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An Elegant Revolution Followed by Slaughter

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Even those who don’t follow financial news have been transfixed in recent days by the unlikely saga of GameStop. The once-moribund video-game seller’s stock price hit stratospheric heights this week, thanks in large part to Reddit message board-dwelling stock-watchers, who — to simplify what’s going on — have banded together to punish Wall Street speculators for betting against the company. (Old stalwarts Blockbuster Video and Tootsie Roll Industries have also been swept up in the madness.) Depending on who you ask, the episode is a long-overdue, people-powered reckoning against vulturish hedge funds, or a frightening sign that nihilism has fully infected the financial markets, and perhaps society writ large. I spoke with NYU Stern School of Business professor and Pivot podcast co-host Scott Galloway about why this is happening and how it will end.

What do you think is going on with GameStop?
Income inequality self corrects through one of three mechanisms: war, revolution, or famine. Wealth of people under the age of 40 as a percentage of total wealth has gone from 19 percent to 9 percent in the last 30 years and this is effectively a form of revolution. People are fed up with the financial industrial complex, which favors the already-rich and people over the age of 40. They’ve adapted their weapons and their skills and took down a hedge fund. It’s a coordinated transfer of wealth from the existing rich to the people who are trying to get rich. To a certain extent, they’re not doing anything that hasn’t been done before. They’re just doing it with new weapons and maybe even doing it better than professional investors. In that sense, it’s sort of inspiring.

These individuals basically stormed the castle. But if you look at a stock price, and you look at its valuation, which is the link between the stock and the actual fundamentals of the company, that curve is bent and jagged and unpredictable. When there’s a reattachment of their equity to the underlying fundamentals of GameStop, they’re all going to look at each other and realize that they’re about to be slaughtered. It may be tomorrow or it may be in a year, but at some point, GameStop will trade in the range of other distressed, or mature, or booming retailers, and everyone is going to bail. They should enjoy their victory, but the army of the valuation is coming for them.

How did we get here? 
It’s a breakdown of the central compact in our society where if young people play by the rules, they’re supposed to have the same opportunities as their parents in previous generations, and that’s not happening. Everything we do, from the stimulus to the tax structure, is all about helping rich people stay rich. People are fed up with that. Some of this is just mastery of new platforms that help people coordinate.

But I also think young, bored men are the most dangerous people in the world and a lot of young men are at home and, quite frankly, not having sex and developing relationships with others that inhibit some of their instincts to gamble. I think if people were going out more, dating more, working more, they wouldn’t need to hit the dopamine bag that is Robinhood. It’s reckless and I think there’s going to be a lot of tears, a lot of really depressed young men coming out of this. Investing is meant to be used to build a future. This is not building a future.

Don’t get me wrong, they are performing a very elegant revolution by taking down a hedge fund — good for them. In many ways that’s inspiring, there’s a healthy component to this in terms of new market dynamics, leveraging new platforms. But they should be careful celebrating because the market tends to get its revenge.

Is there a regulatory solution?
I don’t know if a regulatory solution is justified or required, but there’s no denying that this creates a lot of volatility. The question is: Does it create systemic risk? And to what extent? People have to decide if the volatility creates systemic risk. My sense is that the correcting mechanism will be the market.

Did you see that the Reddit message board is no longer accessible and TD Ameritrade has stopped allowing people to trade options on GameStop? It’s eerily familiar, like we’re relying on Reddit to be a corrective force the way we relied on Twitter or Facebook to shut down Trump.
You’re reading my mind. Traditionally, we turn to institutions like the SEC, the media, and the Senate Finance Committee to do this work. But we’ve been on a 40-year screed since the Reagan Revolution to undermine and defund and delegitimize these institutions. Social media has dispersed a lot of this power to the individual investors and then these platforms dare people to trade on instinct. The liberal in liberal democracy has nothing to do with progressive politics; it’s supposed to slow down the thinking in our institutions such that we don’t present systemic risk to the market or we don’t end up with hate speech that incites a mob. Those institutions have weakened dramatically. As a result, we now look to our new leaders, 30- and 40-something tech leaders to address some of our biggest problems. We don’t look to the FBI or to the Senate to hold seditionists accountable, and we don’t look to the SEC or the Senate Finance Committee to figure out if and what dangers this presents. We look to Reddit. Our new government is Big Tech.

What is your take on this?

I don’t think this is like the French Revolution. Feels more like a collective pump-and-dump with some underlying motives that are vaguely moral or comedic. If this is a revolution, what’s the goal? Or what’s the next step?
Yeah, “We’ve taken the castle and I’m right behind you!” But really no one is going to hold the line. Nobody here is more allegiant to each other than they are to their own economics. This cannot sustain at $350. I don’t know where the stock is going to be next week, but it’s going to be well south of where it is today for most of the year.

Maybe they should all just decide that GameStop is the new bitcoin?
That’s an interesting thought. It could end up being totally detached from its equity ownership and it just becomes a currency. A currency is just two parties deciding something is worth X, but it’s not linked to any underlying asset. That’s an interesting thought. I don’t see that happening here. I don’t think people are going to start buying airline tickets with GameStop.

Reddit’s Elegant GameStop Revolution Will Be Crushed