The Reddit saga roiling Wall Street for the last two weeks has blasted a spotlight on grassroots investing efforts to rally the price of heavily shorted stocks, sending embattled names like GameStop and AMC Entertainment on rollercoaster rides as a bunch of misfit retail traders wage war on hedge funds.
But as the group’s disdain for financial institutions envelops news outlets such as CNBC and Bloomberg, giving financial media a taste of the “fake news” headache its political brethren have long experienced, and as Hollywood prepares several adaptations of the still-ongoing story, experts say that that scorn highlights something deeper about the state of the wealth gap in the U.S. — something more complex than a simple David vs. Goliath story.
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Over the last few weeks, members of r/wallstreetbets, the Reddit community driving the GameStop stock surge, have penned open missives addressed, at various junctures, to the hedge funds betting on failure, to the SEC, to “boomers,” and to CNBC.
Addressing the business news network, a user by the apparently “Lord of the Rings”-inspired name of “ssauronn” wrote: “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.” The user, who elaborated on the financial crisis’ impact on their family’s finances, then listed CNBC’s sponsors, as well as parent company NBCUniversal, a subsidiary of publicly traded Comcast.
CNBC, for its part, hasn’t exactly been doing anything it doesn’t normally do — talking to equity analysts, investors, financial advisors — with coverage reflecting the magnified interest in GameStop and the unusual trading activity. The notion that the business cabler has any bias toward Wall Street institutions is “absurd,” said USC Marshall School of Business finance professor Lawrence Harris. He believes the press is likelier to favor the populace than Wall Street; he also holds the perhaps more cynical view that the media “first and foremost, favors whatever is going to sell advertising. And so keeping the story alive doesn’t hurt the media. That’s just the nature of the beast.”
But the vitriol at the messenger also signals something broader, something that speaks to the vast wealth gap between the 1% and the rest of the country.
“There are a lot of very frustrated people in the world right now,” said Harris. “And in the United States, COVID has been extremely tiring. That’s primed people for being upset. There are lots of people who got riled up in the last election. For years, tax policy in the United States has ensured that rich people are getting richer and poor people are getting left behind. So a populist movement — or a bunch of manipulators who try to associate themselves with a populist position — becomes very popular. But what’s popular is not necessarily right.”
There’s a temptation to simplify the narrative to right vs. wrong, left vs. right, little guy vs. Wall Street elite. But the politics of the situation aren’t quite so easy to paint. (What other issue would prompt Ted Cruz to tweet in agreement with AOC?) Under the right light, the Reddit traders’ strain of populism just as easily echoes MAGA red hats as it does Occupy Wall Street.
And the GameStop trade, supposedly propped up by a merry band of laymen and outsiders, has drawn in affluent supporters like Barstool Sports founder Dave Portnoy and tech billionaires Elon Musk and Chamath Palihapitiya. One of its most prominent members, who goes by “Roaring Kitty,” is a chartered financial analyst, according to an interview with the Wall Street Journal.
Much of the r/wallstreetbets community cheered when billionaire Dallas Mavericks owner and “Shark Tank” investor Mark Cuban took to CNBC on Tuesday to say that Street analysts and Reddit traders essentially have the same goal, to “get long and get loud” in touting a stock. Cuban had earlier that day hosted a lengthy Reddit AMA (Ask Me Anything) on the WSB forum that garnered over 27,000 comments. He was promptly hailed as a “tru bro.”
“Thanks for changing the game. Thanks for taking on Wall Street,” said Cuban, who goes by “mcuban” on Reddit, to the r/wallstreetbets crowd. “WSB changed the game far more than everyone on this board will ever get credit for.”
Cuban blamed commission-free trading app Robinhood, which restricted trades last week in order to satisfy clearinghouse requirements, for hindering the Reddit traders’ momentum.
“You will go after [Wall Street] and the next time you will be smarter… No disruption is easy or happens in a straight line. Stay with it. I am a believer,” he added.
But as much fun as that rah-rah narrative offers, a purely anti-establishment framing can be misleading. The thing to remember, noted USC’s Harris, is that many investors in hedge funds represent pensions for teachers’ unions, police and fire fighters. When hedge funds get hit, so do some retirement investments of educators and first responders.
“The [hedge fund] managers, of course, often do well,” said Harris, “but these attacks are hurting common people like you and I, who depend on these funds for their pensions. That’s an important issue that seems to have been lost in the current discussion.”
Furthermore, while GameStop’s now-crashing stock price means that plenty of individual investors who entered the game late and left the game late will suffer the consequences, some hedge funds made out like a bandit on the Reddit wave.
Still, for a generation of millennials whose professional trajectories and earning potential were hobbled by the Great Recession (and most of whom don’t even have the kind of job that offers a pension), legacy financial institutions are perceived as meriting major side-eye.
“My view on this is that the Redditors have a valid concern that the financial sector is built for the big people and doesn’t really care about the little people,” said UCLA Anderson professor of finance Avanidhar Subrahmanyam, an expert in stock market activity and behavioral finance, citing the 2008 financial crisis. “In this particular instance, people have a lot of pent up anger at everything that’s gone on around them.”
Cuban may have encouraged the WSB group to “stay with it,” but the next GameStop is probably going to be harder to find.
“I believe that future episodes will occur, but they won’t be as dramatic, because now exchanges know what to expect and the short sellers also know what to expect,” said Subrahmanyam. “So I would suggest that they take short positions with more caution, because they don’t really know when the correction will happen and don’t want to be squeezed.” Other shorted stocks like American Airlines, he said, are harder to squeeze, because the airline has more liquidity and a wider shareholder base than the thinly traded GameStop.
And while short sellers, i.e. investors who are betting on the stock to decrease in value, are often made out to be the bad guy, the tactic itself isn’t necessarily a morality play. (Just think about who you rooted for while watching “The Big Short.”)
Without short sellers, said Harris, “companies may be able to raise money that they can’t use as well as others can.” And individual investors may wind up paying for stocks that are overpriced.
“Overpriced stocks, by definition, will drop in value,” he said. “That’s what happens. That’s what we mean by overpriced. And when they do drop in value, then we have individual traders who are losing money. And that’s terrible. And the reason that’s terrible is because at some point, they’ll give up and they won’t save in the market. And then they won’t retire as well. And we won’t have enough capital for good ideas.”
Lastly, as CNBC correspondent Robert Frank succinctly laid out in “Squawk Box” and “Power Lunch” segments on Tuesday, the currently Reddit-fueled trading underscores the massive gap in who gets to participate in the stock market.
The top 1% of Americans own 52.7% of all stock, he said, while the bottom half own just 6%. Twice as many white households as Black and Hispanic households own equities, and the median value of stock held by Gen Xers is nearly 50% greater than millennials, when compared at the same age.
“The risk here is that if a lot of these traders don’t survive these trades, rather than democratizing the market, which is the hope,” said Frank, “we could actually lose an entire generation of traders and go backwards.”
Compound that notion with the fact that about 30% of Americans don’t have enough savings to cover unexpected emergencies, let alone invest in the stock market, and it’s a potent story — one that should be told with the nuance and complexity it deserves.
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