This Week in Startups - Emergency Pod! WallStreetBets vs. Suits, breaking down the GameStop fiasco & more | E1167

Episode Date: January 28, 2021

FOLLOW Jason: https://linktr.ee/calacanis Clips: Andrew Ross Sorkin (CNBC) https://twitter.com/squawkcnbc/status/1354386200157675521 Andrew Left (Citron) https://youtu.be/yS4yPsmaDDQ Chamath Interview with Scott Wapner (CNBC) https://www.cnbc.com/video/2021/01/27/watch-cnbcs-full-interview-with-chamath-palihapitiya-on-gamestop-and-reddit-fueled-surge.html

Hey everybody. Hey, everybody. It's an emergency pod. Yes, you've been waiting for one. Game Stop and Wall Street bets. The markets are going crazy. Retail investors over at Wall Street bets have taken the wheel. The inmates are running the asylum, the asylum being Wall Street, and the suits are panicking while all of these rules are changing. $39 for GameStop just a couple weeks ago. Now it peaked at 370. We're going to explain to you what Wall Street bet. is how it started and this entire GameStop fiasco, which is unprecedented in the history of the stock market when we get back on this emergency pod. Stick with us. Do you ever wish that you invested early in the best performing IPOs of 2019 and 2020? Well, our crowd investors did invest early in many of these amazing IPOs that we're seeing now. And with our crowd, accredited investors can invest directly and easily in startups early before they IPO and before they get bought. And it's really super easy to do. You go to our crowd.com slash twist, our crowd.com slash twist. That's where you can sign up. It's free to sign up when they have an exit.

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Before we get into this GameStop saga that we have been watching, Let's do a little refresher here on Wall Street Betts. If you don't know what Wall Street Betts is, it is a subreddit on Reddit. So Reddit has message boards. Those message boards are called subreddit. So just think of it as a message board where people can post something and people reply to it. It's currently at, wait for it, over 3 million subscribers. They call themselves degenerates.

And Wall Street Betts uses a bunch of different Discord rooms. Discord is kind of like Slack, but for the video game community. So it's an application. You can run it in a browser, but it's also a downloadable app where you can have a chat room. So you have people on a message board on a subreddit on Reddit, and then you also have a bunch of different chat rooms where people are talking live. And what they do is they talk day and night about buying stocks, right? And they've gotten really sophisticated over time.

So there are over 700,000 active users during the trading hours on these sites. They self-describe themselves as what would happen if a Bloomberg terminal and 4chan, which was like the dark, really dark message board that was like things that were too controversial for Reddit went on 4chan. The typical investor or degenerate, as they call themselves, are younger millennial males underemployed, many still in some form of lockdown with nothing urgent to spend their stimulus checks on. This is a broad brush we're painting with here, but it is a very unique confluence of events

that's occurred between the pandemic, no sports betting, and of course Robin Hood, you know, making it easier to trade stocks. So this was created Wall Street Betts back in 2012 as a place where retail investors, which have not been participating in public markets. Retail means just you and I, people who are civilians trading stocks. That's what they mean when they say retail investor. And this is a place where they could make their own bad trades. They could post loss porn, which is basically screenshots of just ridiculous losses they've taken and just joke about the public markets and trade memes and all that kind of stuff. Some users, would post very detailed analysis of really cheap, cheap stocks, you know, like penny stocks and

that kind of stuff with huge growth potential, looking for, you know, maybe the next Apple or Tesla. And it was like this like little research department, like a boiler room. And it started to game Steam in 2017 because Robin Hood took off. And Bitcoin was seeing its first major surge. And retail investors were flooding to this market with meme stocks and crypto. So you have this really interesting group of individuals who have discretionary spending, maybe they don't have kids or a mortgage. And they now have this Robin Hood app, which lets them trade for free. They have this message board and they have nothing to do all day. They're talking to each other. And they picked a common enemy. And their common enemy was the suits on Wall Street. So the professionals. So retail

investors used to be the suckers at the poker table. Now they had their own little Bloomberg terminal, their own little army, and they decided they would start a war with Wall Street. And of course, you know, going up against institutional hedge funds and these traditional market making market makers, like this sounds crazy for retail investors to do. They could never do that. The retail investors typically would buy stocks, hold them. And then people on Wall Street would be shorting them and doing margins and puts and calls and doing all funky ideas. And they just basically had a huge edge. And of course, there was flash trading and front running the market. And so short selling was something as a tactic that people were using to manipulate positions,

you know, trying to take down a stock, making a bet against a company that maybe was weak already, creating all this bad publicity around it. You probably heard about herbal life and these other ones that people would specifically create a massive short interest. In fact, at one point in time, Tesla had the massive short interest on it. And Wall Street bets investors believed that they are basically democratizing. And this is what they believe. They're democratizing finance for the little guys and gals by taking positions in direct opposition

to the institutional short sellers. So that's where they found their battlefield. There's a lot of different ways to make money. You could bet and hold stocks for a long time. You could flip them. You can day trade. But what they really wanted to do was go after this particular, they wanted to fight their battle on a battlefield that they thought they had an advantage, which is when you're shorting a stock,

not disclosing it, and then going on seeing. NBC and trashing the company they shorted was, you know, what they claim was a fairly common practice. And people would, when you go on CNBC, you do have to announce your short positions, but or announce your positions in general. So when I go on, they tell me, hey, if you're talking at these companies, tell us if you have a position in them. So when I go on and I talk about Uber or I talk about Square, I do mention that I have a position in them and I'm long, those companies. But this all culminated in a wild series of events that all happened today. While I was skiing here in Tahoe, I decided to take a week off. And of course, I take a week off to go skiing,

you know, after 13 months of 2020, almost losing my mind in this goddamn pandemic. And then everything's blowing up. My phone's blowing up because the battleground, at least for this week, was GameStop. Now, what is GameStop? It's a video game retailer. It was very popular in like the 2000s when the PlayStation and the Xboxes were coming up because people would buy games. They would wait in line. You would physically get the game. You didn't download the games back then. And they were operating pre-pendemic, 5,500 retail stores throughout the U.S. Canada, Australia, and Europe. They were trading around $50 a share in 2013, according to the research I have here. But it's been on a steady decline for seven years, trading as low as

$3 a share in April of 2020. Today, it hit almost $400 a share. So that's a big swing, right? And there were a bunch of notable bulls who decided, hey, I'm going to place a bet here. Chimoth placed an actual bet. And then Elon just made a passing tweet about it. And he's got a lot of followers. Dave Portnoy. I must have tweeted about it as well. And then there were on the other side, these bears.

So Gabe Plotkin of Melvin Capital. What a terrible name for our hedge fund, Melvin Capital. What, Eugene Capital was taken. So anyway, it's Melvin Capital, which is a giant hedge fund with 12. $1.5 billion, and they had a large short position in GameStop. Seems reasonable, right? Then there's Andrew Left of Citron Research. He's an activist short seller, according to the notes I have here. He had a large position, short position in GameStop. So when you have a short position, you're obviously betting that things are going to go down and then you get paid when that happens,

or you get destroyed when the opposite happens, and you have to cover your short position, which means you have to buy the shares to get out of the contract for shorting stuff. And obviously, stream media. People look at CNBC as, you know, the professionals and the Wall Street bets people have no participation in CNBC, right? Retail investors are not going on CNBC, just like civilians are not going on sports radio. I mean, they may call in, but they're not hosting the programs or the notable guests. Sometime in Q3 of 2020, according to Bloomberg, Melvin Capitals, SEC filings revealed a large short position on GameStop as the stock saw a moderate mid-pandemic bump to $10 a share. And then in

late December, January, as response to the short positions, WSB, Wall Street Betts, that subreddit, that forum run by a bunch of retail investors, apparently. And of course, this is all anonymous. So who knows what the reality is? There could be all kinds of funky stuff going on on message boards. If you're on the internet, nobody knows you're a dog, right? You could be, have all kinds of spam accounts. But they all decided they would buy the stock at the same time, on mass, right?

And they would do it through call options and share buys, some combination of those. And that pushes up the price. rates what's called a short squeeze. You all know what that is, I'm sure, on those hedge funds positions. So the hedge funds are like, okay, these maniacs are buying the shares. The price is going up. We bet against it. What's going on here? They have to make a decision. Do we want to let these, you know, retail investors bully us and we have to cover our positions and take a loss? Or do we want to double down and bet that is going to go down from $40 down to $10 or from $100, right? And so the stock hit this first peak of $39 a share on January 14th. And then it continued to rise as the buzz grew. And is this market manipulation? It's just a

collection of retail investors buying the shares and talking about it. Now, if they're doing it deliberately to short squeeze somebody, is that illegal? I don't know, actually. I think we're in kind of uncharted territory because these are just individuals, you know, making bets in this giant casino called the public markets. The markets allow this. They allow people to short. They allow people to do puts and calls and buy stocks and go long. And then on Monday of this week, it culminated on January 25th with this huge surge to $100. a share. And then I think it was $70 at the close. But on Tuesday, yesterday, shares of GameStop jump from $88 to $140.40. His GameStop became the number one most traded stock in the U.S. market topping Tesla and Apple. So those are, you know, real Tesla and Apple are like established companies, obviously. And then my friend Chamas, my bestie, decided that he would buy some GameSock calls at a $115 strike price. And it was like a $100,000 position.

and he tweeted it with a let's go. And then my pal Elon tweeted his support with a game stonk, which is a joke, because stonks, which is a misspelling of stocks, always go up was a meme. And so he just said game stonk and he linked to Wall Street bets. And that wasn't him buying or selling the shock or telling him. He's just linking to the controversy, just like I might link to a controversy or talk about it here. There's no endorsement here. Well, here we are Wednesday.

GameStop up 138% trading at $347. share with wait for a $24 billion market cap with over a hundred, 70 million shares changing hands in each of the past three days. And so after hours, it's dipping a little bit here as I record this, but a bunch of people are chiming in. And so I thought I would, you know, highlight some of those here. Short seller, Andrew left from Citron Research, posted a YouTube video announcing a big loss after they exited their short position and essentially waving the right white flag. They basically said I give up. So here it is. Here's a 60 second short version. We edited it down for you. Here's Andrew Left and I'll see you after the other side of the 57 seconds. Hi, this is Andrew

left at Citrom Research. Around six days ago, I did a video explaining five reasons why I thought GameStop would go from 40 all the way back to 20. And I had no idea why that would set off. So the reason I'm doing this video is because I cannot answer one more phone call. How are you? Are you okay? Are you in business? What GameStop? Should I short it here? People I have not spoken to in 20, 30 years. This has captured the intention of the America and every trader and non-trader alike. And also I figure I'm doing another video, I'll give you wonderful meme creators, something to go ahead and meme about me. So first, let's answer this question. I'm just fine. Citron Capital is just fine. Even though we have been called boomers many times over the past week, we understand the changing dynamics in the

market. So with that, we'll become more judicious when it comes to shorting stocks. Doesn't mean the industry is dead, but it just means you have to be more specific. Okay, so there you have it. And he's taking it in stride, so I'm guessing it wasn't a huge loss for him. I'm not sure we will ever know exactly how much money he lost shorting the stock. But it seems to be taking a stride, and there was a really interesting moment there. We said, listen, we understand the market is changing and this dynamic is trading. And I've never understood shorting stocks. I'll just put that out there. I never liked when people were shorting tests. I thought that was like a very dark bet. I want to bet against the person who's trying to stop global warming.

It's like, would you like to bet against the vaccine? Like, if you could short the vaccine right now, would you do it? Like, that just seems dark, right? And I understand, like, the argument that, like, there's fraud in the market and the short people can highlight when things aren't what they should be. But those people aren't doing it, like some white nights. They're doing it to make money. And they do have this bullying tackets.

And they do pile on. And they do create a bunch of fear, uncertainty, and doubt. I find that all just a little bit uncouth. I come from a place where you invest in a company and you stick with it and you try to help them for all time. So I just never liked the shorting and all these weird devices. Andrew Ross Sorkin from CNBC broke the news that Melvin Capital had exited their short position at a massive loss. It's undisclosed. But speculation is they came close to being extinct.

There were some billionaire fund managers from Citadel and Steve Cohn from 0.72 bailed out Melvin Capital with a $2.75 billion. investment on Tuesday to stabilize its books. So this feels like this could have been like the risk of ruin. And the risk of ruin is when you basically just run out of money. So if you go play in a poker game and you have, I don't know, $100,000 net worth, you may want to play $5,000 at a time, not $100,000 in the table because if your a ACEs get cracked or somebody hits run and runner or you hit quads and somebody else, you know, you get the idea. So it hits a bigger set of quads like it does happen. You don't want to have the risk of ruin. You never put your whole chip stack on the table at a time. And that's one of the problems with shorting stocks. The loss

be unlimited because at some point you just have to pay and cover it down. So here's a 90-second clip of Andrew Ross Sorkin breaking down the news and explaining his fears for retail investors and confusion at the lack of regulation because this is a little confusing. And it does seem like the market allows for people to basically pursue their vision of how this should work in a very strange way. Melvin Capital is now out of the stock. They got out of the stock from what I understand yesterday afternoon. I just got off the telephone with Gabriel Plotkin, who runs that firm. They have taken a rather huge loss.

I do not have the full number on what that loss looked like. As was reported yesterday, both Citadel and 0.72 have infused something on the order of close to $3 billion into Melvin Capital to try to shore up its finances. and Gabe Plotkin telling me just moments ago that the speculation that the firm would file for bankruptcy is false. To some degree, they might be able to argue now that they succeeded if this was really about vanquishing, if you will, Wall Street or vanquishing a hedge fund manager. In this case, they did take a loss. They made them not put them out of business, but boy, did they come close. as much pain as they may have created for Melvin Capital, for example, my great anxiety at this

point is the number of retail investors that have been jumping into this literally in the last 24 hours who very well may get hurt far more and lose far more than some of the hedge funds that were involved in this. A lot to be concerned about when you think about what's happening here. Where are the regulators? And is this just a lot? the beginning. All right. So, I mean, this is some reasonable thoughts from Andrew, obviously. It does feel like, should this be allowed? And is this really the kind of market we want to have? I mean, the market has a lot of funky ways to place bets. Just like when you go to a craps table, there's all these different ways to place bets. And my bestie, Chimoth, went on to CNBC to talk

with Scott Wapner in a 30-minute interview, which was quite entertaining. You can find the full one online, where he announced he was selling all of his GameStop calls for a, 5x gain, basically in a day overnight, and that he would be donating the $500,000 to Dave Portnoy's amazing barstool fund, which, if you haven't seen the videos, Dave just has been giving hundreds of thousands, millions of dollars to business, small restaurants that would be going and small businesses that'd be going out of business because of the pandemic. Here is Chimath explaining his take on retail investors and Wall Street losing its edge in this two-minute clip. I'll see you on the other side. I think that what you're seeing is essentially a pushback.

against the establishment in a really important way. And I would encourage anybody who is dismissive of this thing to go into Wall Street bets and actually just read the forums. And I think that you're going to see three kinds of posts. The first kind of content are a lot of people doing some incredible fundamental diligence on companies trying to think about long-term value. And in my opinion, many of them are doing as good and frankly a better job than a lot of hedge fund analysts.

that I work with. That's number one. The second are a lot of people who believe that, you know, coming out of 2008, what happened was Wall Street took an enormous amount of risk and they left retail as the bag holder. And a lot of these kids were in grade school and high school when that happened. They lost their homes. Their parents lost their jobs. And they've always wondered, like, why did those folks get bailed out for taking enormous amounts of risk and nobody helped and showed up to help my family. And then the third thing is a realization that instead of having idea dinners or, you know, quiet whispered conversations amongst hedge funds in the Hamptons, these kids have the courage

to do it transparently in a forum. And I'm not saying all of it is perfect by any means. But I think it takes an enormous amount of faith in the system to be that transparent to talk about things and then for each individual to make their own mind up and to do things. whether it's to buy and to sell. And I think that what it proves is this retail phenomenon is here to stay. There are 2.7 million people inside of Wall Street bets. I think that they are as important as any hedge fund or collection of hedge funds.

And the realization should be that if every person was forced to publish their fundamental research, it would be hard to distinguish the best version of research from Wall Street best bets and the best version of research from a hedge fund. They don't have an edge. And this is what you're exposing is that that edge is gone. And now all of a sudden, you know, retail can be on the same footing and they don't have to be the bag holder to Wall Street. I thought there's some interesting points from my best EC. There is a level playing field. And I remember, you know, the idea of even shorting stocks or calls inputs, even those devices weren't really available easily. They're hard to understand. And so financial literacy is a real thing. And making

young people, super financial literate. And if they lose, you know, small amounts of money, I actually don't mind it. People lose small amounts of money gambling. They lose small amounts of money on all kinds of things, books, you know, magazines, whatever. And people lose large amounts of money on, you know, going into debt for their college education, certainly much more than they're probably losing making these tiny bets, you know, in their Robin Hood account. So, and full disclosure, I'm an early investor in Robin Hood. That's, that's not a humble brag. I just, I have to disclose that. So obviously, I'm a fan of it. I like the fact that these young people are super educated. They're going to be super dangerous as time goes on because they're going to understand that in order

to be rich, in order to be able to acquire wealth and move up from poor to middle class, or middle class to affluent or affluent to super affluent, you have to have participation in equities. Crypto is weird and yeah, funky and this is weird and funky. But overall, the fact that they even have a brokerage account, the fact that they're even trading stocks, the facts that they can understand, you know, my nephew understands puts and calls and all this stuff better than I do. I don't, I don't play in that game. I don't want to play spats like that. It's not my speciality, if you will, but I like the fact that these other folks are really doing that as opposed to betting the point spread on the giant game. Later in the interview, things got a little heated. Scott, I think,

is very concerned, Spotwapner, that this is some market manipulation. And of course, Schmoth, you know, has a very good point that there's always been market manipulation amongst these hedge funders. And you need only watch billions. to see all the shenanigans going on. Those things are ripped from the headlines. Obviously, they're exaggerated. In some cases, they might be under-exaggerated. And here he goes.

Scott pressing Shemoth, if he is culpable in all this Michigana. Do you think it's responsible for you and some other big names who tweeted about it yesterday and to get involved yourself, knowing that you guys are considered the Pied Piper's, that people are going to follow you into these trades and some, is ultimately going to get hurt after you and others are long gone, Chimath. Dude, where was that message in 2008, Scott? Really? I mean, that's a joke. For example, let's look at Tesla. Who was right on Tesla? I'll tell you who was right. Every single retail investor. I was right. Elon Musk was right. Let me tell you who was wrong. Every single hedge fund.

Name after name when it comes to innovation, when it comes to growth, when it comes to people trying to do fundamentally useful things in the world. If it doesn't fit into the mold that Wall Street wants, they try to organize against it. And there has been pushback after pushback after pushback in individual names. And this is yet another form of pushback. And all I'm trying to say is the mechanics of how Wall Street has worked. And again, I wish you would ask this detailed question. Why is it allowed for somebody running a hedge fund to basically claim that they are market

neutral, but be levered up. They take a $10 billion fund, and their prime brokers allow them to run $100 billion of notional exposure. Who thinks that that's fair? It's not fair to the retail investor, because when that blows up and a $100 billion whole exist in a fund, which, by the way, this is exactly what happened in 2008, the government bails an out. Who is the government, all of us? So, you know, retail has been the bag holder before. Retail hasn't caused these things before. Hedge funds have caused these things before. So if you're going to talk about taking the gun away from the baby, let's make sure we figure out with the baby. I think it's pretty well stated. There's really little you could say to counter that. There have been lots of shenanigans.

And I never understood this leverage that people put on their accounts. Like it just seems so dangerous and so unnecessary. Why do we allow this level of betting? It would be like, you know, there's this famous Sopranos arc where the guy owns a sports store. And, you know, Tony Soprano takes a nap. they let this guy play in the poker game, the big game. He's in for 50, you know, 10 boxes Zidi. A box of Ziti, I think is 5K. So they wake up and they tell Tony, this guy's in for 10 boxes. He's like, that's guy doesn't have 10 boxes Ziti.

And they wind up taking over as shortly. You shouldn't let people bet beyond their limits. And so they're letting hedge funds bet behind those. And by the way, just in fairness, I don't think that Robin Hood or other services e-trade, I don't, I think they got to be very careful about giving people a lot of leverage and levering up their accounts and making, you know, huge bets that maybe. they can't pay off, right? So I have my own concerns about that entire concept. And obviously, Davy Skatino and the Ramsey Sports store is a pretty good analogy for this. And, you know,

just watching up close and personal what happened to Tesla and how these, you know, folks tried to really destroy the company with these shorts and then, you know, taking aerial photos with drones of 10, you know, Model 3s with dust on them, or maybe that were in the junk heap that were imperfect out of the hundreds of thousands they created and trying to say that they were, like, there was some giant scam going on here. It was like really nasty what they did to the Tesla Q movement. And the Tesla Q movement is gone now. And now we're going to see this, you know, the same sort of performance. I do think, I don't know, who knows about GameStop? Is that a really a great business? It's worth 24 billion. There will be somebody left holding the bag here.

Or maybe somebody like GameStop will use this market cap. I was like, why don't they use that market cap to buy a company right now, like buy some video game company they can pair with it or something. They can, or maybe raise some more money. Dave Portnoy loves Chimau, so I'm going to have to have him on the podcast together. We'll have them on the All In podcast or maybe I'll do a roundtable here. And the White House press briefing, our newly minted press secretary, Jen, noted that the Treasury Secretary Janet Yellen or a team were monitoring the situation. And they actually put out a note about it. Discord has banned Wall Street bets, but they said it had nothing to do with the financial stuff, there was just some hate speech going on in there as well. So obviously people are,

you know, just going to start looking into these forums a bit. And this does have a hook into maybe the arguments that we've been talking about on the All In podcast around censorship. I don't think we'll have time for that on Friday because we'll be talking about Jamal's run for governor. But this is all converging. And I think we understand what's happening here. You have Robin Hood really and they pitched me on this in the early days that they were going to get, you know, millennials to start taking their financial future seriously. And Robin Hood created this amazing platform that allows people to trade commission free. If you don't own account, I highly recommend opening account getting your free stock, tell them Uncle Jason Sension. And then the pandemic is, you know,

nobody's traveling, nobody's spending money. People have excess income. Maybe they got a stimulus check. I don't think that was that much money. But they're looking for ways to spend money. And they're looking for hobbies because Netflix is out of shows. And there's just not, no movies coming out. And God, that Wonder Woman 1984 was terrible. Like, so many disappointings. movies. And so you have the pandemic creating an opportunity for people looking for something to do, right? And so the pandemic, I think, created a lot of this, you know, the pandemic will have helped calm, Robin Hood and Clubhouse, probably more than any companies. Obviously, Amazon and DoorDash and Uber Eats will also benefit from food delivery. So there's a cohort of people who are benefiting

from this free time and people looking for things to do. I think like the stonk, memes and Wall Street bets and Barstool when Davey was doing his day trading, all that stuff, they kind of made it fun at a pastime like going to Vegas. So it's kind of like playing blackjack or betting on sports. And that's fine with me. People should be able to do what they want with their money as long as they're not getting themselves into danger. And yes, you could have this like, you know, edge cases of people who are degenerate gamblers who have the risk of ruin. But I don't want to live in a society where we don't let people place bets or do what they want to do, right? People should be to do what they want to do. The little guys and the David and Goliath theme here is obviously pretty

interesting. And then you have this like, you know, new meme troll generation with these, you know, thought leaders sort of engaging on social media. And so social media becomes the platform to really amplify these things. But, you know, I called it on Monday. I did a tweet and this tweet might be the most viral tweet I've ever done. And I'll just leave you with this. I didn't even mention GameStop because I didn't want to get pulled into it. But this thing's got 28,000 hearts and 2,700 people replied to it, including Elon replied to it. And I said, I guess professional short sellers never considered what would happen if they got squeezed by a legion of tiny retail investors with 20-year-old forum software, a free trading app at a $600 stimulus check at their disposal. And this is

the new world we're living in, the networked world where everybody can share something and it gets trending. And all these tools are available and democratized. So it's a brave new world. And I'm I'm here for it. I'm here for it. We'll see you all next time on this week in startups. Bye-bye. This week in startups is brought to you by Our Crowd helps you invest early in pre-IPO companies alongside professional VCs. If you're interested in investing, you can join Our Crowd for free at O-U-R-C-O-W-D.com slash twist.