BROOKE GLADSTONE This is On the Media, I'm Brooke Gladstone.

 

So back in 1999, in my early 40s, I had a modest individual retirement account, and my account manager was Charlie, who made suggestions when I had money to invest. I must have had a speaking engagement that year or something because I had a thousand dollars to put in. And he suggested that I buy 65 shares of a 15 dollars stock total cost: 975 bucks called GameStop. Now, following my portfolio, as it were, tends to make me bored or worse, anxious or worse still greedy. So I pretty much ignore it. My husband doesn't. Back in April, he said, "You still have GameStop? It's three dollars and fifty cents." And I said, "Yeah, yeah," and just to needle him a little. I added, "Hey, you never know." When your investment shrinks from almost a grand to 50 bucks because you ignored it, the rational move, I reckoned, was to continue ignoring it. GameStop is a corporation that sells digital cartridges containing video games and also video game consoles and other fun widgets from brick and mortar stores to flesh and blood customers. It's a thing of the natural world and so must abide by its physical laws. The stock, on the other hand...

 

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NEWS REPORT Video game retailer GameStop is set to continue their head spinning ascent today. [END CLIP]

 

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NEWS REPORT Absolutely nuts. If you look at the, if you just look at the volume in the last few days, there's never been anything like it in its history. [END CLIP]

 

BROOKE GLADSTONE For most of last year, the company was worth a pretty dismal 250 million dollars, but GameStop stock has soared upward into the exosphere, ballooning the company's worth to somewhere in the ballpark of 20 billion dollars. Did it suddenly have a new strategy to overcome the fact that people could download most of what it sells? That in-person retail sagging for years had plunged into a virus induced toilet? Would even that cause the crazy speculation we've witnessed?  No, runs like that are fueled not by reality, but by phantoms. Like housing bubbles, imaginary investment instruments, dreams of catching a moving train into the sky after it's run out of steam. At least that used to be why it happened, but now there's a new reason. Spite. All this is best explained not by corporate actions or the current state of the actual American economy, but rather, as James Surowiecki explained this week in Marker, as a meme. And you may remember other recent meme stocks: Kodak, for instance.

 

JAMES SUROWIECKI There's usually some kind of catalyst that gets them interested. In Kodak's case, for instance, there was this very odd rumor that they were going to get involved with drugs to to deal with COVID and that sort of got people buying it. And in GameStop's case, the catalyst was really two things. One is, you know, people were saying it was it was pretty undervalued – its stock had been driven down very, very low, and then in the summer, a new guy came on board the board, a guy named Ryan Cohen, who had helped make a company called Chewy very successful. He has all these ambitions to, you know, move GameStop into e-commerce. So that kind of got people talking about it, and maybe the kind of center of the meme stock universe has become a sub Reddit, a board on Reddit called r/WallStreetBets. It actually now has, I think, more than two million subscribers, and it's really just a place where people come in, talk about usually sort of bad companies that could make interesting bets. But what has happened over the last year is that they sort of have realized the power that they potentially have. That even though, you know, most of them, I assume, don't, at least it sounds like when you read it, don't have a ton of money. When you aggregate all of their buying power, they suddenly have the ability to move stocks. So the other thing that's important about meme stocks is generally they all have had two characteristics. They've all been cheap. The vast majority, maybe all of them have had stock prices in the single digits at the time that they really first started to get going. And then the other thing about them is that they were all heavily shorted. In other words, short sellers were betting strongly against them.

 

BROOKE GLADSTONE Give us a brief explanation of short selling.

 

JAMES SUROWIECKI So the vast majority of investors, the vast amount of money that's in the stock market is betting that stocks will rise. Short sellers do the opposite. They bet that stocks will fall. So they try. To identify companies where the business is bad or where they think the stock price has gotten totally out of control, they borrow shares from someone who actually owns the stock and then they sell them. Their hope is that the stock price will fall, then they can buy back the shares at a lower price and return them to the person they borrowed them from. The ideal trade would be you short the stock at 20, it drops to 10. You buy back the shares and you know, you've made basically ten dollars a share. The danger for short sellers is that in theory, their losses are unlimited. If you buy GameStop at five dollars a share, the most you can lose is five dollars a share. I mean, it could go to zero and you would lose five dollars a share if you short GameStop as a lot of shorts did. If you short it at 20 dollars a share and it goes to two hundred and ninety dollars a share, which is where GameStop was a few minutes ago, and you hold on to your short that whole time, you've just lost two hundred and seventy dollars a share. So your losses are in theory, unlimited, and it makes it, a) very hard to be a short seller, psychologically is very hard to do.

 

BROOKE GLADSTONE You need a strong stomach.

 

JAMES SUROWIECKI Yeah, you need an incredible level of pain tolerance. The basic problem for a short is that if they don't want to hold on to that stock all the way up to 290, at some point they just decide, I can't take the pain anymore, I got to close out my shorts, so I have to buy the stock back. But when they do that, it actually sends the stock higher. Right. There's all this demand. If there are still people shorting it, which they usually are, that actually inflicts more pain on them. And so they start to say, you know what, I can't take the pain. They buy the stock that sends the stock higher. And that's what's usually called a short squeeze. And that was a big part of what has driven GameStop's stock higher.

 

BROOKE GLADSTONE Now, you said that people, they don't like short sellers. They're seen as the Darth Vader's of the market by a lot of people, because they're betting that stocks will go down. They're buzzkills.

 

JAMES SUROWIECKI Yeah.

 

BROOKE GLADSTONE But the redditors seem to think that they are just bad guys. Alex Kirshner in Slate quoted some of the Reddit posts: "when these boomers made their bet, GameStop wasn't a big thing on Wall Street Bets yet," "I don't feel bad at all," said another, "taking money from these rich, greedy hedge fund managers." "I'm an old millennial. I'm tired of getting screwed by the globalist elites," another one said. "This isn't left or right, Republican or Democrat. It's the one percent versus everyone else."

 

JAMES SUROWIECKI Yeah, there definitely is a real sense of basically taking it to the man. So there was a hedge fund that had, I think, the biggest short position in GameStop Melvin Capital. Earlier this week, Melvin Capital had to be bailed out. It basically got a three billion dollar, almost three billion dollar injection of equity from two other hedge funds. The celebration on Wall Street bets was pretty palpable. I mean, they had essentially, you know, toppled this hedge fund. And, you know, there is a sense that a lot of people have that Wall Street is basically a corrupt insider's game, and they're not entirely wrong about that, it's a game where big wigs are able to prosper even as everybody else doesn't. You know, obviously, over the last 10 years, a lot of people have gotten rich in the stock market and a lot of ordinary people have too. But that clearly is a dominant image of Wall Street, and it and it's not an incorrect one. And so what this has become for a lot of people, both people who are actually doing the trading and then also people observing it, is a kind of populist revolt. Wall Street is finally getting what it deserves. I actually do think there is a real resonance between what's happening in GameStop and other stocks like it and what happened in twenty sixteen with sort of the meme lords on places like 4chan and Reddit and the way they really tried to sort of – and did – disrupt the traditional media narrative, the traditional way the media covered the campaign, the way sort of politics work.

 

BROOKE GLADSTONE How did they disrupt it?

 

JAMES SUROWIECKI What they were able to do was use social media to spread pro Trump, but really anti Hillary memes that I think helped make really powerful the image of Hillary as a corrupt insider who stood for everything that, you know, the Internet was and millennials were not in favor of. And, you know, we can debate about how effective those memes were, but when Trump won, there was this one poster on 4chan who who posted “we actually elected a meme president.” Slightly overstated, obviously, but there certainly was a dimension to that that was accurate, although that was really driven by kind of an alt right perspective, and that's very different from what's happening with Wall Street Bets. That sense that you can leverage social media, that communities can self organize, and can then really go out and accomplish really interesting things. There, I think is a real resonance between 2016 and what we're seeing right now.

 

BROOKE GLADSTONE Your reference to the meme president is particularly interesting because the virtual world and the world inside of our own heads has merged so much with the “in real life” world. And of course, the stock market, money in general, has always existed principally in our own heads.

 

JAMES SUROWIECKI You know, the stock market is kind of the perfect place for these kinds of [chuckles] for these kinds of projects to sort of play themselves out. There's nothing imaginary about the businesses underlying the stocks, but stocks always have a certain kind of fantastical element to them. The continued ascent of Bitcoin, which is in a way a kind of perfect example of collective willing something into existence. I mean, Bitcoin's value depends entirely on the fact that people think Bitcoin is valuable and as a result, it really is that valuable. This group of people on this sub Reddit and other message boards kind of recognize that if they collectively decided to elevate GameStop stock, they could do it.

 

BROOKE GLADSTONE Is this kind of manipulation, strictly speaking, legal?

 

JAMES SUROWIECKI It's a fascinating question that I don't think we have a clear answer to. It's not obvious who you would hold responsible for the illegality. You know, there's a long history of people organizing pools, you know, to buy stocks, to drive them up, or alternatively to sell stocks to drive them down. That was very characteristic of the of the 19th century and then the early 20th century.

 

BROOKE GLADSTONE The uranium stocks in the fifties and the R.V. stocks in the 60s and the dotcom stocks in the 90s. Maybe the tulip bubble in the 1600’s.

 

JAMES SUROWIECKI Yeah.

 

BROOKE GLADSTONE Is that what you're talking about, or is this something else?

 

JAMES SUROWIECKI This is something else. I mean, that's one of the really important points to make about this, that what we're seeing with GameStop and other stocks like AMC, the theater company, which on Wednesday quadrupled by midday despite the fact that we are in a pandemic and no one is actually going to the movies. What we're seeing with these stocks is very different from what we've seen in past bubbles. In past bubbles, it was really a function of investors believing that a certain set of companies was going to sort of transform the world. So, yeah, uranium stocks in the 1950s or my favorite is the bowling stock bubble of the early 1960s. People became convinced that every American was going to become a bowler, and that feeds on itself because, as you know, stock prices rise, other people say, oh, wait, maybe I should buy them and they get in. But it isn't an organized or strategic effort to drive stocks up. What is distinctive about what we're seeing this week is the essence of it was a kind of strategic recognition. That if enough people got together to buy GameStop stock and drove the price up, then they could create a short squeeze, and if they traded options in a clever way, that would help drive the stock up. And in that sense, it actually looks much more like what we used to see in the 19th century, in the early 20th century, what were sometimes called bull raids, where a pool of investors would basically connive amongst themselves to buy stocks in order to pump up the price in the idea that that would then lure other buyers in and they could sort of ride it up and then dump it at the top. What's happening in GameStop is people recognizing we can do this thing and then going ahead and doing it without anyone being in charge, which is one of the reasons why I think it's so fascinating.

 

BROOKE GLADSTONE Mmhmm. Elon Musk has been tweeting about various stocks. Not long ago, I guess the messaging app Signal and then a lot of investors flocked to the wrong company, also called Signal that was defunct, and was this fun? Was this intentional? People made or lost a lot of money there.

 

JAMES SUROWIECKI Yeah. So, I actually think the impact that Elon Musk is having on the stock market is probably a little closer to bubbles we've seen in the past. During the dotcom bubble, for instance, companies that added dot com to their name or something similar almost always saw their stock prices jump, simply because they added dotcom to their name. But even with the Elon Musk thing, I think there is a level of –.

 

BROOKE GLADSTONE Are you saying? He is like appending dot com to your name?

 

JAMES SUROWIECKI It isn't so much that Elon Musk says it and then everyone says, OK, well, that must mean it's worth buying. I think there's also an element of if Elon Musk says it, then people will think they should buy, so therefore I will buy to cash in on that. And then other people say other people are going to buy. And so there is a kind of positive feedback loop. And that was the case with the Signal advance story. And then more recently, Tuesday, after the market closed, he didn't even really say much about GameStop. He just said GameStonk.

 

[BROOKE LAUGHS]

 

JAMES SUROWIECKI And that, I think helped get the market going again. So, Musk definitely has this kind of ability to move markets.

 

BROOKE GLADSTONE So do you think that the redditors have permanently altered some fundamental aspect of American capitalism?

 

JAMES SUROWIECKI Yeah, on the simplest level, if you are a short seller, you have to be much warier today than you were a week ago. You just have to be, and I don't think that's going to go away any time soon.

 

BROOKE GLADSTONE People who don't hate short sellers see them as a kind of necessary brake on irrational exuberance.

 

JAMES SUROWIECKI All the evidence shows that having short sellers in the market is a good thing. It makes stock prices more efficient. It tends to provide, as you said, a check on irrational exuberance. So, while I have no sympathy or pity for the particular short sellers in GameStop and what happened to them. They're big boys, they should have known what they were potentially getting themselves in for and they were setting themselves up for, you know, a massive short squeeze that could crush them. They should have been well aware that even if they didn't know that, that it was going to be a ragtag bunch of redditors who were going to send them to the poorhouse. So I have no sympathy for them, I do think generally we want shorts in the market. And, you know, it's going to be fascinating to see what happens because, you know, if I were a short seller, I would be a lot a lot more nervous about doing it. In that sense. I think it is accurate to say that what's happened has changed American capitalism.

 

BROOKE GLADSTONE By the way, you want to know how much money I made. 

 

JAMES SUROWIECKI Yeah. How much did you make? I was trying to do the math in my head. 

 

BROOKE GLADSTONE Well, I sold it at 100, so I made 6500 dollars.

 

JAMES SUROWIECKI That is awesome. Congrats!

 

BROOKE GLADSTONE On a 975 dollar investment. Of course, it took 22 years!

 

JAMES SUROWIECKI Yeah, but, you know, it's funny, I was talking, my brother called yesterday, and I was just joking around and I was like, did you buy GameStop? And he was like, yes, I was like, what? And he's not like he doesn't have much money and isn't whatever. But he bought it at sixty and he sold it at 120 or something like that. And I was just like, wow.

 

BROOKE GLADSTONE Last time I looked it was around two seventy, and I just wonder why do people keep buying if they know it's just a manipulation based on very little. That gravity will happen and they can't know precisely when.

 

JAMES SUROWIECKI You know, one of the reasons why it's hard to hold a stock when there's no clear fundamental reason to hold it is that, you know, you're by yourself and you're just kind of you don't have any idea when it's going to drop, so the sensible thing to do is to sell it at one hundred. I mean, you know, you could argue the sensible thing to do would have been to sell it at seventy, whatever. But I think one of the things that r/WallStreetBets does is it actually provides a place where people talk to each other and encourage each other, and so if you go there, you'll see, you know, there are lots of posts saying, hold the line. You know, this is going to a thousand. And it does kind of play a role in in sort of reinforcing that.

 

But there is something mysterious about it. I mean, we don't entirely know, obviously, who's buying all this stock. I mean, a lot of the stock buying, I think, has been done by shorts who are basically covering their shorts and trying to get out of their positions. And some of it is being done by Wall Street professionals who need to own the stock in order to sell options against them and stuff. But if you look at the volume, I mean, an absolutely incredible number of GameStop shares is trading every day. So, there are a lot of ordinary people in there buying and selling the shares. I think some of what's happened in the last couple of days is that there's a lot of day trading in the stock. So, people are just trying to ride it up and down. But I think the main thing that's keeping it elevated where it is is this Wall Street Bets’ conviction that there's still more pain that they can inflict on Wall Street, and that's the idea. But I just don't know, that's the fascinating question is: at what point does that resolve vanish? It's an incredibly interesting story.

 

BROOKE GLADSTONE Thank you so much.

 

JAMES SUROWIECKI I appreciate it. Thanks for having me on.

 

BROOKE GLADSTONE James Surowiecki writes about business and finance. His article, titled The Game Stock Fiasco proves wearing a meme stock bubble. Is at Marker.medium.org.

 

And that's the show. On the Media is produced by Alana Casanova-Burgess, Micah Loewinger, Leah Feder, Jon Hanrahan, Eloise Blondiau, Rebecca Clark-Callender and with help from Alex Hanesworth. Xandra Ellin writes our newsletter. Our technical director is Jennifer Munsen, our engineers this week with Josh Hahn and Adriene Lilly.

 

Katya Rogers is our executive producer. Bob Garfield will be back next week. And I'm Brooke Gladstone.

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