A Social Short Squeeze

You get the audience you deserve.

All over the news this week is the stock market shenanigans surrounding GameStop. Ever since Gamefly started losing money to the XBox Season Pass, and Steam got a bigger profile, financial wags have been predicting the downfall of GameStop, a brick and mortar grandpa of the gaming industry. Yet like those chains whose business models and customer demographics I don’t quite understand, like Jamba Juice and Lucky Jeans, GameStop has persisted. I used to stand in line for Halo updates back in the day, but dude there’s no way this company is worth…

What happened to the stock is a complex phenomenon, but there are many simple and incomplete ways of looking at it. Indeed internet technology has made those simple and incomplete ways more clear to a larger segment of the population than ever before. So now more people are putting their money where their pieholes are. One such enabler is an app called Robinhood. You can think of it as a repeat of the day trader phenomenon of the late 90s, except now peddled to nominal millennials and other people who look at the world through smartphone colored glasses. We have expanded capital markets open to people who understand social media virality. They are getting fleeced one nickel at a time. The situation in play is called a ‘short squeeze’. It happens when people who hate a stock need to keep feeding their appetite for hate in order to make money. When people decide to love instead, the haters get buried. The artificial love for GameStop was initiated by naifs on Reddit who believe love conquers all, and decided to gather a flash mob of love to teach the Wall Street haters a lesson. The result is that GameStop, which deserves very little love, is now the darling of the new cheesy stock hippies. Robinhood couldn’t have come up with a better name, but stealing from the rich is not exactly what they’re doing.

I’ve long held the conceit that I can understand and follow the Smart Money. I’ve read Ray Dalio and lots of Taleb. I have done damned well picking stocks the old fashioned way going all the way back to the days of Netscape and Inktomi. Back when Lehman Brothers still existed. I’ve read cautionary tales of Silicon Valley and Wall Street both. So I have exercised caution as well. The old saying goes “When your shoeshine boy has a stock tip for you it’s time to get out of the market.” It’s actually not very difficult to pick such non-so-smart money folks. It’s the guy who holds the real-estate seminar telling you that ordinary people can flip houses like the pros. It turns out that counting cards in many capital markets doesn’t require a lot of brains. However what it takes to survive the volatility and virality is lots of cagey experience and capital. Bruce Willis can make 4 bad movies in a row. You cannot. Robinhood, being a market maker in league with others who build the machine turnstiles that keep the gates of Wall Street trading, can make money on the thrash of the market, Robinhood customers cannot. There’s an excellent thread from a new Twitter entity I am following named @toxic who explains what’s going on in the arcane business of computer mediated trading that will blow some minds, and put others at ease. The bottom line is that new players to the game, attracted to simplified versions of money making in capital markets are outgunned. Robinhood may or may not be a good idea but most people have no idea how deep that rabbit hole goes.

When you put this tale in the abstract form of love and hate, something magical happens. At least it did in my head. You see all of the SJW corpo hippies decided not long ago that the haters in America needed to be deplatformed. But what Facebook and Twitter lost, Parler and Gab won. People weren’t deplatformed so much as they were replatformed. The haters of GameStop may lose today but they can always win with another security. So long as the market is free from onerous regulation there will always be another home for Robinhood traders’ money and alt-Right speech. Short sellers and provocative pieholes are part of the system. A marketplace of ideas and a marketplace of securities need to balance themselves out, not be so very restricted and pre-emptively aggressive.

Capitalism goes hand in hand with democracy. So too does the tyranny of rapacious be they calculating about how people speak their words or vindictive about how people spend their money. Speech is not money but they both flow in the realm of Extremistan - which is to say there is never going to be a bell curve distribution in the domain and range of free markets of ideas or money. That goes for fame as well. These are realms of exponential differences. If this were not the case, nothing in the world could even go viral.

So if you are trying to moderate these phenomena down to some law of averages you not only are defying their very mathematical properties, you are being absolutely oppressive.

I explained the matter of Extremistan in this post:

If you describe certain variabilities like height, you will get a very reasonable bell curve distribution. The range of that distribution will be within the same order of magnitude. This is Mediocristan. Height, weight, IQ, golf scores: these are typical human attributes that live in Mediocristan. You can expect someone to be 6 feet tall. If you have a football stadium full of people and take a representative sampling you might get a few adults somewhere around 4 and a half feet on the short side and a few somewhere around 7 feet on the tall side. But you would never get anybody ten times taller than 7 feet or ten times shorter than 4.5 feet. That’s Mediocristan.

Now change that to hits on their YouTube channel. Now you’re in Extremistan. You might find somebody with 1000 views per year, 100,000 views per year or even 10 million views per year. Many orders of magnitude different. When people think of income inequality, they think income should be one of those things bounded by small multiples, not several orders of magnitude. But income, like fame, works in the domain of numbers called Exteremistan.

So any successful attempt to rid the public, or a particular open market of ‘toxic extremists’ will only redistribute them somewhere to where they raise the normal to their floor of extremity. You should recognize this in the analogy of the population of a maximum security prison. The worst violent felons expelled from open society create a very violent norm in their closed society. And of course suburbanites who get bored in their normalized bell curve Mediocristans flock to the extremist entertainments like Orange is the New Black, or Oz.

Sooner or later societies that survive war are the most sanguine about actual human diversity. It is the most tolerant society that works to maintain openness without shunning the deviant into ghettoes. My argument is for softer borders and fewer regime changing interventions when the extremists show their faces. I can’t tell you when to harden the distinctions and draw lines that should never be crossed, but I can tell you that there is Smart Money out there who have developed strategies to persist even under times of extreme duress. They don’t do so by making up new rules to protect the hapless. They do so by having built up experience, yes and equity in open markets, by becoming anti-fragile, by developing muscles on the black diamonds rather than flattening the dangerous risky world into a bunny slope.

So yeah. They newbies getting fleeced by Robinhood will learn their hard lessons. That doesn’t mean they will get any better, but they might think a bit more next time and search for other entries into the market. The expelled journalists, academics and alt-Right loudmouths are being shaken out of the comfortable trees of Facebook and Twitter (where you pay zero to play and often get what you pay for) and for some unfortunate few, out of good paying jobs. But the SJW hounds themselves will find that a free society will route around their simpleminded plays. Social media is on its way to becoming a multipolar world, and these cold-hearted Cold Culture Warriors will find themselves doubled down in their shorts on public expression.

Life always finds a way.