What’s Going On With GameStop?

Audio Length: 01:04:00


S2: Hello.

S3: Welcome to the What’s Going On with GameStop (GME) episode of Slate Money, your guide to the only business and finance story of the week. As far as we can tell, there has been exactly one story. It is very rare that we devote an entire episode to one story, but the demand has been so great that this entire episode is going to be about GameStop. I’m Felix Salmon of Axios. I’m here with Anna Shamansky of Breakingviews. Hello. I’m here with Emily Peck of Huff Post. Hello. And because this story is so big and so gnarly, it wasn’t enough to just have the three of us. We have a special guest, Hope King Hope, welcome.

S4: Hi. Thanks so much for having me.

S3: Introduce yourself. Who are you?

S5: My name is Hope King. I’m a business journalist based in the New York City area. I have covered business for CNN, for Business Insider and most recently, etc. where I was an anchor.

S3: Hope is going to help us uncover what people are really saying about GameStop, because she has done the the hard legwork of spending like twenty seven hours on clubhouse. It’s a hard job, but someone’s got to do it. Anna is going to explain why market manipulation is bad. Emily is going to try and work out whether there’s a whole Marxian take to all of this. Apparently there is. I am going to add some stupid asides. This is going to be fun. And we’re going to have a Slate plus segment about AMC (AMC), which is the mini GameStop, which is interesting in its own way. I hope that many of your questions will be answered, although I fear that many of them will not be. But do stay tuned because we have a lot of GameStop content coming up on slate money. So let’s get right into this. Emily, how many emails and tweets and random people stopping you on the street? Have you had saying, like, oh, my God, I can’t wait for you to talk about this? Please tell me you’re going to talk about this honestly at me.

S6: Oh, my God, Felix, I have never seen anything like this. Nothing to compare to the interest in this GameStop story in all the time. I swear to you that I’ve been reporting on business and finance and all this other junk. I mean, a long time, right. From Wall Street Journal, from the financial crash. I have never seen this much interest in a business story as GameStop. We have gotten so many tweets directed to us saying that people are excited to talk about this. We have gotten a lot of emails. Felix went on the political gabfests and did like a whole thing. There are already you can listen to that, too. I mean, it’s just people are interested in this for some reason, which we should get into. Why why the interest?

S3: Let’s start with that hope. What is your theory? You’re sort of like Metromedia theory here for why? What nerve has been touched here? Why is everyone obsessed with this story?

S5: It’s actually easier to understand on the surface. You hear it. You know the name GameStop. You’ve probably been to a store repassed buy one. So from that sort of headline aspect, it’s easy to understand and get into. And then you see a trending, of course, on social media. But then I know we’ll talk about this. Once you start to unpack what is actually happening, it starts to get confusing. And that always then gets people talking about it, trying to figure out what’s going on.

S3: Right. And that’s the one question we got this most recently, about twenty five seconds ago from Jessamine. Molly, she’s like, I can’t wait for you to talk about this because I want you to explain what’s going on. Let the three words I’ve heard most frequently over the past week is what’s going on, what’s going on with GameStop? And it’s really hard to know where to start on this. Emily, where would you begin? You begin with Wall Street bets with short selling, with Melvin Capital, with the share price. Where do we begin?

S6: I think we begin around the summer fall and we begin by knowing the GameStop is, you know, one of these mall stores that is from a previous era that everyone kind of thought was going to go to zero because no one goes to the store to buy video games anymore. In my family, when we want a video game, we just press buy on the PlayStation and we buy it. And that is the end of the story. So I think the place to start is OK. A lot of people thought this company was mayor. And then this guy, I think the CEO of Chewy (CHWY), stop me if I’m wrong. He gets interested in the company and involved founder.

S3: Yeah, the founder of Chewy who exited Chewy too early. And he was like, no, I can turn this retailer around. And then most importantly for our story, this isn’t just a corporate turnaround story. This is also a financial story, because if GameStop went from being a struggling retailer. To being a slightly less struggling retailer, honestly, no one would care. The reason people care is the roaring kitty got involved and Anna is here to tell us who roaring kitty.

S6: Let me just finish let me just finish for a second, because I feel like there is a little confusion and people think like while that Reddit just jumped on the stock for no reason. And I think the kernel of the reason was a few people saw some potential here. And from that, things went like wild.

S3: Exactly. I would have thought that it wasn’t that people thought that it wasn’t a $4 stock and it should be like a $20 stock.

S1: Yes, perhaps. Although I think the bigger reason was the fact that it was one of the most heavily shorted stocks and it was a relatively small company that is incredibly heavily shorted, which makes it a big fat target so that if you want to engage in a short squeeze, you do that company. I think that’s the main reason why this company was targeted.

S3: I want to go back to what Emily was saying and agree with her that that wasn’t the reason back in the summer, that that has certainly been the narrative for the past few weeks. But if you go back to when Roaring Kitty first put on this trade, in fact, he started buying the stock back in twenty nineteen, like this was a very long Yes. Tooth overnight success for him. And back in twenty nineteen, this was not you did not have short interest of one hundred and fifty percent of the free float then that kind of thing. There was a turnaround narrative there. His name on Reddit is deep fucking value. He considers himself to be a value investor. And while he did certainly become a short squeeze and the financialization of the whole thing and it became this crazy bet and valuations got completely divorced from reality, eventually the little grain of sand that turned into the pearl of crazy was actually a value play.

S1: I think whether or not one individual or two or a hundred individual investors decided that, hey, maybe this stock is worth slightly more than we think it is, is not the real story here. Although Wall Street Bets is notorious for engaging in strategies to pump up or push down, prices usually push them up. So I think that the much larger story and the reason we’re talking about this and the reason that this guy is doing so well is not because this company really turn themselves around and has some new board members. It’s because they figured out a whole in market structure that they could exploit. Yeah.

S6: So let’s talk about that, because I think that the start of the story was a little glimmer of interest or whatever. But the real the story and the reason why it went viral was because of Wall Street bets and the short squeeze and the idea that this band of rogue traders or whatever could team up and like, screw over the short sellers. So I feel like Anna should explain that.

S3: I think we’re jumping from part one to three. Right. But one is like this, a cheap, struggling retailer. Part three is there’s a short squeeze in between. You have part two, which is a bunch of large hedge funds. Most prominent among them, this one called Melvin Capital, decide to put large short positions on the stock. So, Annette, explain part two to me, explain what they thought they were doing and why they did it.

S1: So any short seller you’re looking at a company or saying, I think this company is overvalued or I think this company, I think the value of this company is going to decrease. That is why I’m putting on a short position. You’re also likely you’re going to be using leverage, so you’re going to amplify the return that you can make. Right. And in a company like this where clearly all of the fundamentals are not particularly good. It is not unreasonable that this would be a target for shorts.

S3: Let’s stop there. Let me bring hope and this is a bet that is very close, I think, in my mind, to the efficient markets hypothesis. What you have is a bunch of hedge funds who are believers on some deep fundamental level that there is like some truth about how much the company is worth in the real world and that the financial value of that company is bound to converge on that truth at some point, and that when it does, they will make money. I mean, it seems almost pure in that. Is it the short selling hedge funds? Who are the like the the pure naive?

S5: You know, I think what you said and short sellers would agree with you, hedge funds who do this would agree with you that they play a role in making sure markets are efficient and that to every very bullish story, there is another interpretation of where certain number where the future of a company could go. So if you look at it away from just the stock market in quotes and you look at just what the company is going through, that will the word you use fundamental is how people on Wall Street talk about this. The fact is that people are not going to malls. They’re buying video games online. There are cloud services that provide this. So the future of the company is not rosy. So these companies, like hedge hedge funds are coming in. They know that that is the fundamental story and they think that then the company ultimately will not be worth very much. And so they’re putting their bet on this. And this is also something that retail investors understand. I have spent the past probably thirty six hours on clubhouse. And if you don’t know what clubhouses it is, the twenty, twenty one version of public AOL chat rooms, all audio based. And I have been listening to dozens of retail investors, probably hundreds at this point nonstop, six, seven hours a day. Talk about the fundamental lack of understanding that the quote unquote financial media have and why does that sound familiar about them? They’re not a monolith. People are actually looking at these companies just as closely as maybe some of these hedge funds in a different way. They don’t have access to the same platforms, but they see the same fundamental story. And the reason why the story is also incredibly viral is because there are almost no wrong takes on what’s going on here. Almost everyone can understand some aspect of the story, whether it’s what the company is, GameStop, whether it’s on Reddit, whether it’s about financials. So everyone can talk about this. And that’s what also makes it incredibly viral. I’m getting away from your question. But yes, essentially, Felix, this is about people who feel like there’s a different story to a company and they’re playing a role to make this market around the stock efficient.

S1: Kind of jumping off that a little bit because we haven’t maybe I’m sure we will talk about this a lot more. But, you know, part of the reason, as this story has also become so viral is because there is frequently this idea that short sellers are doing something bad, that sticking it to short sellers is somehow a good thing, which is I think I imagine most of us will probably agree is a fairly ridiculous argument, because you need people to go short. And actually in this market where you have so many forces pushing asset prices very, very high, we really definitely need short sellers.

S3: So I don’t understand that because what we seem to have learned over the past couple of months, but certainly the past couple of weeks is the short selling is a mechanism whereby stocks go up. It’s not a mechanism whereby stocks go down. So we just saw on Friday that Citron Capital, which is one of the big short sellers, announced that it was no longer going to put out any YouTube videos explaining its short thesis. Once upon a time, if a big short seller put out a YouTube video saying, this is why we think a company is bad and this is why we think it’s going down, that would encourage people, other investors to say, oh, yeah, I think you’re right, I’m going to put on short bets as well. And it would cause the stock to go down. Now, that’s been flipped on its head. And if you put out a YouTube video saying I think the stock is going down, then I’m sure that’s just going to encourage a whole bunch of people to buy it and try and squeeze you. And so in that sense, the existence of short selling does not make markets more efficient. It makes markets less efficient. All it does is it creates short squeezes and it creates crazy things like game stock trading at four hundred and eighty dollars a share, which I think everyone can agree is far more than any conceivable fundamental value.

S1: We’ve had short sellers basically since the 17. Century, I don’t think because we’ve had activity in the last three weeks that we will completely change the function of people talking down stocks of saying like this company is a lousy company. Now, is it likely that short sellers are going to react to what has happened and are going to use techniques to take advantage of the retail investors and what they assume they’re going to do? Yeah, I’m sure they will, because that tends to be how markets work. But you certainly need forces in markets on both sides putting out information. And, yes, no one here is naive enough to think that, especially in this market right now, that we’re getting fantastic price discovery and many different types of assets. But that doesn’t mean we should discourage this type of activity. That is saying this lousy companies, a lousy company. Yeah, we need that.

S3: I haven’t seen a lot of people saying that we should discourage short selling, but I have seen a lot of people saying that if gazillion hedge fund managers like Gabe Plotkin, who just dropped forty four million dollars in a pair of houses in Miami, because why not? If he loses a bunch of money, no one’s really shedding any tears for him. Like, that’s not a sad outcome. That’s not a bad outcome. And if a bunch of relatively small traders on Reddit wind up getting a large chunk of that multibillion dollar loss, I mean, that’s real Robinhood, right? That’s taking from the rich and giving to the much less rich. It’s a redistribution of wealth in the right direction. And in a world where financial markets generally exacerbate inequality, this seems to be one of the few stories in financial markets where inequality has gone the other way and we are taking from the gazillions and giving to the poorer first.

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