You stand for everything I hate. Powerful words in an open letter published to the WallStreetBets subReddit, the group behind the incredible movements in GameStop and other unloved stocks, as well as wider stock market volatility today.
In this blog and video, let’s take a look together at the open letter, which explains some of the reasons why retail investors are rallying behind GameStop, and attempting to bankrupt hedge funds in the process. It’s juicy stuff.
Before I go through the letter, a little bit of context, if you haven’t been following the WallStreetBets and GameStop story. This Reddit forum, with around 4 million members, is attempting to (with a lot of success, so far!) to significantly inflate the stock price of GameStop, a pretty much unloved US retailer.
They targeted GameStop to create what’s known as a short-squeeze; to force the hedge fund managers who are shorting the stock, in the hope the business will become bankrupt, to sell out of their positions.
What’s a short? In simple terms; if you expect the price of a share to fall, you can borrow that share from another institution, and then sell it. Let’s say that you borrow 100 shares and they are worth £20,000, so £200 a share. You borrow them and then you sell them, raising £20,000 in cash but owing the investor you borrowed them from £20,000.
Your hope, as a short seller, is that the share price will fall and you make some money. Let’s say the share price falls to £10 a share. When that happens, you can buy the shares back at a total cost of £10,000, give those shares back to the original owner, and pocket the profit, in this case the £10,000 difference between the original price and new price.
But what happens when the share price heads in the other direction? Well, at some point you have to buy the stock back at its higher price, so you make a loss. If the price of the share you borrowed rises to £50 a share, it costs you £50,000 to buy them back, and you lose £30,000 on the short.
What’s a short-squeeze? This happens when the stock price goes up sharply, so the hedge fund managers are forced to buy that stock to cover their position, or risk even bigger losses. But the act of them buying the stock back contributes to the rising stock price, pushing it higher.
That’s what has been happening with GameStop, after WallStreetBets users colluded to artificially inflate its price, sending it soaring higher and placing a squeeze on the hedge fund managers who have been shorting it.
But what’s motivating hordes of retail investors to, in their words, send this stock to the moon? This open letter from Reddit user ssauronn aims to shed a little light on that.
He starts by referring to the ‘08 global financial crisis, when he was in his early teens. “I vividly remember the enormous repercussions that the reckless actions by those on Wall Street had in my personal life, and the lives of those close to me.”
His family didn’t lose their home, like so many in America did at that time, but the economic crisis clearly had an impact on their lives. “…we lived off of pancake mix, and powdered milk, and beans and rice for a year. Ever since then, my parents have kept a food storage, and they keep it updated and fresh.”
There was financial trauma for those close to him, his aunt for example, who had to move in with his family. His parents, once they had recovered their income, were able to help out others during their time of need. “I will forever be so proud of my parents, because in a time of need, even when I have no doubt money was still tight, they had the mindfulness and compassion to help out those who absolutely needed it.”
Ssauronn then addresses Melvin Capital, one of the hedge funds shorting GameStop; “To Melvin Capital: you stand for everything that I hated during that time. You’re a firm who makes money off of exploiting a company and manipulating markets and media to your advantage.”
He goes on: “Your continued existence is a sharp reminder that the ones in charge of so much hardship during the ’08 crisis were not punished.”
There’s an allegation of illegality, which I won’t repeat in this video, for fear of being sued, but addressing the wider Wall Street fraternity, he says: “Your ilk were bailed out and rewarded for terrible and illegal financial decisions that negatively changed the lives of millions.”
So, with this hatred as motivation, here’s what ssauronn and so many others on WallStreetBets did: “I bought shares a few days ago. I dumped my savings into GME, paid my rent for this month with my credit card, and dumped my rent money into more GME.”
This isn’t, by the way, a course of action he recommends, certainly not a course of action I recommend. Please don’t invest your rent money into the stock market.
He goes on: “This is personal for me, and millions of others. You can drop the price of GME after hours $120, I’m not going anywhere. You can pay for thousands of reddit bots, I’m holding. You can get every mainstream media outlet to demonize us, I don’t care. I’m making this as painful as I can for you.”
He then turns his attention to the media. One of the things the members of this subReddit believe is wrong with Wall Street is its cosy relationship with publishers. Addressing CNBC, he says: “you must realize your short term gains through promoting institutions’ agenda is just that – short term. Your staple audience will soon become too old to care, and the millions of us, not just at WSB but every person affected by the ’08 crash that’s now paying attention to GME, are going to remember how you stuck up for the firms that ruined so many of us, and tried to tear down the little guys.”
He then lists CNBC sponsors and partners, inciting the attention of his fellow Reddit members towards them.
And then addressing the baby boomer generation, the boomers, who are now starting to pay attention because of the many press headlines in recent days, he says: “you realize that, even if you weren’t adversely effected by the ’08 crash, your children and perhaps grandchildren most likely were? We’re not enemies, we’re on the same side. Stop listening to the media that’s making us out to be market destroyers, and start rooting for us, because we have a once in a lifetime opportunity to punish the sort of people who caused so much pain and stress a decade ago, and we’re taking that opportunity.”
So this is asking the wealthy baby boomer generation to stand on the side of their children and grandchildren, instead of siding with the Wall Street institutions. He isn’t asking them to risk their pension pot by investing in GameStop, but to be “…understanding, supportive, and to not support the people that caused so much suffering a decade ago.”
There’s praise in this letter to fellow members of WallStreetBets: “you all are amazing. I imagine that I’m not the only one that this is personal for. I’ve read myself so many posts on what you guys went through during the ’08 crash. Whether you’re here for the gains, to stick it to the man as I am, or just to be part of a potentially market changing movement – thank you.”
This letter really gets to the heart of what’s going on here, and it’s important to understand. Is this simply the chickens coming home to roost after so many senior people in the finance sector escaped punishment for their role in the global financial crisis? It’s hard to watch a movie like The Big Short and not wonder how those taking such big risks escaped custodial sentences, and in many cases were allowed to continue trading in the 12 years or so since.
This generation of new investors hates Wall Street investment firms, especially those trying to profit from the demise of once beloved businesses. There’s a huge element of nostalgia at play here; Wall Street, don’t mess with the brands we loved and love.
Is the global financial system corrupt? I think that’s a label too far, despite the passionate arguments seen on WallStreetBets. But there are elements of the system in desperate need of reform.
There are reports of mass panic at investment firms, in the US and here in London, with one hedge fund portfolio manager in Mayfair telling Financial News London that “the retail folks are targeting EVERY stock with a lot of short interest” and another claiming “It is short-squeeze hell,” “People are crying. Once every few years people get to learn all over again the meaning of gamma squeeze,”
Gamma squeeze being a transient increase in the stock price due to an investor buying options to drive up the price due to option sellers needing to hedge their trades on the underlying stock. If you’re a hedge fund manager, I can only imagine that’s a fairly miserable place to be in, financially speaking. There are unverified videos doing the rounds on social media of investment managers going nuts, smashing up their offices in reaction to the price movements.
It’s no coincidence, in my opinion, that this action with GameStop and other shorted stocks comes so soon after Joe Biden was inaugurated as the new US President. I’ve no doubt this will be gaining the attention of his administration, including new Treasury Secretary Janet Yellen. In fact, the White House has confirmed that Yellen is monitoring the situation with GameStop and other heavily shorted companies, according to the White House Press Secretary.
This story isn’t over yet. But for now, the open letter on Reddit offers a useful insight into the motivations behind many of the retail investors attempting to send GameStop to the moon. Keep in mind what usually comes with that phrase though; to the moon…and back. There’s no fundamental support behind this stock price, so what goes up will ultimately come down.
What do you make of this situation with WallStreetBets, GameStop and other shorted stocks?