Brooke Gladstone: Back in 1999, in my early 40s, I had a modest individual retirement account. My account manager was Charlie, who made suggestions when I had money to invest. I must have had a speaking engagement that year or something because I had $1,000 to put in. He suggested that I buy 65 shares of a $15 stock, total cost $975, called GameStop. Following my portfolio, as it were, tends to make me bored or worse, anxious or worse still, greedy so I pretty much ignore it. My husband doesn't. Back in April, he said, "You still have GameStop? It's $3.50." I said, "Yes," and just to needle him a little, I added, "Hey, you never know."

When your investment shrinks from almost $1,000 to $50 because you ignored it, the rational move, I reckoned, was to continue ignoring it. GameStop is a corporation that sells digital cartridges containing video games and also video game consoles and other fun widgets from brick-and-mortar stores to flesh and blood customers. It's a thing of the natural world, and so must abide by its physical laws. The stock on the other hand--

Speaker 2: Video game retailer GameStop is set to continue their head-spinning ascent today. Shares are now up more than 60% pre-market.

Speaker 3: Trading in GameStop. We're talking about it more, going absolutely nuts. If you just look at the volume in the last few days, there's never been anything like it in its history.

Brooke: For most of last year, the company was worth a pretty dismal $250 million, but GameStop's stock has soared upward into the exosphere, ballooning the company's worth to somewhere in the ballpark of $20 billion. Did it suddenly have a new strategy to overcome the fact that people can download most of what it sells, that in-person retail sagging for years had plunged into a virus-induced toilet?

Will even that caused the crazy speculation we've witnessed? No, runs like that are fueled not by reality, but by phantoms, like housing bubbles, imaginary investment instruments, dreams of catching a moving train into the sky after it's run out of steam. At least that used to be why it happened. Now, there's a new reason: Spite. All this is best explained not by corporate actions or the current state of the actual American economy, but rather as James Surowiecki explained this week in Marker, as a meme. You may remember other recent meme stocks, Kodak for instance, or Hertz.

James Surowiecki: There's usually some kind of catalyst that gets them interested. In Kodak's case, for instance, there was this very odd rumor that they were going to get involved with drugs to deal with COVID. That got people buying it. In GameStop's case, the catalyst was really two things. One is, people were saying despite its business being not great, it was pretty undervalued. Its stock had been driven down very, very low.

Then in the summer, a new guy came on board the board, a guy named Ryan Cohen, who had helped make a company called Chewy, very successful. He has all these ambitions to move GameStop into e-commerce. That got people talking about it. Maybe the center of the meme stock universe has become a sub-Reddit, a board on Reddit, called r/WallStreetBets. It actually now has more than 2 million subscribers. It's really just a place where people come and talk about usually bad companies that could make interesting bets.

What has happened over the last year and what has really happened over the last month, is that that community has become almost self-aware. They have realized the power that they potentially have, that even though-- Most of them, I assume don't, at least it sounds like when you read it don't have a ton of money. When you aggregate all of their buying power, they suddenly have the ability to move stocks.

The other thing that's important about meme stocks is generally, I shouldn't say generally, they all have had two characteristics. They've all been cheap. The vast majority, maybe all of them, have had stock prices in the single digits at the time that they really first started to get going. That made it easy for people to buy them and it also made it a little more fun to own them. It's just more fun to own like 50 shares of GameStop than one share of Apple. It just makes it easier to think, "I'm going to get rich." Then the other thing about them is that they were all heavily shorted. In other words, short sellers were betting strongly against them.

Brooke: Give us a brief explanation of short selling.

James: The vast majority of investors, the vast amount of money that's in the stock market is betting that stocks will rise. Short sellers do the opposite, they bet that stocks will fall. They try to identify situations, companies, where the business is bad or where they think the stock price has gotten totally out of control. They borrow shares from someone who actually owns the stock and then they sell them. Their hope is that the stock price will fall, then they can buy back the shares at a lower price and return them to the person they borrowed them from.

The ideal trade would be you short the stock at 20, it drops to 10, you buy back the shares and you've made basically $10 a share. The danger for short sellers is that in theory, their losses are unlimited. If you buy GameStop at $5 a share, the most you can lose is $5 a share. It could go to zero and you would lose $5 a share. If you short GameStop as a lot of shorts did, if you short it at $20 a share and it goes to $290 a share, which is where GameStop was a few minutes ago, and you hold on to your short that whole time, you've just lost $270 a share. Your losses are in theory, unlimited. It makes it a very hard to be a short seller psychologically, it's very hard to do.

Brooke: You need a strong stomach.

James: Yes, you need an incredible level of pain tolerance. The basic problem for a short is that if they don't want to hold on to that stock all the way up to 290, at some point, they just decide I can't take the pain anymore. I got to close out my short, I have to buy the stock back. When they do that, it actually sends the stock higher. There's all this demand. If there are still people shorting it, which they usually are, that actually inflicts more pain on them. They start to say, "You know what? I can't take the pain." They buy the stock. That sends the stock higher. That's what's usually called a short squeeze. That was a big part of what has driven GameStop's stock higher.

Brooke: You said that people, they don't like short sellers. They're seen as the Darth Vaders of the market by a lot of people because they're betting that stocks will go down. They're buzzkills, but the Redditors seem to think that they are just bad guys. Alex Kirshner in Slate quoted some of the Reddit posts, "When these boomers made their bet, GameStop wasn't a big thing on WallStreetBets yet." "I don't feel bad at all," said another, "taking money from these rich, greedy hedge fund managers." "I'm an old millennial, I'm tired of getting screwed by the globalist elites," another one said. "This isn't left or right, Republican or Democrat. It's the 1% versus everyone else."

James: There definitely is a kind of populist element to what's happening. A real sense of basically taking it to the man. That's pretty clearly the way this is developed. There was a hedge fund that had, I think, the biggest short position in GameStop, a hedge fund called Melvin Capital. Earlier this week, Melvin Capital had to be bailed out. It basically got almost $3 billion injection of equity from two other hedge funds because its losses in GameStop and other stocks, but GameStop primarily, were so huge.

The celebration on WallStreetBets was pretty palpable. There really was the sense of, we had basically not necessarily knocked down the best deal, but they had essentially toppled this hedge fund. I think that there's a sense that a lot of people have that wall street is basically a corrupt insider's game. They're not entirely wrong about that. That it's a game that rewards insiders, it's a game where big wigs are able to prosper even as everybody else doesn't.

Obviously, over the last 10 years, a lot of people have gotten rich in the stock market and a lot of ordinary people have too, but that clearly is a dominant image of Wall Street. It's not an incorrect one. What this has become for a lot of people, both people who are actually doing the trading and then also people observing it is a kind of populist revolt that this really is a sense of, Wall Street is finally getting what it deserves. The fact that the people getting punished are people who are betting on stocks to go down, which is something everybody hates anyway, makes it all the more delightful for them, I think.

Brooke: You've noted that when you wrote about this story, and you talked about the clever exploitation of the system of Wall Street's weaknesses, you got a lot of pushback from people saying, "Stop defending Wall Street." It became a moral judgment.

James: Yes. Obviously, Twitter is a place where people make quick judgments. The story I wrote for Marker was really an attempt to describe what was happening, and to argue that what the traders on WallStreetBets were doing was, not just mindlessly buying a stock because it was going up, or succumbing to delusion, but that they were actually being quite strategic and quite clever in exploiting the mechanics of the way shorting works, and the way options trading works.

There really was no moral judgment involved in the piece or in the tweets I made about it, but some people reacted as if describing the situation necessarily implied that you were crying foul, or whining about it, or that you wanted things to be different. I think that derives in part from this sense of, "We're taking it to the man, and therefore anyone who writes about this, without necessarily praising us strongly, is probably trying to defend the man in one way or another." I think it just feeds into this element of people really feel like the deck is stacked against them, and here is a blow for, I don't know, justice is probably overstating it.

Brooke: Well, if not justice, then at least retribution.

James: I think that's right. I actually do think there is a real resonance between what's happening in GameStop and other stocks like it, and what happened in 2016 with the meme lords on places like 4chan and Reddit, and the way they really tried and did disrupt the traditional media narrative, the traditional way the media covered the campaign, the way politics work.

Brooke: How did they disrupt it?

James: What they were able to do was use social media to spread memes, anti-Hillary, pro-Trump, but really anti-Hillary memes, that I think helped make really powerful the image of Hillary as a corrupt insider, as an institutionalist, as someone who stood for everything that the internet was, and millennials were not in favor of. We can debate about how effective those memes were. When Trump won, there was this one poster who posted on 4chan, "We actually elected a meme of president." That was slightly overstated, obviously, but there certainly was a dimension to that that was accurate.

Although that was really driven by an all-right perspective, and that's very different from what's happening with WallStreetBets, that sense that you can leverage social media, that communities can self-organize on the internet simply by talking to each other and can then really go out and accomplish really interesting things, whether you think those things are good or bad, they are certainly interesting and have a real impact. There, I think is a real resonance between 2016 and what we're seeing right now.

Brooke: Your reference to the meme president is particularly interesting because the virtual world and the world inside of our own heads has merged so much with the in-real-life world. Of course, the stock market, money in general, has always existed principally in our own heads, wouldn't you say?

James: The stock market is the perfect place for these kinds of experiments or projects to play themselves out because there is something. There's nothing imaginary about the businesses underlying the stocks, but stocks always have a certain fantastical element to them. Another place that you can see this, and there are real resonances again, is obviously the continued ascent of Bitcoin, which is in a way a perfect example of a collective willing something into existence.

Bitcoin's value depends entirely on the fact that people think Bitcoin is valuable, and they have chosen to think that Bitcoin is valuable, and are acting as such, and as a result, it really is that valuable. There's some element of that in what's happening with GameStop, that this group of people on this sub-Reddit and other message boards recognize that if they collectively decided to elevate GameStop's stock, they could do it.

Brooke: This is a quick question, and I know you're not technically qualified to answer, but I think you can give us one. Is this kind of manipulation, strictly-speaking, legal?

James: It's a fascinating question that I don't think we have a clear answer to. It's not obvious who you would hold responsible for the illegality, in the sense that as far as one can tell, there isn't a leader of this movement. People aren't making explicit commitments to each other. They're really just talking about what they'll do, or the like. If we see this continue to happen with lots of stocks going forward, you can imagine the SCC getting involved, but I don't think we really know. There's a long history of people organizing pools to buy stocks, to drive them up, or alternatively, to sell stocks, to drive them down. That was very characteristic of the 19th century, and then the early 20th century.

Brooke: Should we talk about some of that history?

James: We can.

Brooke: The uranium stocks in the '50s, the RV stocks in the '60s, and the dot-com stocks in the '90s, maybe the tulip bubble in the 1600s. Is that what you're talking about, or is this something else?

James: This is something else. That's one of the really important points to make about this, that what we're seeing with GameStop and other stocks like AMC, the theater company which on Wednesday quadrupled by midday, despite the fact that we are in a pandemic and no one is actually going to the movies. What we're seeing with these stocks, I think, is very different from what we've seen in past bubbles. In past bubbles, it was really a function of investors believing that a certain set of companies was going to transform the world.

Yes, uranium stocks in the 1950s or my favorite is the bowling stock bubble of the early 1960s. People became convinced that every American was going to become a bowler, and that as a result, bowling stocks were going to become incredibly valuable. That's an element of a collective delusion, and that feeds on itself because as stock prices rise, other people say, "Oh, wait, maybe I should buy them," and they get in. It isn't an organized or strategic effort to drive stocks up.

What is distinctive about what we're seeing this week is the essence of it was a strategic recognition that if enough people got together to buy GameStop stock, and drove the price up, then they could create a short squeeze. If they traded options in a clever way, which is too boring to get into, but if they did it in a certain way, that would help drive the stock up. This is a much more coherent strategic way of investing.

In that sense, it actually looks much more like what we used to see in the 19th century, and the early 20th century, what were sometimes called bull raids, where a pool of investors would basically connive amongst themselves to buy stocks in order to pump up the price in the idea that that would then lure other buyers in, and they could ride it up, and then dump it at the top. What's happening in GameStop, again, isn't a small group of people getting together, but it's people recognizing we can do this thing, and then going ahead and doing it, without anyone being in charge, which is one of the reasons why I think it's so fascinating.

Brooke: Elon Musk has been tweeting about various stocks, not long ago, the messaging app, Signal. A lot of investors flocked to the wrong company also called Signal that was defunct. Was this fun? Was this intentional? People made or lost a lot of money there.

James: I actually think the impact that Elon Musk is having on the stock market is probably a little closer to bubbles we've seen in the past. During the dot-com bubble, for instance, companies that added .com to their name or something similar, almost always saw their stock prices jump, simply because they added .com to their name. There was also stories similar to the Signal story where investors would get confused, and buy one company thinking it was another. Even with the Elon Musk thing, I think there is a level of-

Brooke: Are you saying he is like appending .com to your name?

James: His endorsement of a stock-

Brooke: Just fairy dust?

James: -just suddenly makes everyone else be willing to do it. I think part of what's interesting about the Elon Musk thing is it isn't so much that Elon Musk says it, and then everyone says, "Okay, well, that must mean it's worth buying." I think there's also an element of if Elon Musk says it, then people will think they should buy. Therefore, I will buy to cash in on that. Then other people say, "Hmm, if other people are going to buy." There is positive feedback loops that get started. That was the case with the Signal Advance story.

More recently, Tuesday, after the market closed, he didn't even really say much about GameStop, he just said Gamestonk.

[laughter]

James: That, I think, helped get the market going again. Musk definitely has this ability to move markets.

Brooke: Do you think that the Redditors have permanently altered some fundamental aspect of American capitalism by their ability to simply get into a room and chat about it?

James: Yes. On the simplest level, if you are a short seller, you have to be much warier today than you were a week ago, you just have to be and I don't think that's going to go away anytime soon.

Brooke: People who don't hate short sellers see them as a necessary break on irrational exuberance.

James: There's already enormous pressure in the market to goose stocks prices, to put them up. All the evidence shows that having short sellers in the market is a good thing. It makes stock prices more efficient, it tends to provide, as you said, a check on irrational exuberance. One of the things that happened in the late 1990's, during the dot-com bubble was that it was hard for short sellers to borrow a lot of stocks, they couldn't even really short a lot of dot-com stocks. Then short sellers just got crushed as dot-com stock prices rose higher and higher. I think that clearly played a role in why the dot-com bubble got as auto control as it did.

I have no sympathy or pity for the particular short sellers in GameStop and what happened to them. They're big boys, they should have known what they were potentially getting themselves in for and they were setting themselves up for a massive short squeeze that could crush them. They should have been well aware that even if they didn't know that it was going to be a ragtag bunch of Redditors who were going to send them to the poorhouse. I have no sympathy for them.

I do think generally we want shorts in the market. It's going to be fascinating to see what happens because if I were a short seller, I would be a lot more nervous about doing it than I would have been even last week. In that sense, I think it is accurate to say that what's happened has changed American capitalism.

Brooke: By the way, you want to know how much money I made?

James: Yes, how much did you make? I was trying to do the math in my head.

Brooke: I sold it at 100. I made $6,500-

James: That is awesome, congrats.

Brooke: -on a $975 investment. Of course, it took 22 years.

James: Yes, but it's funny, I was talking-- My brother called yesterday, just about something else and I was just joking around and I was like, "Did you buy GameStop?" He was like, "Yes." I was like, "What?"

[laughter]

James: He doesn't have much money and is in whatever, but he bought it at 60 and he sold it at 120 or something like that. I was just like, "Wow." Anyway.

Brooke: Last time I looked, it was around 270. I just wonder, why do people keep buying if they know it's just a manipulation based on very little, that gravity will happen and they can't know precisely when? I understand why people do it but I don't get why people do it.

James: One of the reasons why it's hard to hold a stock when there's no obvious reason to hold it and when there's no clear fundamental reason to hold it is that you're by yourself and you're just-- You don't have any idea when it's going to drop. The sensible thing to do is to sell it at 100. You could argue the sensible thing to do would have been to sell it at 70, whatever. I think one of the things that WallStreetBets does is it actually provides a place where people talk to each other and can reassure each other and encourage each other.

If you go there, you'll see, there are lots of posts saying hold the line, this is going to 1,000. It does play a role in reinforcing that. There is something mysterious about it. We don't entirely know, obviously, who's buying all this stock. A lot of the stock buying has been done by shorts, who are basically covering their shorts and trying to get out of their positions. Some of it is being done by Wall Street professionals who need to own the stock in order to sell options against them and stuff, but if you look at the volume, an absolutely incredible number of GameStop shares is trading every day. There are a lot of just ordinary people in there buying and selling the shares.

I think some of what's happened in the last couple days is there's a lot of day trading in the stock. People are just trying to ride it up and down, which is a fool's game, but lots of people do it and if you do it right, you can make money. The main thing that's keeping it elevated where it is, is this WallStreetBets conviction that there's still more pain that they can inflict on Wall Street. That's the idea. I just don't know, that's the fascinating question. It's like, at what point does that resolve vanish? I really have no idea. It's an incredibly interesting story.

Brooke: Thank you so much.

James: I appreciate it. Thanks for having me on.

Brooke: James Surowiecki writes about business and finance. His article titled, The GameStop Fiasco Proves We’re in a ‘Meme Stock’ Bubble is at marker.medium.org. Thanks for listening to this midweek podcast. You can catch the Big Show on Friday around dinner time, which is when we usually post it and check out the On the Media newsletter. You really won't read anything like it anywhere else.

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