The Breakdown - Wall Street Is ‘The Hunger Games’ With Suits

Episode Date: February 7, 2021

On this edition of Long Reads Sunday, NLW reads Ben Hunt’s latest essay “Hunger Games” about the lies of Wall Street and how the GameStop episode has exposed them for all to see. 

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? It is Sunday, February 7th, and that means it's time for Long Reads Sunday. And boy, oh boy, do we have a fiery one for you today. Today's selection is going to be Hunger Games by Ben Hunt published this week on his website, Epsilon Theory. Ben has obviously been a frequent guest on the show, and I think his perspective on the whole GameStop movement is interesting. It's a little bit different than mine,

in the sense that where his frustration has located itself is less about the betrayal of the traditional financial system, because of course they were always going to betray. Because what did we expect was possible. His frustration is less about some perceived betrayal on the part of Robin Hood or any other aspect of the financial system, and more of frustration with the promoters, the billionaire tweeters, who were egging the GameStop community along, saying they should go try to fight the system when inevitably and always that system was going to eat them alive. I think rather than say any more right now, I'm going to read the piece and let you make up your minds for yourself. You have been told that investing in the stock market is like betting on a sports game. You have been told that you are a

spectator in the game of markets and that you are watching a game being played out in front of you by lots of different companies. You have been told that you should make bets on those companies based on how well you think those companies can play the game that you are watching. The companies will play the game and they will keep score by beating or missing on revenues and earnings and the like, and then that score will determine whether or not your bets pay off. You have been told that the better you are at analyzing the teams playing this game, the more due diligence you put into studying the teams playing this game, the more money you will make with your bets.

You have been told that everyone can win with their bets, and that is how you too can achieve the wealth that you deserve. You have been told that the odds are ever in your favor. You've been told this for your entire life. More and more, you suspect that this is a lie. But if it is a lie, what then? What meaning exists in the stock market if this is a lie? Over the past few weeks, you've been told a new story, a brave story, a story of heroes,

a story of meaning. You've been told that by banding together and acting as one, you can, quote, democratize the stock market. You've been told that you can slough off your market oppressors who want companies to fail. You've been told that you can be a participant in the game of markets, that you can storm the playing field of companies, that you can take matters into your own hands and rescue a promising company under unfair attack. And yes, make some good money in the process. Why not? Seems only fair. Today, as you see the collapsing stock prices of the companies you supported, you suspect that this was a lie as well.

And you'd be right. Neither story is true. Neither story has ever been true. Both of these stories are narratives for our very own Hunger Games, a spectacle that chews up the participants in the arena while delivering enormous profits to the networks, media, financial, and political that put them on. Media networks count their profits in eyeballs

in the attention the games garner. Financial networks count their profits the old-fashioned way in the sheer volume of dollar-generating order flow the games produce. As for politicians, they get their most valuable coin of the modern realm, an issue. The wackos on the left get to propose insane transaction taxes. The wackos on the right get to tell us how much a liberty we are enjoying by giving Ken Griffin all of our money. The very serious centrist get to tell us about how we need a national conversation about the T-plus-2 settlement issues raised here. And what about the rest of us? What about the rest of us reading story after story about the Reddit revolution and what it means for us?

What do we get out of the Hunger Games? We are entertained. This. The events of last week, with GameStop soaring to $400 a share and a subreddit chat group being the focal point of the revolution, and Robin Hood shutting down trades at the height of the frenzy, and every hedge fund in the world degrossing at a mad clip, and the usual Caesar Flickermans in politics and media trumpeting out a bullshit narrative that the little guy sticking it to the man

changed nothing. You were played again. Also this. The events of last week, with GameStop soaring to $400 a share and a subreddit chat group being the focal point of the revolution and Robin Hood shutting down trades

at the height of the frenzy and every hedge fund in the world degrossing at a mad clip and the usual Caesar flickermans and politics and media trumpeting out a bullshit narrative of the little guy sticking it to the man changed everything.

We had two Emperor's new clothes moments last week. Two moments that individually come around every 20 years or 30 years. In one week. What is a new emperor's new clothes moment? It's when the meaning of a social institution changes on a dime. It's when the common knowledge of a social institution, what everyone knows that everyone knows, changes on a dime. Last week's events accomplished every goal set out by the orchestrators of the Reddit Rebellion. Goal one. Melvin Capital's ridiculous short position was obliterated, and there was much rejoicing by the usual Wall Street suspects who had set up their long positions in hopes that this narrative snowball they rolled down the hill would create just such an avalanche.

Goal number two, both retail order flow and target stock volatility grew exponentially, creating windfall market maker profits. Sure, things got a little dicey there with the whole Robin Hood Clearinghouse thing, but all's well that ends well. But accomplishing these goals came at a price. The curtain was pulled back on what Wall Street really is, and the man behind the curtain was revealed for everyone to see. We all see it. And here's the first thing we all saw. We all saw that the thing that determines whether or not our stock market bets pay off is other bets. We all saw that there is no game of companies taking place independently of our bets. We all saw that our bets in and of themselves can win the game with absolutely zero input

from the team that is supposedly out on the field. What happened last week would be exactly like New York Jets fans getting together and deciding, hey, if enough of us bet on the Jets to beat the Patriots that will cause the Jets to beat the Patriots. Insane, right? But that's exactly what happened. Because unlike football, the bets are the game. This is secret number one. This is what Stevie Cohen and all the hedge fund masters of the universe know that you don't.

Here's the second thing we all saw. We all saw that the rules of the game can be changed without warning if the game isn't working out for the owners of the game. We all saw that the dominant retail broker platform and non-dominant ones too were told by trading settlement rule makers to shut it down for a day. No warning, no hearing or discussion, just a phone call that they were on double secret probation and could either come up with billions of dollars in cash now or shut it down. What happened last week with Robin Hood would be exactly like if the referees who were

working that Jets versus Patriots game, the ones that the Jets were miraculously winning, decided at halftime that the Jets would not be allowed to have the ball on offense in the second half unless they ponied up a couple of billion dollars in an escrow account. Insane, right? But that's exactly what happened. Because unlike football, the referees own the game. In this game, it's not the people who make the biggest and most profitable bets, who have the most money and the most power. No, it's the referees. And by referees, I don't just mean the people who adjudicate the rules at the settlement clearinghouses. They're basically the equivalent of, say, college football referees, an important but not that important subset of all referees.

I want to focus on the equivalent of professional sports league referees, the top of the referee hierarchy, if you will. I want to focus on the people who place the ball on the 40-yard line or the 41-yard line in the Super Bowl. On the people who whistle a charge or a block on LeBron's drive, on the people who call balls and strikes on Jared Cole. And who call the shots at the settlement clearinghouses, too, if you want to know the truth. I want to focus on the people who adjudicate the bets and take a small fee from every transaction for their trouble. I want to focus on the market makers. Many investors want to be a part of the next bull run. Others seek to build their dream home, finally launch that startup or fund their education.

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They did this without taking any market risk. None. Every time you push that button on Robin Hood to buy something, Citadel Securities matches you with the seller and tells both of you what price you got. Every time you push the button on Robin Hood to sell something, Citadel Securities matches you with the buyer and tells both of you what price you got. And in that infinitesimal point in time when there is a tiny difference between what a buyer bids for a security and what a seller asks for a security, an infinitesimal point in time when Citadel Securities is both buyer and seller of that security. An infinitesimal point in time that exists for every market order that has ever occurred in the history of man, Citadel Securities is there. They pocket that tiny difference. Not so tiny in the case of options. Definitely not so tiny when

volatility spikes and that bid-ask spread widens dramatically. That's what a market maker does, and that's why they are the masters of this game. They literally make the market. Citadel Securities doesn't care if you're buying or selling. Citadel Securities only cares that you are buying or selling. And you are. Business is good. Everyone all of a sudden wants to download that Robin Hood app and start trading. You may have noticed that there are a lot of media stories about that. Virtually all of the Robin Hood orders go through Citadel securities. Why them? Because they pay Robin Hood top dollar for it. That's how Robin Hood makes money. Not by charging you a fee on your transactions, but by selling your flow to Citadel securities. What's that line? When the products is free, yada, yada, yada.

You know who else Citadel pays top dollar to? Janet Yellen. For the nanosecond that Janet Yellen was between jobs as Fed Chair and now Treasury Secretary, Citadel paid her $810,000 to deliver three speeches. Apparently that first speech was so riveting that they needed two more. And you thought your 10-bagger and GME was a good investment. Imagine spending 800,000 to be best buds with the person who regulates your $7 billion in annual revenues. It always amazes me how cheap it is to buy political influence, the best investment on earth. This is secret number two. This is what Ken Griffin and all the market maker masters of the universe know that you don't. Is any of this stuff illegal?

Probably not. Maybe. I don't know. But here's what I'd be asking if I were a congressional staffer trying to figure out how to make my boss look good. First, I'd swear in CEO Vlad of Robin Hood and ask him the following question. Sir, are your internal controls so poor and your understanding of markets so rudimentary that you found yourself in violation of capital posting requirements to such a degree that your only option was shutting down client trades or did the National Security

clearance corporation raise their capital posting requirements to a shocking and unprecedented level without warning? Now, the answer to at least one side of this question must be yes. Maybe the answer to both sides is yes, but at least one must be. And if the answer to that latter side of the question is yes, well then we need to ask the NSCC some questions. Start with the people who are on the phone with Vlad. I bet he remembers their names. I can promise you his lawyers remember their names, work backwards from there. How did this decision to give Gabe and Stevie and all of the other hedge fund titans on the wrong side of this ridiculous trade a day to trim their sales and throw their ballast overboard come about? How did this process begin? Who made

the first call? I suspect many people will need to refresh their relections of these events. Ah well. And then I'd call CEO Vlad of Robin Hood back for some follow-up questions. Because you see, in the days immediately after this extortionary rules change and emergency shuts, down, Robin Hood got 3.4 billion in new capital. Hmm. If a prime broker had pulled this stunt in the institutional world, it wouldn't have survived a single day. But Robin Hood gets billions in more capital, more capital than it has ever raised in all of its investment rounds before, combined. Hmm. Per Matt Levine, the VCs got a substantial desperation discount. They bought convertible notes that will convert into equity at a $30 billion valuation, or a 30% discount to an eventual valuation

in a public listing, whichever is lower. Per the WSJ, new and existing Robin Hood shareholders participated in the deal, which is structured as a note that conveys the option to buy additional shares at a discount later, a person familiar with the matter said. So, here are my follow-up questions for Vlad. Sir, Bloomberg describes your latest financing round as being priced at, and I quote, a desperation discount. Who are the new participants? in this financing, sir, where the participants or the terms or any other aspect of this financing discussed alongside your negotiation with the NSCC for permission to resume trading. And before you answer, sir, I would remind you that you are under oath. And that's when this gets interesting. Because,

of course, the capital raise was part of the negotiations with the NSCC, and of course the new participants will include a friend of Ken or a friend of Wes or a friend of Stevie, if not an outright market maker affiliate. And the beat goes on. Honestly, though, the investigations in legal issues around last week are a sideshow. None of these postmortems are going to change Wall Street. What happened last week wasn't some aberration that can be reformed or punished so that we can return to some mythic Wall Street that never existed in the first place. What happened last week is Wall Street, and government regulators have zero interest in changing it. All this concern that Janet Yellen and regulators suddenly have for the little guy, all this worry that retail investors

are getting themselves into trouble. Complete theatrical horseshit. The only worry regulators had, was a degrossing contagion, and whether they needed to step in to ensure big financial institutions, including hedge funds, didn't go belly up from all of their suddenly excessive risk. So nothing changes, right? Not if you expect Janet Yellen and Ken Griffin to do the changing. Well, screw that. We're never going to get change in Wall Street from the top down. We're never going to get change from reform. We're only going to get a change in Wall Street by the way that true and lasting change always comes, from bottom up in individual action. The time to take action is now. Why? Because we all saw what we all saw last week. That's what it means

to have an Emperor's New Clothes moment, to have a sudden shift in our common knowledge about the stock market. The common knowledge that the market is a derivative reflection of some real-world game of companies is gone. It's over. It can't be saved. No matter how many times Jim Kramer or Caesar Flickerman says otherwise, there's no more shushing and whispering about the two big secrets of the market. Everyone knows that everyone knows that, one, bets are the market, and two, market makers own the market, because we all saw what we all saw last week. There was a revolution last week, just not the revolution you heard about. There was no Reddit revolution. That's not a thing. It's just another story spun by those who would use you for fodder or feed or

flow. There was a common knowledge revolution last week. The only revolution that really matters over the long haul, and that is what changes everything. This is our chance to mobilize a critical mass of citizens, our chance to break out of sheep logic that has gripped us for so long. It won't be our only chance, but it's a good one. I don't want to democratize control over Wall Street. I want to diminish Wall Street's control over democracy. I don't want to open up Wall Street to the little guy. I want to reduce Wall Street's pernicious power and control over the little guy.

I don't want a new viral narrative of meaning for Wall Street. I want to vaccinate against the faux narratives of meaning that Wall Street constantly evolved. How do we do all that? Through policy action, investment action, and personal growth, all are easier as a team. All are easier as a PAC. Policy action, we take every opportunity to press legislators and regulators to take leverage out of financial institutions. All of them. Every chance we get. And yes, I understand full well that taking leverage out of Wall Street means getting off zero interest rates. Yes, please. Investment action. We take every opportunity to put our money where our money. our mouth is. We invest to achieve fractional ownership positions in real-world companies with real-world cash flows. We invest in public markets as a transmission belt for placing our private capital with management teams who can utilize that capital to more productive ends than we can. You know, what a stock market is supposed to do. When it's necessary to sit down at one of the casino tables that modern markets have become, we are armed with tools to measure and calibrate the narratives

that determine price and flow around those tables. Even if it's the only game in town, we refuse to be the sucker at the table. Personal growth. It's the question that I posed earlier. It's the only question that really matters. If it is a lie, what then? What meaning exists in stock markets if this is all a lie? Meaning is found in calling a thing by its proper name. Meaning is found in the choice to engage with that properly named thing in the fullness of your identity and human autonomy. Clear eyes, full hearts can't lose. Or in a full-blown zen cone mode, my all-time fave. This is from Zen Flesh, Zen bones, a collection of Zen and pre-Zen writings. Tanzan and Akito were once traveling together down a muddy road.

A heavy rain was still falling. Coming around to Ben, they met a lovely girl in a silk kimono and sash, unable to cross the intersection. Come on, girl, said Tanzan at once, lifting her in his arms, he carried her over the mud. Akito did not speak again until that night when they reached a lodging temple. Then he could no longer restrain himself. We monks don't go near females, he told Tanzan, especially not young and lovely ones. It is dangerous. Why did you do that? I left the girl there, said Tanzan. Are you still carrying her?

It's the hardest thing in the world, right? To let go of those thoughts and narratives that have been drilled into our heads for as long as we can remember. To let go of the narratives that we have been carrying around like so much dead weight for years. To see the markets with fresh eyes and yet not give yourself over to bitterness, but to engage with the market for the good that presents itself on its own terms. On its own terms. It's not easy. It's a two-step forward, one-step back type of thing.

I struggle every day with this letting go process, especially with the no-bitterness part. And I'd like to think I'm more of an adept at this than most. But it's so worth it. It's so necessary if you're going to invest a part of your life towards playing the game of markets. This is the biggest game in the world. If you're a game player, as I am, you cannot resist it. The question is, can you survive it? And I don't mean financially.

You'll be fine. I mean, can you survive it with your autonomy and your authenticity? and your honor intact. The long now is going to get worse before it gets better, and there is strength and numbers. Watch from a distance if you like, but when you're ready, join us. I've said before, and I'll say again, and this is Nathaniel again, that ultimately this show is a show about power, and it's about how power is shifting. Sometimes it's about how power seems like it's shifting when it's actually being consolidated. And I think often about how adept power is at infiltrating the disruption that might come for it. When I look at this market moment over the last couple weeks,

what's clear is that this is about power. And there are literally exactly two options. Either we let it be a consolidation of power by the already powerful, or we, as Ben put it, name it for what it is. We call it out. We engage with it. And we wrench just a little bit of that power back to us. And when we've wrenched the door of power back just a little bit, we jam something in there so that it can never close fully again. I hope you're having a great weekend, guys. Until tomorrow, be safe and take care of each other. Peace.