Spencer Jakab: GameStop, Reddit & the Fleecing of Small Investors | SALT Talks #269

Speaker A: Hello everyone, and welcome back to SALT Talks. My name is John d'. Arcy. I'm the managing director of salt, which is a global thought leadership forum and networking platform at the intersection of finance, technology and public policy. SALT Talks are a digital interview series with leading investors, creators and thinkers. And our goal on these SALT Talks is the same as our goal at our SALT Conferences, which is to provide a window into the mind of subject matter experts as well as provide a platform for what we think are big ideas that are shaping the future. And we're very excited today to welcome Spencer Jacob to SALT Talks. Uh, Spencer is an award winning financial journalist and a former top rated stock analyst at Credit Suisse. He, uh, edits the Wall Street Journal's Heard on the street column and previously wrote the daily investing column ahead of the Tape. Uh, prior to joining the Journal, he wrote for the Lex and On Wall street columns at Britain's Financial Times. He's also the author of a brilliant new book called the revolution that GameStop, Reddit and the Fleecing of Small Investors that captured this moment that we all experienced last year with GameStop and, uh, the rising up of a swell of small investors to try to conquer, uh, Wall Street. But was that actually a revolution or was it just a blip on the radar? We'll talk a little bit, uh, with Spencer about that on today's saltalk. So hosting today's talk is Anthony Scaramucci, who's the founder and managing partner of SkyBridge Capital, which is a global alternative investment firm. Uh, he's also the chairman of salt. And with that, I'll turn it over to Anthony to begin the interview.

Speaker B: So first off, congratulations on the book. I got a chance to read it because you were nice enough, uh, to send me an advance copy. And I also promise you that I'll be buying the book. It's out today. Um, and you have the book behind you. Why don't you hold it up, Spencer? Because I'm all about. Here we are. I'm all about self promotion.

Speaker C: See how I strategically place that where people can see it?

Speaker B: But it was, it was too far for old people like me that can't see maybe Darcy because he's such a young man. So There you go. GameStop, Reddit and the small investors. The Revolution that wasn't. So, um, I want to talk about you, but I want to talk about that title for a second. So why the Revolution? That wasn't. It's a great title. But why'd you come up with that?

Speaker C: If you looked at Headlines at the time, it was like small, ah, investors stick it to the man. Give Wall Street a black eye. That's the thing that amazed me about it the most as well. I've been following financial markets, either working in them or writing about them, uh, for 29 years now. I was gobsmacked, I'm sure that you were too, by what was going on. Because as you know, you couldn't have two or three hedge funds do what all these hundreds of thousands and even millions of people did, which is to gang up, sneak up on some of the smartest money managers in the world and ambush them. First of all, because it would be illegal. But it wasn't illegal the way they did it, as far as the SEC is concerned, at least there's no way they could go after it, which is basically, they discussed it openly. Uh, they all bought options and shares in their individual accounts and they blew these guys up. And they thought that they were going to get a twofer by sticking it to the man. It wasn't a revolution because they didn't really accomplish either one. I mean, as you know, Wall street is a big place. Wall street isn't two or three hedge funds. Wall street is all the middlemen. It's lots of other hedge funds. It's lots of other mutual funds. And basically my point is that this was a, uh, great time for Wall Street. If you look at anybody who was in the business whose information you know about publicly, any. They had a great first quarter of 2021. They had a real good last three quarters of 2020, as a matter of fact, with all this surge of money coming to the market. And so that's why it wasn't a revolution. And then the people who were involved, of course, some of them individually did pretty well, but a lot of them I know did not do too well.

Speaker B: I enjoyed reading the book because it is about the. It's a David and Goliath story. Um, and it's ultimately a bee swarm attacks these Goliaths. They don't anticipate it, they get knocked down, they go on to recover and they reform themselves. And of course, many people that are holding these meme stocks, if you will have been blasted by that, what is your reaction to all that? What's the cautionary tale here that you would tell an investor, a hedge fund manager or small investor, a Wall street bets person?

Speaker C: I think this book is of great interest to anybody who works in finance. But I didn't write it in a way that it's only comprehensible to those of us who've worked in finance for a while. I thought about my mom and my sister, smart people who don't have any connection to it. I explain things.

Speaker A: Ah.

Speaker C: As it goes along. I don't think it slows it down too much. It's also written for ordinary people in the sense that you need to be reminded again and again that if you think that you're outsmarting Wall street, if you're going to get very active and very excited as an individual investor, then it's not going to end well for you, in all likelihood. And it's going to be a good time for the industry of giving financial advice and managing money and stuff like that. Not that I have anything against that industry, but it does line the pockets of the industry much more than usual when you have a big upswell of people. And this was no different. It's so ironic, right? Because you had people basically wanting to stick it to the man. And, you know. And, uh, they didn't. And if you. The weird thing is, is that it has continued. So it's a great thing for somebody who wrote a book about something that happened in history. It's really a period of like 10 or 11 days. It lasted like. It lasted a Scaramucci. Right. I mean, the whole. The whole episode, Right. It was. It was more a week and a half.

Speaker B: Give it full credit.

Speaker C: Okay.

Speaker B: We don't want to say Scaramucci unless it's a 11 days, Spencer.

Speaker C: Oh, it was like about 11 days. Okay. It was less than a Scaramucci.

Speaker B: It's 10, 11 of a Scaramucci or like 9 11s. But you.

Speaker C: It was not Scaramucci in terms of the crazy.

Speaker A: Crazy.

Speaker B: I just want to make sure we're there because Darcy's going to chime in and mention to all of our delegates that I got fired from the White House in a few seconds. But I just want full credit for my career there. Okay. So.

Speaker C: Okay.

Speaker B: So.

Speaker C: All right. Okay. I don't want to mislead anybody.

Speaker B: Yeah.

Speaker C: So the episode that I write about did not last that long, but I go back to its roots, first of all. And it's very interesting how the pieces came together. But it's also interesting that it is, as you said, it has continued to be a phenomenon. You've had lightning struck. All these things happened all at once to make lightning strike on Wall street. And you've had this crowd that got very excited about it, and they tried to make lightning strike a second, third, fourth, fifth, sixth time. And they've remained involved. And so it stayed a story, which is a great thing for an author. Right. It's great when the thing that you're writing about is still in the news, not just because it's the anniversary when the book came out, but also because people are agitated about it and it continues to affect markets. But they didn't succeed the second, third, fourth, and fifth time. Um, because for a variety of reasons. One is that they use the options market to a large extent to do what they want it to do in the options market. Prices in volatility. The options market sees you coming. The black Scholes formula. Prices in implied volatility. If someone thinks that things are going to be very volatile because a bunch of retail investors are interested in it, then they'll jack up the price of the options that they sell you. And that makes it much more expensive to do this. Also, it's just not a media phenomenon in the same way. You don't have millions, uh, of new people piling into it and opening accounts anymore. People are bored with it and they've moved on to other things like crypto, or they lost money and they moved on. It's continued to be out there. And of course, if a bunch of people buy a stock, it's going to go up, but they're not ambushing hedge funds. And of course, there's a conspiracy, as you might know, that they will. That if they keep on buying and keep on holding, that they're going to. Which makes me very sad.

Speaker A: Um,

Speaker C: one reason that I became a journalist taking a big pay cut from finance is to inform people about what goes on. And these people are very poorly informed because they think that if they keep on holding these stocks, that there's some phantom shorts and there's going to be the muffler of all short squeezes and that they're going to win, which is not right, obviously.

Speaker B: And you point that out in the book. Let's go to your background for a second, because I think you are made to write a book like this. And when I was reading the book, I was like, there's very few people, Spencer, that could write this book. And I think that this book came together as beautifully as it did because of your background. So tell our viewers and listeners what your background is.

Speaker C: Well, I got into Wall street by accident, so, uh, I wanted to be a historian. I got an application by accident, like, literally by accident to this program at Columbia. And my undergraduate advisor said, oh, yeah, I think you should do that. I'll give you some options. I started this program met a kid the first day who had been an investment banker. I know my parents were immigrants. Um, we didn't know anybody who worked on Wall Street. I had heard the word investment banker, but I had no idea what it was. This kid had been an investment banker and hated, Hated it. He happened to drop how much he had made, though, coming out of College in 1986 or whatever. And I couldn't believe it. And I was concerned about money. And I said, well, how do I do that? Um, he told me all the classes I had to take while we were at Columbia. I could take all the finance classes at Columbia Business School that I wanted to. So I did. Uh, and I got a job working in emerging markets because, uh, I was bilingual. Um, and Eastern Europe was opening up at the time. My parents are from Hungary. I worked there as an analyst. It was very exciting. I love finance. Uh, and then after a while, it was just so much talking to clients and managing people that I got bored with it and decided that I wanted to write about finance and be able to call up smart people and talk to them about it. So I became a journalist. I wound up actually sitting next to a longtime Wall Street Journal veteran reporter, uh, and her family on the plane. And she talked to me about it. Two days later I was interviewing, and three days later I was working for her. Uh, and it's been 19 years now that I've been a journal. I'm glad I made the switch. Um, having been on Wall street and the kind of journalism that I do, I do financial analysis and opinion. And having been an analyst, I think makes it much, uh, more comfortable for me to do it. Not that I know everything, but, um, I'm comfortable expressing an opinion. And, uh, I kind of know when I'm being spun a tail by somebody who I speak with on Wall Street.

Speaker B: A new category of people, um, we're calling them fin fluencers. They're financial influencers on things like TikTok and YouTube. It's also Silicon Valley billionaires that are smoking blunts on people's podcasts and are opining on cryptocurrencies and other sorts of things. What do you make of all this as a traditional, uh, Wall Street Journal journalist?

Speaker C: Look, if you were to buy everything that I suggested you should buy and sell everything I suggested you not really sure how you would do. Um, I don't think that there's anybody out there who really has a magic formula who's cracked the stock market thing or cracked this financial markets thing. I think that Very few people, uh, who tell you especially for free what to do really are going to be able to tell you on a consistent basis. But this young generation doesn't trust Wall Street. You have to think about, uh, how they grew up. They grew up seeing their parents probably suffer during the financial crisis. They have student loans that they're resentful of, a lot of them. And they think that there are two sets of rules, one for Wall street and one for everybody else. Uh, so it's not that they don't like rich people. They don't like rich people who wear suits and work on Wall street very much. And then there's this cartoon villain type of person on Wall street called a hedge fund manager. That in their imagination really is the worst of the bunch because they sell stock short. And then if they sell a stock, which for young males, and it was young males primarily who took part in this, uh, patronized all throughout their youth. And I've got three boys and I've driven them there about 18 billion times, they resent it. They think that if you bet against a company, you're trying to destroy it, which is two different things, as we know. But that's not how they see it. They don't see the distinction. And GameStop was a dying business at the time that the story begins. So was AMC, and so was BlackBerry, and so is Nokia. That's what they all had in common. And, and they felt like it was like a, um, crusade really, uh, that was noble to go and blow up the hedge fund managers who were betting against these things. And then a lot of them, and not just those people, but many young people are very willing to take, uh, advice from people they meet online, even if they're strangers, uh, or if it's a Silicon Valley billionaire, uh, smoking a joint online, or if it's, uh, some guy who brings a bunch of spacs to market. And I'm not going to name names, but they really idolize these people because they're cool and they're rich. So young people still admire rich people. Uh, they just don't admire a certain type of rich person. And it is kind of dangerous, I think, to take advice from strangers on the Internet. I'm not saying that your mom and dad stockbroker at Morgan Stanley is going to give you better advice, but at least they're a professional. They're not going to tell you to put 100% of your money, uh, or fritter away all your savings on options, premium on meme stocks. Uh, their advice at least is better. I'm a big fan of, uh, fiduciaries and sound financial advice for individual investors. I think that it's a great thing to have an advisor. It's worth the money. And if you don't think it's worth the money, you can have a robo advisor, uh, which is a lot cheaper. And those are good too.

Speaker B: I think it's very well said. But you, unfortunately are an old fogey, Spencer. Okay. And by the way, I'm probably 10 years older than you. Okay? So I'll pass you my AARP card once. Once you cross into m my age realm. So how do you make sense as an old fogey of a guy by the name of Keith Gill, AKA Roaring Kitty, who you write glowingly about, who becomes the Pied Piper for more than a million people to buy the beaten down GameStop shares. And he does this, and he goes on to make $50 million for himself while other people are on this roller coaster ride. How do you make sense of all that?

Speaker C: So he is a fascinating character. And the way that I structured the book, and I think this keeps it moving, is I go back and I follow the story through him, through his adventures and 90% of that period. And it just begins in 2019. He, uh, was ignored. He was worse than ignored. He was ridiculed online because he kind of came across as an old fogey. Of course you didn't know who he was. You didn't see his picture until he started making YouTube videos a year into it. Uh, because he was roaring kitty on YouTube and people didn't connect the two Personas. Uh, but he has a cfa. Uh, he wrote in complete sentences. Uh, people would tell him to take the money and run when he had doubled his money and say, no, that's not how you do this. And, uh, behavioral finance and biases. And he was citing Aswath, Damadoran and all these other people who. These people had no clue who he was. And so the way that you get influence on social media is to be confident, to be funny, to be wild, especially on Wall street bets. And he was initially the opposite. He was cerebral, he was sane, he was measured, and he was totally ignored. And then people discovered him when GameStop became this candidate for a short squeeze because he'd been there all along. He'd made this significant personal bet, basically just a gigantic chunk of his net worth. And he did it through the options market, which amplified the gains that he could make. He made 1000 times his money. At one point in the story, he stopped Posting those cerebral posts. And he began just posting memes because he's a young guy, he's 34 at the time the events take place. Um, he started putting, ah, screenshots of his E Trade account without his name on it, of course, but everything else was there and he'd do it every day. And people just couldn't believe, A, how much money he'd made and B, that he wasn't selling. And so you had social proof come into it. And then he just became a hero because he didn't sell. And the gist of this whole thing was not to sell. You had to have diamond hands and not sell. So it's kind of an incredible transformation that, uh, he went through. And I have to say I admire him, um, just for his discipline. Not for the fact that he led this revolution because, uh, he didn't really lead it, but he inspired it. But I admire him for his, uh, gutsiness as an investor.

Speaker B: Trading apps like Robinhood and others that make it so easy for you to just log on with commission list transactions. You explain in the book that there's an underlying cost of those commissionless transactions. What do you make of these trading apps? Are they good for our society? Are they good for the individual investor? Are they good for the overall markets?

Speaker C: I'm going to give you a quick answer. No, they're not. Um, I don't think they're going to go away, but they're not good. It's not a good development. I mean, I'll tell you what's a good development. If you go back decades and you remember this. Even I remember this. Uh, even though I guess I'm younger than you. I think we might be the same age, though. Uh, it used to cost a lot to trade a stock. A lot, a lot. Before, uh, the 1970s, certainly. Uh, my dad was a refugee and he died when I was still a kid. He's got briefcases full of these stock statements. Uh, he got fascinated by the stock market. I'm looking through those things. One thing I can't believe is how much commission he paid just to transact in the stock market. It's a good thing that it's become much cheaper to transact and much easier to transact. But it's only good up to a point. You take the friction out of something completely. You went in late 2019, every single broker basically saw Robinhood having all the success. They got one out of every two new brokerage accounts in America opened up. They're small accounts, to be sure, but they were Getting a lot of new customers, and they all threw in the towel and they all went to zero commissions. And they thought it'd be bad for them and it was great for them. And what they didn't understand was that when you make something free, that's fun, and they didn't think of their product as fun. When you make something free that's fun, then people take as much of it as they can. It's like when you leave out a bunch of Snickers bars on Halloween. Instead of answering the doorbell every time some kid's going to come and take 10 Snickers bars and have a stomachache the next day. And that's kind of what these people did, is they traded like crazy. There's an explosion in trading by people who didn't understand that there actually are costs to being very active in the stock market. Because as we know, the more often you trade and the more often you even check your investments, the worse you do. There's a direct inverse correlation. They gave people just enough rope to hang themselves. You can't say to a business, make it harder, make it cost something, make it cost more. I don't think you can put the genie back in the bottle in terms of, uh, free trading, but I don't think that it was helpful, uh, especially to this young generation that had no experience of investing through 08 or the.com bubble or previous catastrophes, um, in the market.

Speaker B: I'm going to turn it over to John d', Arcy, who's got us beat by generation. Of course, as you and I both know, Spencer, his generation is smarter and wiser than our generation. So we're going to turn it over to him in a second.

Speaker C: But I want to ask you, I

Speaker B: want to play the devil's advocate for, for a second. Um, these experiences may make people more humble, they may make them wiser, and they may actually learn about the stock market. It's a forced tuition, if you will, uh, to your point about losing money and so forth. But, uh, it may be, um, more positive than we both think. Do I have that wrong?

Speaker C: I don't think you have it wrong. I think first of all, when you're talking about a group of 8 to 10 million people, you can't treat them as a monolith. So you had some people who were in this just to make a buck, just to kind of ride greater fool kind of thing, and a lot of them did. And then you had people. And it's like any movement, any political movement, the people who come to it Late or any religious movement. The people who come to it later really earnest, and they really believed in sticking it to the man. I think that's the rough breakdown. So some people believed in both, some believed in one, some didn't care if they made money and believed in the other. And then, yeah, this generation, if they lost money or if they felt silly after the entire experience, I see it going three ways. I see some saying, wow, uh, well, I lost a few hundred or a few thousand dollars. It's kind of tuition in the school of investing for life. And it's going to pay off multiple times in their life because they learned a lesson. So that's happened to many people. I, uh, hope that happens to a lot of people. And I hope that they invest and invest over the decades remaining in their productive lives, their working lives, and have a nice nest egg. But I think that's a minority, unfortunately. I like to be optimistic. I think some people, uh, will take the opposite lesson. And this is the most expensive thing you can do, which is not do anything. Just say, wall Street's crooked. I'm not going to engage with it. Forget that. You think about people in 1929 who lost everything, bought stocks on margin, lost every single thing. And that generation never came back to the stock market. 1932, 1933 would have been a great time to start saving money in the stock market. And no one wanted to buy stocks when the Shiller PE was 6 or 7. It was basically a bonanza for anybody who started deploying capital and did so for a while, and they did not. It took another generation. I'm afraid that some people are going to take that lesson, which will cost them in potential gains. And then there's some small subset that's very conspiratorial about it that continues to believe that. I don't know that Ken Griffin, uh, told Vlad Tenev at Robinhood to stop them from trading. It's all a conspiracy. And doesn't matter what you say, that's what they think. And of course, it was not a conspiracy. There's a real boring explanation for what happened. But, um, they're very bitter and they want their pound of flesh.

Speaker B: I mean, as it was going on even before Vlad gave his interview to Andrew Orsorkin at cnbc, I knew, because I have operational training at Goldman Sachs, I knew why he had to do that. I understood what was going on in his Risk book. Um, and so obviously, and you pointed out beautifully why there was no conspiracy. Let me turn it over to John Dorsey. Um, but Please do me a favor, Spencer. Don't say, oh, that's a really good question, or that's a brilliant question, because we're in solidarity generationally against this inimical foe. So please don't say that. But go ahead, John.

Speaker A: I'm going to start it off with a story and I'm going to keep it anonymous because I have a very close friend that I grew up with and actually went to college with as well. He does research in the biotechnology medical field. And so he reached out to me, must have been a year and a half ago when this was just getting started. He said, have you ever looked at the stock GameStop? It's, uh, this company that's been beaten down and they have this brick and mortar strategy that's sort of dying, but the short interest on the stock is 100 plus percent. I've been on Reddit, I've been watching these videos and talking to these people in this community that think this is a once in a lifetime trade. And my response was, you're an idiot. This stock sucks, the company sucks. This trade will never work. I'm not going anywhere near it. We have certain restrictions at Skybridge. Anyways, uh, I steered clear of it, but, uh, watching it unfold from that perspective. I had a very close friend that was involved in this massive run up and I was trying to counsel him along the way, but it was very unprecedented the way it happened. I'm curious the environment that we were in where everybody was working from home, including, uh, my friend that I just described. How much did the pandemic play into this, do you think? The fact that people working from home developed side hustles and developed, uh, new hobbies, including trading and investing on places like Robinhood that, uh, we talked about. How much do you think that played into it? People sort of developing these side hobbies like my friend.

Speaker C: Well, John, first of all, you seem like a very nice young man, so

Speaker A: thank you, thank you.

Speaker C: Um, no, the pandemic played a huge role in this and lots of aspects of the pandemic played a huge role in this. So you had first, let's go back a little bit. Okay. Um, and I'll be quick. In 2018, you had a Supreme Court decision that allowed sports gambling in most states. Basically it broke down the sort of the law that only made it possible in Vegas. And so you had a large number of mainly young men. That's the one type of gambling that skews very, very young. Sports gambling. Daily sports betting, went to direct sports, uh, or daily Fantasy sports to sports gambling. And they loved it. And it was an explosion in advertising and participation. And all of a sudden, when the pandemic happened, a bunch of things happened. First of all, sports went away. We all watched Korean baseball on espn. Hello. Uh, that was the only thing on for a few weeks. If you remember, uh, March Madness was canceled right before it was about to start. You had all these young people, uh, who are stuck at home, either in their own apartments or in mom and Dad's basement. Um, this generation that kind of spends money as soon as it makes it. Um, I hate to stereotype, but I've got a couple of young men in that, my sons in that demographic. And all of a sudden they had extra money. Their savings ratio went way up. They got stimulus checks. They got, in some cases, they got expanded unemployment benefits. So they had more liquid cash than they'd had a long time, that. A lot more free time. There was a speculative thing that they couldn't do for a while. Then they had the stock market. And the pandemic did a very unique thing to the stock market. It wasn't just that it caused a, uh, short bear market. It caused the sharpest descent from a record high into a bear market ever. And then it caused the sharpest ascent into a new bull market ever. So the volatility, the kind of, the shape of that V, that descent and bounce back was epic. And the things that bounced back were epic, right? Cruise lines and, uh, airlines, all kinds of stuff that maybe you didn't know that there were going to be vaccines that worked. You didn't know any of that stuff. And people bought bankrupt rental car companies. Success is a very bad teacher. And these young people opened stock accounts in droves during 2020, especially during the spring. They were following Dave Portnoy, debut day trader, and people like that. The guy had, like a month of, um, experience in the stock market, period, would pull Scrabble towels out of a bag and tell them what to buy. The ticker symbol. So it was bonkers, right? They were like the Wall Street Journal interviewed some guy who doubled his money on Hertz shares, put all his money into it. It was bankrupt already. Hertz actually did emerge later out of bankruptcy, but they didn't know that then. So it just was too easy. During the year, from the beginning of the bottom of the pandemic to a year later, uh, 96% of American stocks rose. That's unprecedented. It was very hard to pick a loser.

Speaker A: So those are great points. Somebody described the crypto market, for example, and there's some element of this in financial markets more broadly. There is a fireball of money that's flowing around through cryptocurrencies, through NFTs right now. And really people are dictating, uh, what markets become hot and what markets tend to stagnate. And there's really no underlying value to most of the NFT market. There's certainly some NFTs, uh, that have some utility in the real world and things like that. But uh, these asset markets are booming just because the right people decide that they want to invest them and they want to build community around these ideas. How does social media, Reddit, um, and those types of things, they help foster a sense of identity and camaraderie among a group of people. How much of a role is this mob psychology playing, uh, in this trading mania? And where does it take us in terms of the way financial markets operate? Are they going to become more and more detached from fundamentals and it's purely going to be based on technicals and mob psychology, uh, or where do we go from here?

Speaker C: I don't think, and I hope that uh, isn't sustainable, but without a doubt, uh, that's a huge part of the financial markets that we deal with. Uh, you have to be aware of it, you have to be cognizant of it. Uh, Bloomberg Intelligence reported recently that 85% of hedge funds either, ah, pay for or have their own, uh, programs that monitor social media on an active basis like natural language processing. They can read Reddit faster than a human can read it because they want to be prepared and sometimes they want to take advantage and jump on these things. Mob psychology is really important, but it is most definitely negative. And I'll tell you why. Because let's think at the roots of what financial markets are. It's a place to match up savers and users of capital. If you have two companies, you have one, uh, that is pretty promising but is boring and dowdy and just never gets the attention of this crowd and is trading at a, um, pretty uh, dull valuation. And you have another company that, for whatever reason, a movie theater chain that gives you a free popcorn for being a shareholder, let's say just to make something up out of thin air, that gets a huge valuation, then that company's cost of equity capital is a tiny fraction of the other companies. Now let's say that other company is the next Apple. That next Apple is never going to be able to raise money, uh, as cheaply as the company that has the attention of the crowd. And so it distorts the cost of capital. And that's a bad thing because the capital markets at the end of the day are a place for companies to raise money. Of course there are companies that go out there and raise money and lose all your money. And that's part of it. There's risk involved. But you can't just have the capital markets be, uh, the greater fool theory, uh, forever because it's going to destroy what capital markets are for. I don't think that it's going to last because you can buy something intangible, um, and sell it to somebody else later and maybe its value will stay permanently high. Who knows? Gold is tangible but not useful. There are times when people have bought gold and it's at least kept its purchasing power, I guess. But I think the best thing that you can own is a productive asset, a mine or a farm or real estate or a stock, something that's producing cash. Because that's the only way to really know what something is worth, as we know is discounting its cash flows. Uh, you don't know what those cash flows are going to be. You have to make a projection. But if that's not the reason you're buying it, then you're buying it for the wrong reason. Uh, I hate to be old fashioned but I think that's just true.

Speaker A: Well, you're seeing it self correct, uh, in some markets, especially in the tech space. And the Cathie Wood portfolio, there was an ETF that just came out which is Sark. Ah, which is the anti Cathie Wood portfolio. So certainly plenty of people betting on uh, this self correcting even further in terms of um, attaching actual value to fundamentals and cash flows and things of that nature. Um, let me let that lead into my next question which is about Federal Reserve policy in the current environment that we're in. So you're a finance guy. Um, how much has the Fed been the entire basis behind this run up that we've seen in tech stocks, high growth stocks with poor fundamentals in cryptocurrencies in NFTs? Is this completely a Fed driven phenomenon? So as the Fed tightens, is this going to completely dissipate or you think there's something more broader culturally, um, and generationally that's happening in markets?

Speaker C: Yeah, no, I think the Fed has had its finger on the scale of speculative assets. And let me just clarify, there are people out there who will say things and maybe they don't literally mean it, but they said the Fed is pumping money into the stock Market, the Fed is pumping money into the economy. They're not literally doing that. They're doing it in a very indirect way. When you make money so cheap, you make returns on money so low, then part of the reason that you're doing it is to get these animal spirits going. That's why they began to do it after the financial crisis. It's just that, uh, it's 2022 now. It's not 2008, it's not 2009. Doing this, it changes things psychologically, first of all, because there's the whole Tina trade. There is no alternative, uh, but there's also the value that people place on very distant, very speculative cash flows. And whether you understand that intellectually or you just get it intuitively or instinctively, money being so cheap, money being almost free or basically free, or having negative interest rates in many countries until recently, uh, has encouraged people to bet on those very, very distant, very speculative cash flows, as opposed to a steady, boring stream of them that you get over the years. And that makes speculative investments more attractive. And then since those speculative investments were doing very well through all these years, people kept just trying to jump the shark and pushing it out farther and farther and farther. And I think that, uh, it was a crucial element to the meme stock phenomenon and to crypto and to other things. I think if you took it away, uh, then it would recede. I'm not saying they should take it away because of course there are other reasons for them doing it, but in my opinion is a vital ingredient.

Speaker A: Right. Um, we talked about Reddit, um, and the role that it played in the Gamestop, um, scenario. Uh, but in general, are you concerned about the proliferation of pump and dump schemes?

Speaker C: True.

Speaker A: Pump and dump schemes. Some people think that, that uh, certain crypto markets are pumping up schemes, even blue chip crypto markets, but there's certain cases now in front of the SEC about celebrities that are endorsing, uh, meme coins or things of that nature. Are you concerned about, um, the proliferation of these pumping up schemes that are going to leave inexperienced investors holding the bag, uh, which is the basis of your book about how ultimately the little guy is going to suffer from this?

Speaker C: Yeah, totally. I think that we live in a kind of a golden age of grift, uh, except a lot of the grift never, uh, gets prosecuted. So, um, whether it's celebrities who are taking no real risk, themselves taking a risk by promoting a SPAC or whatever, or whether it's actual offshore criminals doing a, ah, pump and dump, uh, and having Bots post messages. And I go into that in the book and I, I have to say I'm extremely disappointed as a financial journalist with the SEC and with exchanges like Nasdaq, uh, where they come in very late, if at all, when there are obvious cases of uh, fraud. I won't mention this specific thing, but I did an investigative, uh, piece that I worked on for months, uh, about uh, financier and a company that were very clearly bilking small investors and taking advantage of them. Not only was this obvious to uh, the SEC and to anybody with eyes in their head and any knowledge, but you would bring it up with Nasdaq, I'll tell you that much. It was a stock on nasdaq. Nasdaq. I just said I want to talk about this thing. I didn't say the name of the company. They knew exactly what it was about. They brought their legal counsel on with me. They brought all these people. Yet they kept doing things administratively that allowed it to keep happening for months and months and hundreds of millions of dollars more in losses to investors until finally a halt was put to it. And then other people copied the same exact technique again and again. And it happens all the time. Um, people say, well, hey, we're democratizing finance. You can't stop that. Yeah, you're not democratizing finance. Okay? Finance, uh, is already democratized. Or people say we have our First Amendment rights and there may be bad eggs that say things on social media. They're always bad people, but whatever. No, I think that I don't want you to put, you can't put the genie back in the bottle like I said, but you can put up guardrails for people. The SEC needs to do its job and do it more quickly and other people need to do their job. I mean people are really being taken advantage of and uh, it really bugs me.

Speaker A: Right. And talking about things self correcting. Robinhood is very central to this story because it's the platform that onboarded a lot of these young investors and created this gamification. Uh, they frame it as democratizing investing. Um, other people might frame it as in a predatory way, luring young people into using things like leverage and excessive risk with uh, money. But Robinhood itself, the stock at one point was booming. It was above $70 per share. Today it trades in the low teens as we record this. Do you think this is going to be self correcting? Where either through regulation or just a recognition that Robinhood, by providing free transact things, isn't going to be able to commercialize their business. Uh, but what do you make of Robinhood's general fall from grace, why it's happened, and what the future is for the platform and platforms like it?

Speaker C: I think that the world just moved on a little bit from Robinhood. I think they can come back. Uh, I think that's the reason that it fell from grace, is because the peak period, the best time for Robinhood was during this meme stock squeeze. So if you look at how they made Money in late 2020 and then especially early 2021, when this was going on, the height of the GameStop squeeze, it was, uh, first and foremost through selling their customers trades to wholesalers or market makers, uh, which meant the more you traded, the better they did. So they had a very strong incentive to, uh, have you be very active as one of their customers. They, uh, made a lot of money, disproportionate amount of money relative to the dollars involved in, um, selling options trades to market makers. Then that morphed into cryptocurrency and the next quarter, Dogecoin was their big earner and stocks became less important. But there always has to be a new thing. And I think people moved on and they started, uh, opening accounts at Coinbase or wherever the speculative fervor died down, uh, in stocks. But it's still there. It's still pretty bubbly. In historical terms. Robinhood was valued. It's a hockey stick going up. That's what people buy a stock, they buy it as a hockey stick going up. And it really looked like it was going up. They did their initial public offering at a time when, optically, they were doing the best. They were on top of the world. And not that they were making a lot of money yet, but they were going to make a ton of money. That's, I think, basically why, because the average revenue that they made per user had already peaked and was coming down. And they might come back because they might be able to sell those people some really useful financial products like, um, give them debit cards or open IRAs or, uh, have a robo advisor or something like that. Something, uh, that really is useful to those people. Maybe they'll reinvent themselves, I don't know.

Speaker A: Right, last question before we let you go, is what do you think the long term impact, if any, is going to be of this episode, uh, both for individual investors and for Wall Street? How do you think it's forever changed the way a hedge fund manager thinks about risk management or how, uh, individuals think about managing their personal portfolio?

Speaker C: Well, I think it definitely Changed the way that hedge, uh, fund managers think about risk management. They're watching. They're ready not, uh, to say that they won't get, uh, caught with their pants down in the future because there's a lot of hubris, uh, in um, people who manage a lot of money. And there was this, uh, time, of course, and there will be next time, so there'll be some other thing. But in terms of the effect more broadly on financial markets, one thing is that there's never anything new. It just has a new flavor to it. And this was the latest flavor. I think that when people get very excited and very active, um, in financial markets, when the broad public gets excited, then it's a good time for Wall Street. And when you look back on it later, you say, wow, it wasn't really a great time for the general public. And rules come out of it too, usually the United States. At least you had the SEC come out of the 1929 crash and you had Sarbanes Oxley come after, uh, and analyst settlements come out after the dot com bubble and you had the Volcker rule come out of, uh, 2008 and the CFPB. And I think that you'll get some new rules. But I suspect that the new rules will be like the generals fighting the last war, because it always is. And they might even be destructive. And for example, you might put. Because short sellers, for whatever reason they got beaten up in this, they might come out with rules that make it even more difficult to be a short seller during a time when it's really been difficult already to make money as a short seller. Uh, they, they kind of were, you know, they were part of the story, but they weren't the cause of the story. And I mean, most short sellers are honest people. They're not out there distorting or putting out fake stories. They are providing really a vital function. Not that they're angels, but the existence of short sellers, whether it's dedicated short sellers or people who have shorts as part of their portfolio, are very important to mom and Pop. You need people to be out there because you need prices to be as correct as possible. If you're not trained in Wall street, then you open up your Yahoo Finance app and you see a price and you're wondering if it's a correct price and it might be a completely incorrect, insane, um, unjustified price. If a short seller can't do something about that, then the possibility that you'll buy that stock and think that it's okay and then lose 80% of your money or 100% of your money if it's Enron, uh, is there. Right. So I think that the rules that will come out of this won't really help, unfortunately. What, uh, I wish would come out in this are more guardrails to protect it. Even if they don't want it, they need it. They need guardrails to protect themselves, uh, from the industry and from their own worst impulses.

Speaker A: Well, one thing that came out of this episode was a great book that I think is very educational for people that are looking to learn about what happened here with GameStop and let it be a cautionary tale. I think, as you alluded to earlier, it's hard for people to fully understand, um, financial markets without experiencing it themselves, either experiencing the tremendous highs of a big winner or the pain of getting fleeced. But, uh, I think your book does a great job of educating people. So thank you for writing it and Spencer, it was a pleasure having you on again. The book is called the revolution that wasn't GameStop, Reddit and the Fleecing of Small Investors. Anthony, you have a final word for Spencer before we let him go.

Speaker B: Yeah. And he's hurt on the street. He is the famous hurt on the street at the Wall Street Journal. And we've learned a lot from you over the years, Spencer. It's a fantastic book. And for me personally, I'm glad it was the revolution that wasn't. I wasn't ready for these meme stocks to take over, uh, the hedge fund industry. So, um, I'm glad that that happened, actually. But I thought the book was great. I don't have the actual copy, but why don't you hold it up again one more time before we go because, you know, I love self promoting. There it is. And, uh, we wish you great success with the book. Thanks for joining us on Salt Talks.

Speaker C: Thank you so much for having me. It was a lot of fun. Great questions, guys.

Speaker A: Thank you again, Spencer. And thank you everybody. For Salt.

Speaker B: He meant both of us. Great questions from both of us.

Speaker A: Of course, of course. Not just the latter half. Uh, but, uh, thank you again everybody for tuning into today's Salt Talk with Spencer Jacob from the Wall Street Journal. Just a reminder, if you missed any part of this Salt Talk or any of our previous Salt Talks, you can access them on our website, uh, salt.org talks or on our YouTube channel, which is called Salt Tube in podcast form. We're also available, uh, on any app that you use to listen to podcasts. Uh, we're also on social media. Twitter is where we're most active altconference. But we're also on LinkedIn, Instagram and Facebook as well. Please spread the word about these SALT Talks again. I think this is a very educational read. Uh, the book that Spencer, uh, wrote about, uh, just the dangers of financial markets and making sure that you're educated about risks before you jump, uh, into some of these frenzies that, uh, start to build up. But on behalf of Anthony and the entire SALT team, this is John d' Arcy signing off from SALT Talks for today. We hope to see you back here again soon.