. It was the haves and have nots had a funny fight and the have nots won for once. So that's, that's sort of fun to watch. All right, Pete Evans, thank you so much. Thanks for your time. All right. So before we say goodbye today, just a quick update on Ben, the Redditor that we spoke to who had bought in and brought his mom along too. He texted us on Thursday to say that he had sold, quote,

due to the ban and the spike down in the price per stock. The ban being the restrictions put on GameStop by the trading app Robinhood. He said he already regrets the decision and wishes that he had held on, but he did note that he broke even. That's all for this week. Front Burner is brought to you by CBC News and CBC Podcasts. The show is produced this week by Imogen Burchard, Elaine cbc news and cbc podcasts the show is produced this week by imogen burchard elaine chow shannon higgins and ali janes ali was actually responsible for our episode about the young canadian woman who had two people in her life go down the conspiracy theory rabbit hole i think it was a really important story to tell and so thank you so

much for that ali our sound design was by Derek Vanderwyk and Matt Cameron. Our music is by Joseph Shabison, a boombox sound. The executive producer of Front Burner is Nick McCabe-Locos. And I'm Jamie Poisson. Thank you so much. And we will talk to you on Monday. For more CBC Podcasts, go to cbc.ca slash podcasts.