Half a share, half a share,
Half a share onward,
All in the valley of Hedge
Rode Reddit’s hundred.
“Forward, the Daytrade Brigade!
Charge the indices!” he poasted.
Into the jaws of the Short
Rode Reddit’s hundred.
“Forward, the Daytrade Brigade!”
With diamond hands, not a man was dismayed.
Only then the hedgie knew
His gamble had foundered.
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For theirs was to buy,
Theirs was to expose the lie,
Theirs was to do or die.
Into the jaws of the Short
Rode Reddit’s hundred.
Media to right of them,
D.C. to left of them,
Wall Street in front of them
All dundered and blundered;
Stormed at with short and sell,
Boldly they bought and well,
Into the jaws of the Short,
Into the mouth of hell
In the last few weeks a loosely organized throng of Redditors has mounted the raging bull of Wall Street, scuttling the financial maneuvers of top private equity funds and embarrassing some of the titans of finance with an audacious display of people power. Laughing in the face of the Efficient Market Hypothesis, these posters on r/WallStreetBets have gleefully poured their life savings, their paychecks and their allowance money into so-called “meme stocks,” sending the share price of companies like GameStop, AMC and Nokia, among others, to the moon.
This is no pump and dump. In a campaign that has blurred the lines between self-interested speculation and moral crusade, with tinges of Gordon Gekko and Richard the Lionheart both present, Reddit’s legions are holding on to their stocks for dear life (“HODLing,” for the uninitiated). These retail investors hope to both personally prosper and to make Wall Street suffer for shorting (placing a bet against) the aforementioned beleaguered yet beloved companies.
To do so, these Redditors have purposefully driven a short squeeze, an event which occurs, according to Investopedia, when “a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall, to buy it in order to forestall even greater losses. Their scramble to buy only adds to the upward pressure on the stock's price.” Initially, the retail investors were met with success after success, driving the prices of the meme stocks to precipitous heights and trapping prominent Wall Street hedge funds in a financial pincer movement. Yet even after such an impressive opening gambit, this is far from over.
Now, Wall Street is conducting a sortie against Reddit’s financial smallholders, striking back at the price of laying some of the contents of its arsenal bare. By lashing out against average people, restricting their trading abilities, forcibly selling their securities and deleting negative product reviews of the largest trading platforms, Wall Street’s response has exposed the contours of an organized corporate cartel that can proficiently execute combined arms maneuvers across a wide variety of sectors, integrating media, tech, finance and government. Out of an obscurant haze of media-laundered lies, opaque financial connections and shared backchannels, an unholy hulking amalgam of business interests, more menacing than any Lovecraftian fever dream, has loomed into view. When a lone hedge fund falls in the forest, clearly the broader corporate and political world hears it loud and clear.
Much has been written about the stakes of this ongoing conflict, but a one-sided story has been told. As Wall Street’s alarm sounded, the press dutifully fulfilled their role as the bellhops of the powerful, dumping heaps of contrived narrative baggage onto the informational landscape. They mourned the tragic loss of billions by the purportedly talented managers of Wall Street. They sowed fear about the prospect of a market crash. They heaped scorn upon the unseemly, irrational hordes who are ostensibly just grabbing fistfuls of dollars from the air.
The overriding implication is that the unscrupulous poor are depriving the meritorious rich of their well-gotten gains. The press wants you to think that the real scandal, as Senator Hawley put it, is that “ordinary people… want in on a system that’s not meant for them.” The child of immigrants looking to pay off his parents house and secure their retirement, the debt-laden college student looking to fray the bonds of financial serfdom, the aspiring entrepreneur who just needs seed money––they do not “deserve” the means to pursue lives of decency. Instead, the meritorious managers of Wall Street are the “good guys” in this saga, declares a grotesque headline from the Bezos-owned Washington Post, and they should reap the rewards of hard work, expert analysis and loyalty to their shareholders. Nothing could be further from the truth.
The default assumption at institutions like Duke is that financial elites are some of the most valuable, productive members of society. As Daniel Rasmuseen discusses, a recent poll of institutional investors revealed that 94% believe that private equity (PE) funds will outperform the public market by anywhere from 2 to over 4 percent. A mere 6% believe that PE funds will achieve parity with public markets and the poll did not even bother to ask about the prospect of underperformance. Given the gargantuan profits they produce, it is easy to see why many subscribe to the notion that PE funds are the brains of the economy, efficiently allocating capital in a way that generates returns for shareholders and that produces productive, well-functioning businesses countrywide.
Yet as Wells King at American Compass points out, the ostensible whiz kids can barely beat simple index funds that track well-known indices like the S&P 500 and the Russell 2000. Moreover, the average PE fund has a 5 year life-span and a third of funds fail each year. How has a reputation of intelligence and expertise survived rife mediocrity and rampant failure? Because the house always wins. PE funds use in-house experts and contracted accounting firms to appraise their investments, enabling a “smoothing effect” that allows them to downplay risk and volatility when uncomfortable numerical realities arise.
Worse still, institutional investors, like the Duke Endowment or the various North Carolina public employee pension funds, readily accept this “phony happiness” offered by PE funds. They care less about getting the best returns and more about the faux stability that PE funds can offer them through the “‘phony happiness’ of… smoothed accounting.” But phony numbers do have real consequences, just not for those who are ultimately responsible. When PE funds consistently fail to deliver for institutional investors, normal people, like pensioners and students on financial aid, bear the cost.
Furthermore, PE funds do not deserve the managerial mystique they cloak themselves in. They often don’t even improve the operations of the companies they acquire. Writing for American Affairs, Dean Baker describes how the short-sighted, leech-like practices of PE firms bankrupt scores of companies, extracting rather than producing value in the process. PE firms often “load the companies they purchase with debt. This debt is often used to repay the private equity firm a large portion of the money it paid for the company.” Another predatory strategy involves buying a retail company, selling its storefronts, pocketing the cash from the sale and having the company pay rent for the stores it used to own. These are the business strategies of Count Dracula, not John Galt.
The commanding heights of the American economy are occupied by a group of firms that are extractive, rather than productive, in nature. PE firms manipulate numbers, companies and the lives of millions of average people to enrich themselves. Even still, these firms fail to deliver on their core value proposition, that their managerial expertise will reliably enable them to beat the returns of public equity markets, to their shareholders.
Are the Redditors speculating in public securities? Sure they are. But I don’t care. If I am faced with a choice between two groups, each of which is wildly speculating in financial markets for personal gain, then I am going to side with the group that is giving average people a helping hand, that is helping to save a few community institutions from bankruptcy and that is producing some of the best memes of 2021. If we’re all going gambling, I’ll root for the player and not the house. Hold $GME.
Reiss Becker is a Trinity senior. His column, “roused rabble,” runs on alternate Wednesdays.