February 6, 2021
By now, everyone and their mother knows about the GameStop story… People with zero interest in the stock market suddenly have their ears perked up (and their wallets open).
It’s a tale framed as a 2021 David and Goliath, a feel-good underdog tale of a merry band of Redditors who took down the evil hedge-fund billionaires. Netflix is already in talks to take the story to the small screen.
But beyond the Hollywood treatment, what happened? And more vitally, what does it mean for the typical retail investor? Is Wall Street safe for the average American?
On the podcast this week, I chatted with the reformed prince of the “pump and dump” short-squeeze stock scheme, Jordan Belfort. You might recognize him from Martin Scorsese’s movie The Wolf of Wall Street, starring Leonardo DiCaprio (based on Jordan’s 2007 memoir of the same name).
Jordan shared some gritty insider takes with me about the stock market game that you can’t afford to miss.
The reality is, there’s a lot of volatility in the markets these days – GameStop, silver, Big Tech, Big Pharma – fueled in large part by an economic inequity created by the Fed and a core distrust Americans have in its institutions, from trading platforms to politicians.
(You know that anytime a story can bring together AOC and Ted Cruz calling for more regulation, it’s worth a closer look…)
The real villain here is not the hedge-fund managers… It’s not WallStreetBets… It’s the Federal Reserve.
Debt and leverage created by the Federal Reserve set the stage for this Wall Street dramedy. Politicians whine about market manipulation, but the Fed exists to manipulate markets to its whim, trying to artificially create growth and inflation, no matter how distorted the numbers.
With the U.S. as the world’s reserve currency, the Fed leaves interest rates low, enabling a system to print money and inject liquidity when it wants. But this is just a symptom of an uglier economic woe. The elephant in the room is not the struggling GOP – it’s the American wealth gap.
Shorting, while it can be egregious, generally acts as a market equalizer. It helps reflect what a company’s worth, i.e., reality.
But once the dust settles, the hedge-fund managers will still be sitting pretty, financially speaking. But your friendly, neighborhood retail investor who’s putting everything into GameStop will lose money they can’t afford to lose.
If the Fed keeps trying to correct the economy by just creating an ever-growing debt golem, who cares about capital misallocation? They’ll keep printing more of it! And this spells ruin for personal finances in this country, as the Federal Reserve exacerbates speculative market behavior, only furthering the economic disparity in America.
Let’s be real… The stock market is a glorified casino. And if you’re not betting on fundamentals, you’re going to assume a lot of risks.
The Wolf of Wall Street and Robinhood
If you already think the stock market’s an ugly place, just wait until you hear it from Jordan Belfort.
My conversation with Jordan really illuminated the dark underbelly of investing, showcasing how it’s nearly impossible for the average American to keep up. And while Jordan applauds the Redditors for sticking it to the hedge funds, he still wanted to detangle some of the story’s threads.
Even though he agreed that short-selling checks market momentum and creates liquidity, Jordan shed some light on the darker side of the practice. It’s pricy to short-sell. Even if you’re right, even if the company’s overvalued, it might take the market six months or more to come to that realization. And you’re stuck covering the margins.
If real estate’s all location, then Wall Street’s all timing… So, a more nefarious short-selling arises to expedite the process and coerce the stock to drop faster. Now things can get straight-up illegal: contacting the FBI to investigate the company you’re shorting, getting journalists on your payroll to run smear pieces, and feeding lies to the company’s suppliers.
He firmly believes this is the kind of short-selling WallStreetBets was protesting… He said:
Do most Americans stand a chance in the stock market? No, not really.
But Jordan also thinks once this unwinds, Robinhood, the well-known commission-free trading app, is in trouble. And by trouble, we mean it could stand to lose billions of dollars. They’re dealing with very concentrated, overly volatile trading and are close to burning through their capital.
When GameStop stock inevitably drops precipitously, investors will lose more money than they put in – then bail and leave Robinhood to pick up the tab. According to Jordan, the investing app should have increased their margins to reduce their risk.
But it’s too late for that.
Jordan told me that Wall Street is just as dirty as Washington, and they are more intertwined than they should be. And people are tired of both of them. People are seemingly sick of all institutions – the government, the stock market, the media, the police, the lobbyists, Big Tech. All of them.
Jordan and I agreed that it’s always been this way. It’s just accelerated and more exposed now. And at the core, you’ll find the ultimate short squeeze of the American middle class and our suffocating wealth gap.
I know that a lot of people are angry right now. Between the toll of the pandemic and the economic uncertainty ahead, many Americans are struggling. And desperate times often lead to desperate measures. But the extremism in this country is cancerous, and we need a new middle.
And not just need a new middle class, but a new middle ground for ideas. If this national infighting persists and we don’t invest in each other as Americans, we’ll be left morally bankrupt as a nation and a people.
Love us? Hate us? Let us know how we’re doing at [email protected].
Publisher, American Consequences
With Editorial Staff
February 6, 2021