The Breakdown - Is This the End of the Reddit Retail Investor Dream?

Episode Date: February 3, 2021

WallStreetBets is having a rough day. Its stocks are crashing. Champions from as recently as last week are selling out. More brokerage apps are turning off buying.  In this episode, NLW explores what it means for this set of assets and the larger shift in power from institutional to retail investors.  He argues, ultimately, that over the last year retail traders of the type led by WSB have established themselves as too powerful a force for the market to simply turn away from now. -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

There once was a stock that put to see the name of the stock was GME. The price blew up and the shorts dipped down. Hold my bully boys hold. Soon may the Tendie Man come to send a rocket into the sun. One day when the trading is done, we'll take our gains and go. Before the news had hit the market, Wall Street bets came up and bought it. With diamond hands they knew they'd profit if they could only hold. Soon may the tending man come to send our rocket into the sun. One day when the trading is done, we'll take our gains and go.

As far as I've heard, the fight's still on, the shorts not squeeze, and the gain's not one. The tennie man makes his regular call to encourage the captain crew and all. Soon may the tending man come to send our rocket into the sun. One day when the trading is done, we'll take our gains and go. Soon may the Tendie Man come to send a rocket into the sun. One day when the trading is done, we'll take our gains and go. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world.

The Breakdown is sponsored by nexo.io and produced and distributed by CoinDesk. What's going on, guys? Tuesday, February 2nd, and that song that you just heard was called The Tendie Man. It is a sea shanty, obviously, and it was posted on Wall Street Betts two weeks ago by user Quigon Shin. The lyrics feel particularly pertinent today. As far as I've heard, the fight's still on, the shorts not squeezed and the gains not won. One day when the trading is done, we'll take our gains and go. Today's episode is about a key question. Is the trading done? To read the numbers or the headlines, one could be forgiven thinking that this

whole retail investing movement was dead. So what's the truth? Is it really over? Is Wall Street bets crawling back into the hole from whence they came never to rear their ugly heads on traditional markets with upstanding participants ever again? Of course not. But let's dig in. First, let's review the story so far. Last week, my main episode on Wall Street Betts was focused on the idea that this was about more than any single stock. Instead, it is about a power shift, or at least an attempt among the part of retail traders, to reclaim market power that has been denied to them. Yesterday, we talked about the state of that movement. More specifically, we explored whether and how it was being co-opted, either maliciously by hedge fund bots and institutional infiltrators, or we talked about

more legitimately, but no less messily, by an influx of new community participants who had different interests, different values, and different bags to pump. My point on yesterday's show about silver was that, to the best of my ability to read it, the mainstream USB community was actively trying to say, don't try to squeeze silver, while every mainstream media story was saying they were trying to squeeze silver. The best counter argument that I've seen to my position is that Wall Street Betts mods have been aggressive about shutting down anything about silver. So perhaps the lack of discussion on silver on the subreddit is less reflective of the community's interest and more about the centralized authority of the mods. While my skepticism remains, in the context of Wall Street

bets being the world's first large-scale, the centralized hedge fund, as it was called by Chimath Palahapitia, questions of centralized authority are not only appropriate but necessary. So what's happening today. Despite all the cheering, memes, and cries of hold, it would appear that the levy is breaking. GME is down 47% on the day. AMC, 39%, BlackBerry, 19%. People who were champions last week like Dave Portnoy are having second thoughts. He tweeted that he sold all of his meme coins, losing 700,000. He also tweeted that he thinks the Robin Hood founders should be in jail. And on his live stream, he said that he doesn't blame anyone because when people aren't allowed to buy, it's almost guaranteed to go down. Still, you can feel the squeeze, only it's not the short squeeze

that Redditors were trying to create. It's the squeeze of the boa constrictor of financial reality settling in around the holders. One part of the squeeze is from the financial establishment. As we discussed on the show previously, it seems that their decision had more to do with capital requirements and their broker, then some emergency phone call from Citadel, but there are still major questions such as why buying was the only thing shut off. While there is a hearing now scheduled in Congress for February 18th, even if there was malfeasance and more unlikely than that, punishment for said malfeasance, the damage will have already been done. What's more, it's not just Robin Hood. Just today, Cash App had buying turned off for AMC, although they handled

it very differently. Cash App posted this blog post. Clearing broker has halted buys of AMC and Nokia. The clearing broker who processes our trades, Axos, has temporarily halted Cash App's ability to complete purchases of AMC and Nokia. This was not Cash App's decision. This halt only applies to buy trades of these stocks, sell trades remain available. Cash app currently works with a carrying broker dealer drive wealth and a clearing broker-dealer Axos to process trades on our customers' behalf, and we are entirely subject to our broker's ability to support our trades. Clearing brokers must provide capital deposits to support trading. Yesterday, the Central Clearinghouse, DTC, significantly increased the capital requirements on Axos. As of this time, Axos has not provided the necessary

additional capital and has restricted purchases of AMC and Nokia. To provide our customers with full transparency. We've posted the exact email we received from Drive Wealth regarding the buy-trade halt. Cash app has not yet been provided with a clear path to fix this situation ourselves. We are monitoring the situation closely and are working to make these stocks available for purchase again as soon as possible. Effectively, quite the opposite of Robin Hood, these guys threw their broker under the bus and said this is not the decision that we would have made. Still, even if Cash App is acting better, it doesn't change the fact that this. This power has been reclaimed away again from the Reditors, from the retail investors.

A second part of the squeeze on them comes from financial media. Every headline is brutal. The Wall Street Journal says GameStop shares tumble. Bloomberg says GameStop breaks below 100 as Route erases $28 billion in value. The Financial Times says GameStop shares plunge as Reddit rally deflates. What's more, some headlines have moved on even to minimize the role of retail in the first place. Another one from Bloomberg says Carson Block suspects hedge fund coordination in short squeeze. Now, Block is an activist shortseller. He's the CEO of Muddy Waters, and he doesn't have a

bone to pick with the Redditors. But this type of headline has the impact of reducing the role of retail by default. On the one hand, all of these media outlets are just reporting the numbers, right? The same numbers we discussed above. On the other, there is a natural narrative arc of these stories. The heroic David versus Goliath fight was fun on the way up, but you could only write so much of that story before you want to give your reader something new. I don't think the media caused this turnaround, although people will argue that the silver story certainly didn't help focus conviction. What's absolutely clear to me now, however, is that the media has made clear that they are over this story. They are no longer interested in indulging the fantasy that these small investors

could change anything about the system. Take, for example, Joe Wisenthal from Bloomberg's tweet, the idea that Wall Street bets was this close to taking down the financial system, but then Robin Hood stepped in to save it at the behest of Janet Yellen, Ken Griffin, and Steve Cohen is going to be a myth that people believe for years to come. On the one hand, Joe's right. Of course there wasn't some vast grand conspiracy. On the other, how sad and dismissive of something so much bigger than just one stock? How patronizing to an entire community of people who've spent an incredible amount of time trying to understand the dynamics of a market and find their edge to participate.

How utterly reflective of the baseline built-in table stakes contempt that traditional financial media has for everything and everyone who aren't part of the existing power structure of markets. However, ultimately, it's not just the squeeze of the financial infrastructure, and it's not just the squeeze of the media that kills. The final part of the squeeze comes from within. There is a reason that this community has so much meming around diamond hands. Their strategy was, admittedly, by all who have written about it, a game of chicken, a game of who blinks first. Yet at the same time, the individual members of this WSB army have real lives, real families, real considerations. At some point, you have to think that some reasonable number of them had achieved serious gains.

The temptation to sell, especially as both the market apparatus and the narrative were shifting against them at once, must have been immense. Looking for the best way to stay on top of your investment game, nexo.io has you covered in three easy steps with their high-yield savings account for digital assets. Step one, create an account at nexo.io. Step two, transfer assets to your secure nexo wallet with new. no minimum or maximum limits on funds deposited. Step three, sit back, relax, and earn up to 12% compounding interest paid out daily on your crypto and fiat. Your passive income made simple. Get started at nexo.io. What does Wall Street Betts think? This is not a community that's going to give up easily. In many cases, because they simply can't. It would mean ruin. To look at the

subreddit today, there are two types of posts by and large. The first are trying to explain the crash as engineered by financial institutions. There's a lot of arguments that it's a ladder attack where institutions are selling it to each other for cheaper to drive the price down. The second, as you might expect, is encouragement to continue on. Mark Cuban joined the subreddit for an AMA today and had this to say about everything going on. When someone asked, why is the stock plummeting so much? Cuban responded, supply and demand, but in this case it literally could be because the source of demand has been crippled. When Robin Hood shut down, they cut it back, let's put aside why, they cut off the greatest source of demand. They created a Robin Hood dive. No Robin Hood buyers

means sellers lower their price to find buyers, and they keep on lowering until they find buyers. Keep the most natural buyers out of the market and the price keeps on falling. Then that drop accelerates because the more the stock falls, the more owners who bought on margin get margin calls. When the margin call happens, it's brutal. They just take your stock, send you a fuck you note and sell your stock at the market price no matter how low. They just want to get your cash to pay back the loan. That then accelerates the selling, which then leads to what we're seeing in the market right now with GME in particular. So what to do? If you can afford to hold the stock you hold. I don't own it, but that's what I would do. Why? Because when Robin Hood and the other

online brokers open it back up to buyers, then we will see what WSB is really made of. That is when you get to make it all work. I have no doubt that there are funds and big players that have shorted this stock again, thinking they are smarter than everyone on WSB. You are going to hate to hear this, but the lower it goes, the more powerful WSB can be stepping up to buy the stock again. The only question is what broker do you use? Do you stay with R.H., who's going to have the same liquidity problems over and over again? Or do you, as a group find a broker with a far, far, far better balance sheet that won't cut you off and then go ham on Wall Street. So let's now discuss what this all actually means and go back to the main question of this podcast. Is this the end of

the Reddit retail dream? As I said at the beginning, the TLDR, and of course you knew I was going to say this, was no. But to better understand it, let's look at it from two sides. First is the dream of GME and AMC in these particular assets. Second is the dream of retail reassertion. themselves as a meaningful force in these markets. On the first front, I have absolutely no idea what happens next. I suspect it honestly has to do with just how many people have the stomachs to continue to hold. When you zoom out, GME is still up massively, at $113 from $20 on January 12th. The game of chicken is still on. However, the question is how many people are underwater now on that, and how many people can afford to keep on holding with the risk that it goes to zes?

I will say that I think for now at least the media narrative is pretty well lost. I also want to acknowledge that there are some for whom this first question, the dream of GME, is inextricable from the second. In other words, as GME goes, so goes retail as a whole, especially for those who are all in. But I don't think that's true. So let's look at that second front, the dream of retail reasserting themselves as a meaningful force in the markets. First, performance of retail has been unignorable over the last 11 months. GME is the first stock where it made major attention because the retail community was going after some specific other vaunted institution, i.e. it identified an enemy in Melvin Capital and took the fight to them. But if you look at the last 11 months,

retail has absolutely kicked the crap out of institutional investors. According to Goldman Sachs, over that period, the S&P 500 is up 72%, hedge fund long favorites are up 106%. And retail favorite are up 179%. And by the way, a lot of that S&P 500 gain is directly attributable to the fact that retail investor bullishness made institutional investors doom and gloom post-COVID a losing strategy, so they had to overcorrect and get on the bull train much faster than they might otherwise have. I don't believe that market professionals are going to ignore that type of force. I think they can't afford to ignore it any longer. Second, what happened with Melvin Capital exposed that retail is getting more sophisticated. In other words, they can play real financial games

and go toe to toe with the big guys. Not only is that unlikely to change, one, it's likely that retail gets even more sophisticated, and two, it's likely that many in the financial mainstream are going to try to partner with or align their strategies around those retail investors. Sometimes this will be in good faith, other times it will be a user relationship. Sometimes it will start in good faith, but because of financial incentives, end in tragedy. A new skill set that retail will have to evolve is separating these out, which gets us to the third reason why it feels very unlikely to me that the retail dream has died. A new generation of infrastructure is likely going to change in response to this new market force.

I discussed cash apps stark messaging difference from Robin Hood, but public.com went even farther. Now, a big part of this whole movement started when apps like Robin Hood started offering quote-unquote free trading, i.e. you didn't have to pay when you made a trade. However, that's not exactly true. Users may not have had to pay an explicit fee, but their data, the data around what trades they were making, was being sold to external bidders. That's the cost. It's a classic example of, if you're not the customer, you're the product. Yesterday, Public published a post called aligning with our community and said that they were ending that business model. Here's the key section called Where Do You Go After Zero Commission?

Quote, we've given a lot of thought to the future of our industry and have come to the conclusion that most players have been following each other without actual leadership. We were part of that. We started off with Zero Commission accepting it as the standard for the industry. And in turn, we participated in payment for order flow, PFOF. This is a practice where brokerages are paid to route orders to market makers for trade execution, creating a potential conflict of interest between brokerage and customer. To do the right thing for our customers, we have to lead the industry with first principles

thinking and proper values. Public will stop participating in payment for order flow and introduce tipping. To align our incentives with those of our members, we will stop participating in the practice of PFOF and instead introduce a tipping feature on trades. By doing this, we can remove this conflict of interest from our business model. Trades will remain commission-free and tipping is entirely optional. Whether this model works is yet to be seen, but at least it shows that there will be changes designed to cater to this market and what it demands and expects. A fourth factor in why this retail dream isn't dead is that there are going to be regulatory hearings about this. As I mentioned, a date has been set in Congress for February 18th, and there are people from both sides

of the aisle who are not happy about this. Well, I think it's a reasonable question and concern about whether there can be real regulatory impact that makes markets more fair, rather than is just exploited as a new set of loopholes for the most powerful, at least there's a conversation happening. But fifth, when it comes to this retail dream, which as I've said so many times, is really about power and who has it in the system, and at the risk of being predictable, you have to look at Bitcoin and the world of decentralized financial rails that are being built. I tweeted earlier today that the house always wins. The interests are so huge, the power so entrenched, the ways to exert influence so immense and opaque, it feels truly impossible to change anything and even get

anything but your scraps from the table. This doesn't mean don't try. As I've articulated above, I think retail is likely to become more rather than less of a market force. But I would point to something that Naval tweeted a few days ago. It's easier to build a new financial system than it is to reform the existing one. I don't want to be overly bombastic here. There are going to be major forces trying to smash Bitcoin and the decentralized finance ecosystem into existing regulatory frameworks that will benefit big players more than little guys. Stablecoins could introduce a battle that could hit the highest levels as they compete with Fiat Central Bank digital currencies. But it is impossible to look at what is being built on Bitcoin and in the larger decentralized finance space

and not see the genesis of something that is largely out of the power and control of the institutions that dominate markets the day. Which brings me to one more Naval tweet, if you want to bet with the internet, bet against institutions. Michael Krieger reiterated this, saying at an individual level, the GameStop saga was about profit and loss, but at the macro level, it has nothing to do with that. The real purpose was to force the system to respond, thus showing its desperation and fragility. mission already accomplished. There is a larger battle here. Don't let media or anyone else reduce it. Don't doubt your own conviction. And remember that the diamond hands that you need most aren't about anyone asset,

but about the belief that a different financial system is possible and the fortitude to do the things required to bring it into existence. Until tomorrow, guys, be safe and take care of each other. Peace.