The Gamestop Paradox
Background
At the time of writing this, we are witnessing a petit class warfare being played out between institutional capital (IC) and a collection of individual investors (WSB). Certain members of the IC cartel greedily over-shorted a failing company (GME), and put themselves in a precarious position by buying more puts (shorts) than outstanding shares.
WSB, realizing this opportunity for arbitrage, organized a “buy and hold” movement, forcing the price to remain high; when the puts expire, the IC firms (Melvin, Citron, etc.) will lose billions when they are forced to close their losing positions.
Immediately, the PR wing of IC (the mainstream media) smeared WSB, calling it market manipulation while ignoring that IC collusion is the norm, and is the exact same thing. Their message: “You, the individual of WSB, will be hurt in the end.” Let’s put this one in our back pocket.
In order for WSB’s strategy to work, the individual investors must remain mostly united. This is bolstered by a revolutionary spirit, but hampered by the fact that each member of WSB remains an individual investor motivated by making a personal profit. There is an emotional investment (viva la revolucion), but also a rational one.
Like clockwork, social media platforms began denying service to WSB in order to disrupt communication — without communication, the revolutionary spirit required for cohesion cannot be disseminated and the unity fractures. Discord banned the WSB server for ‘hate-speech’, Twitter suspended the @wsbmods account, and Reddit is experimenting with temporarily outages. They have not currently banned WSB, but that remains a likely next step.
The next step, brokerages have mostly removed the ability to buy GME, AMC, etc. This is only for individual investors, though, as IC firms can continue to buy and sell. This has the effect of driving down the stock price, because the majority of long players (which drives up the price) are individuals using Robinhood, Schwab, Ameritrade, etc.
So while analysts on the MSM pretended their negative forecast was impartial, what’s left unsaid is that IC is reaching across industries to guarantee it. The fundamental rule of capitalism is that value is extracted from those below you; it can never be allowed that value is extracted from above.
Ultra-bourgeois cannibalism
What makes this a bit more complicated is that IC is a cartel. Yes, they collude, but cartels are always temporary because at a certain point, the profitability to “break” from the pack reaches a certain point. If you imagine the major gas companies colluding to keep gas prices high, at a certain point one of them will undercut the rest and all consumers will flock to them. At this point, the rest of the cartel must fracture and compete, driving the price of the service back down.
For IC, firms like Melvin and Citron simply got too greedy, and their value can be extracted by other IC firms like Citadel — I’ll cover this shortly.
No-fee brokerages like Robinhood make their money by selling “order flow” information to certain IC firms, like Citadel. This means Citadel actually gets to see trades before they are executed, and their robo-trading software is able to make its own trades before those of the general public are executed. Again, this is fundamentally unfair, as it gives special rules to those with money, breaking the facade of a ‘free market’.
Thus, Citadel is able to make money hand-over-fist from the destruction of its peer (a “dog eat dog” situation). Yes, there are some scraps that fall to the floor for the rest of us, but fundamentally this is about IC cannibalizing their own, reducing the number of players, and further consolidating power. This all happens behind the facade of “WSB market manipulation” so when the SEC gets involved, it’s WSB that gets the slap on the wrist, not any IC firms.
The WSB cartel possesses something the IC cartel does not: revolutionary spirit. This is something only an under-class can possess. Again, we should keep in mind that WSB is not the proletariat; it is the petit bourgeois. But still, the petit bourgeois sits beneath the ultra-bourgeois (IC class).
If a government bailout happens (unlikely if IC as a whole becomes more efficient), then there would be zero loss of value from IC, and the people really punished are the proletariat: taxpayers too poor to own stock.
The paradox
As a member of WSB, I try to think rationally. At what point do I sell? (For every member of WSB is ultimately an individual seeking a profit.) The WSB cartel requires a certain denialism, or “magic”, to work. If everyone were a purely rational agent (not emotional), there would be no magic produced. Every time I’m tempted to sell, I read another post on r/wsb by someone with more than me who is blindly holding without any real claim to reasonable justification. The WSB cartel’s strategy only exists because of this magic. This is why, when you try to confront another member of WSB with a cold analysis, the response is a meme: “MOON! 🚀”. At first, this seems troublingly nonsensical, but this denialism is essential for WSB to work. It is part-and-parcel of the play.
Meanwhile, people continue shorting GME, buying new puts. They see the price as artificially high, and I’m tempted to agree, but if all of WSB comes to feel this way then the price collapses and everyone left holding loses their investment. On the other hand, if everyone buys into the magic then all the short positions will be closed (and no new ones bought), turning the share price into a pure bubble, since there is no fundamental value in the Gamestop company.
The value of the stock price to the long players (WSB) is not the “fundamentals” of the company, but the greed of short players; the value of the stock price to short players is the inevitable end of the “magic”, or revolutionary spirit, of the long players.
In order for a player of either side to make money, a) there must be a healthy balance of magic and realism (longs and shorts), and b) you must get out near the peak of either squeeze (for both sides are being squeezed by one another).
Thus, we come to the paradox: both sides are being squeezed, and there will be winners and losers on both sides. It’s not a fundamentally bad position to be long, and it’s not a fundamentally bad position to be short.
That said, if you’re petit bourgeois and you short, you’re effectively taking the side of IC, making you a class traitor. But still, we should remain aware that we are not the proletariat, but petit bourgeois, and that a real possible outcome of this game is a government bailout… meaning the people who stand to lose the most are those not playing at all: the poor taxpayers. As such, we are playing a risky game on someone else’s behalf, and that is fundamentally immoral.
As of writing this, I hold about $3,000 worth of various stocks involved in this short vs. long class warfare. If at the start of the battle I had held the viewpoint I do now, I probably would not have participated, but selling now would mean a victory for IC; thus, I continue to hold and pray that this doesn’t end in a government bailout.
There is no free market when there are different rules for different classes. What we are seeing is not revolution, but an acceleration of the coalescing of power at the top of the chain. Those who stand to make the most are less-greedy IC firms like Citadel, and billionaires in the same class. When Elon Musk tweets pro-WSB sentiments, it is because his class will profit, and it will be the petit bourgeois who get slapped on the wrist for it.