How the GameStop fiasco foretells our unfixable future

The democratisation of a retail stock investing did not work out as planned. It wasn’t supposed to be so embarrassing for the financial industry.

Trading app Robinhood has found itself in the unenviable position of having to scramble to raise billions of dollars to cover a Reddit-fueled surge of trades of shares in morbid brick-and-mortar video game chain GameStop. On the bright side for Robinhood, which had offered users a way to make complex trades without the advice of brokers, saw a jump in new downloads.

Hedge funds, which leverage big sums of money to make many bets that stocks will go up or down, had borrowed the stock in the expectation that its price would fall, a reasonable wager amid the upheaval of a pandemic and a wider shift to downloadable games.

Two major hedge funds, Melvin Capital and Citadel, had taken that bet, but in doing so had exposed themselves to the theoretical risk that the stock price could go up. Just a month ago, that seemed unlikely.

What they did not expect was that a group of individual investors would call their bluff, and buy the stock to send its price soaring beyond. Assailed from all sides was the assumption that stock prices were supposed to reflect a rational appreciation of the value of a company.

Voices on the populist left and right cheered on the humiliation of a financial industry that had profited sagaciously from trading on human misery and immiseration at scale, and had lost its lustre as a legitimate driver of growth in the popular imagination, especially after the 2008 financial crisis.

The peak of the frenzy lasted about three days last week. Rising from just $10 dollars a share to a height of more than $347 dollars, the value of GameStop stock is now back down to around $80 dollars. Here’s a graph of the rollercoaster ride the shares took.

Some of the retail investors were able to get out before the stock fell. The ad-hoc hedge fund created out of a phalanx of strangers on Reddit saw the app start to restrict trading when it could no longer cover its clients’ trades. Robinhood doing that was not illegal, but it was an emergency brake most brokers rarely have a reason to pull.

‘’I made $30,000 by getting out when the stock price was highest, and I feel a bit guilty about it,’’ said one investor, who asked to use the pseudonym Rob Roy, a legendary heroic outlaw from 18th century Scottish history who defied the designs of landed nobility. ‘’I took money from people who were holding on to it in the hope that holding the stock would hurt a hedge fund.’’

‘’It made me feel like the second to last guy off the Titanic,’’ Roy told TRT World. ‘’When I was looking at the price go up and up and up I felt vertigo. And when I got out of it, I felt relief. I pity everybody else who is still in it because they can’t.’’

Roy had been casually buying GameStop stock based on the buzz about it on the subreddit r/wallstreetbets. The activity on that message board is now the subject of scrutiny from the US Treasury Department and the Securities and Exchange Commission (SEC), which will now have to figure out what, if anything, can be done to better manage the next online insurgency with populist characteristics.

You Only Live Once

The purpose of financial regulation, in theory, is to protect the weak from the strong, or the poor from the rich. As of Friday, February 5, Robinhood has reopened trading on Gamestop stock. But the hype has now encouraged people to try their luck that the bubble will come back. One of the top posts on r/wallstreetbets warns investors not to gamble in a self-destructive fashion.

‘’New members of this sub need to understand to only put in money that they can afford to lose. I can see comments of single mother putting her life savings in and college kids borrowing money at a very high interest and going all in,’’ Redditer u/mooboy333 writes.

‘’This is not a joke. Losing money is not a joke. If you get a loan and buy a stock, you are at a risk. Only buy with money that you can afford to lose. Don't put your life savings or retirement corpus on this. For people who are getting emotional and going all in against the hedge funds, the hedge funds will have a small scratch and you would be destroyed in the end. The concept of YOLO [You Only Live Once] with buying stocks works only till you don't go bankrupt.’’

Robinhood and other retail investment firms were there to herd investors like cattle from pasture to marketplace, and suddenly these cowboys got knocked off their horses in a stampede. A good portion of the cattle are now on their own, and the unlucky ones destined to wander off and succumb to thirst or exposure in the unforgiving desert.

These unlucky cattle were, of course, deaf to calls for them to consider that the stampede was self-defeating, unwise and ill-advised. Financial services still represent the largest industry as a share of US Gross Domestic Product (GDP), at 21 percent, the consultancy Deloitte estimates.

The industry remains viable for investors who can dodge retail trader stampedes, and hedge funds will learn how to adapt to the potential for future message-board rebellions. Investment firm algorithms that trawl the web to find out how to make savvy bets can be recalibrated to account for such chaos.

Surveying the hoof-marked landscape, it’s worth asking why so many retail investors would desecrate the concept of equity itself. Is it just sheer bloody-mindedness, obstinance or pig-headedness? Is it just a desire for vengeance? Superficially, these factors are certainly at play, but there’s a deeper phenomenon at work.

Where did the reverence for the financial industry go? It went the way of the financial industry, which has more or less disappeared in physical form. The New York Stock Exchange is no longer a bustling hall full of human beings in downtown Manhattan. Most of it is a blinking colonnade of servers inside a building in New Jersey, just across the Hudson River from New York City. Trades take place in an anonymous ether. It’s hard to believe in the utility of something you can’t even see.

The pandemic has simply accelerated the placelessness of not just the American economy, but every society that weaved smartphones with interacting in physical space. Interacting in physical space with other people is now both dangerous and, at scale in some places, illegal. It’s also created deep class resentments.

Hedge fund investors can work from home and avoid death by coronavirus. People with jobs at grocery stores and in meat processing plants cannot work from home. Vaccines should, at some point, slow this trend to some degree, but the memory of its unfairness will remain, just as the 2008 financial crisis does.

And then, of course, there’s the placelessness of young men in modernity, searching for some kind of collective source of meaning. . What we consider ‘’meaning’’ can be appreciated in an intellectual or philosophical or metaphysical or spiritual sense. But when it manifests itself outdoors, the craving for meaning can be destructive, especially when society has forgotten to find a purpose for them that gives them a stake in a future that keeps them occupied or, at the very least, distracted from engaging in self-defeating market panics.

‘’To reproduce the next generation in equal or greater numbers, a given tribe or society needs most of its women to participate in reproduction. But only a fraction of the men are necessary for the same goal. The rest are disposable. Our traditional gender socialisation reflects that,’’ Alex Gendler, a Brooklyn-based writer who discussed this topic in a recent article for the magazine American Affairs, told TRT World.

And more men than ever are surviving to adulthood in the developed world thanks to modern medicine and an overall lack of wars and famines that have reliably culled men who would otherwise have gone on to live malcontented lives of mischief. When the future is a fog, self-destruction can look a lot like heroism.

As Gendler’s article notes, this phenomenon is particularly pronounced in China today, and the fermented discontent of these men, known as ‘’bare branches,’’ has been the cause of social upheaval and subversion in the country’s past. The same demographic phenomenon is happening in India. It’s bad news for the prospects for peace in the 21st century that the countries that control the three largest standing armies should each be experiencing their own crises of excess, aimless testosterone.

‘’Men are encouraged to take more risks, and also given more freedom to do so. And in a hierarchical society, that risk-taking has often been directed towards things like war, hard labor, exploration of new colonies, and so on,’’ Gendler said.

‘’These have the double benefit of possibly reaping huge benefits for the ruling class by increasing the society's material base, but also reducing the number of 'unattached men.’ When you don't have this kind of release valve but you still have a hierarchical society, you end up with a lot of resentful young men at the bottom who have neither the economic nor the social opportunity to start a family and ascend the ladder, and they channel their frustration in street violence, organized crime, and even mass political rebellion,’’ Gendler added.

Loopholes in Wall Street regulation

This is not to say that all unmarried men are destined to criminality or subversion, but rather that even a minority of men who feel like there is no purpose to their future can have a destablising effect on societies with steep social hierarchies and economic inequalities.

This phenomenon is especially pronounced when political narratives revolve around accusations of treason or terrorism, as have become more common in the US over the last five years. Those words are like lightning strikes in a drought-parched forest. The GameStop bubble and crash was like a brushfire caused by a more serious, underlying ecological problem.

And government policies to promote marriage are also not a solution. Social engineering programs directed by the state are bound to breed new resentments, and elicit new brands of anti-elitist backlashes of a libertarian variety. This ecological problem is a product of industrial civilisation itself.

Meanwhile, the pandemic has heightened the scales of hierarchy and also the intensity of social isolation. There’s a profound loneliness to getting meals delivered through an app, both for the customer and the delivery driver, both behind masks but both drawing wildly different incomes.

The customer’s risk of catching the virus is momentary, but for the driver that risk lasts all day and the reward is far less. A tip can serve as an expression of gratitude, but also of guilt. That hierarchy is alienating for everyone involved.

And Gendler doesn’t think that the online uprising will make a dent in that essential inequality.

‘’I don't think the GameStop saga is gonna affect much of anything - the most likely outcome in fact is that the vast majority of these people are going to get burned and lose everything, while a smaller percentage who got in and out will come out big,’’ he said.

All that’s left for the winners is a mild sense of guilt to keep them up at night on top of a pile of easy money.

Gendler observes that stereotyping the GameStop trader as a purposeless ‘’spare man’’ may not tell the whole story. The concept of the ‘’involuntarily celebite’’ (commonly referred to as ‘incels’) reactionary anti-semite lurking on a message board is not without its reflection in offline misanthropes, and even in at least one doctored misinformation meme, but dissatisfaction with the financial industry is far broader than America’s bigoted basement dweller community.

‘’I think in some ways that's been gleefully magnified by mainstream media eager to discredit any kind of populist sentiment. Certainly incels share the general motivation of 'wanting to watch it all burn' - but so do a lot of other people at this point, especially when the 'it' is Wall Street,’’ Gendler added.

Reformist politicians in the Democratic Party such as Massachusetts Senator Elizabeth Warren, now on the Senate Finance Committee, and democratic socialist New York Rep. Alexandria Ocasio Cortez, and member of the House Finance Committee, expressed sympathy for the anti-elitist motivations of the GameStop traders.

Cortez said major hedge funds had long been using ‘’similar exploitations’’ to make money quickly at the expense of small investors. She called for a hearing into the reasons for Robinhood’s halt to trading. Warren said that publicly traded companies have been taking advantage of loopholes in Wall Street regulation to inflate their stock prices for years.

"Understand: What's happening with GameStop is just a reminder of what's been going on on Wall Street now for years, and years and years. It's a rigged game," Warren told CNN, saying that regulators need to make sure that retail traders weren’t duped by other hedge funds that took advantage of the bubble. "We need a market that is transparent, that is level and open to individual investors. It's time for the SEC to get off their duffs and do their jobs."

(‘’Duff’’ is American slang for the human posterior.)

Rob Roy, the pseudonymous GameStop investor, feels that a libertarian approach, allowing anyone to invest independently, with the intervention of a brokerage firm, is the best solution rather than a new regime of regulation.

‘’Right now we have the worst of both possible worlds,’’ he said. ‘’We don’t distribute money to people who need it, but there are protections against losing money for people who already have it.’’

But that solution is bound to produce new unjust outcomes, because of the emerging rules of our cyberpunk dystopia. As Roy himself notes, the individual investor is at a disadvantage against a hedge fund because hedge funds have the ability to sink more money into the technology that allows them to trade at a fraction of a second at scale.

Even if these trading collectives were outlawed and anybody could invest in any company however, whenever and wherever they saw fit, there’s nothing stopping that digital arms race from starting all over again.

Imagine a whirring, overclocked personal computer gaming setup, but for stock trades. One individual having the same computing power as a multibillion dollar firm will create a crop of fiefdoms prone to inventing new forms of exploitation for smartphone serfs and new regulatory vulnerabilities for a reconstituted cadre of elites.

Gendler notes that the most durable aspect of 21st century politics, so far, has a distrust of the wealthy. But that distrust and resentment does not translate into a solution.

‘’Populist hostility against 'the elites' does seem to be a huge common ground whether you're left or right, normie or incel, what have you, but of course it breaks down the moment you try to define who exactly the elites are or how best to oppose them or what kind of society you think they're preventing from flourishing,’’ he said.

There is, as ever, a deeper horror here, and it’s buried deep inside our brains.

Tom Wilson, a psychology researcher at the New School in New York City, says political ideologies are incapable of overcoming the pull of oxytocin, a hormone that people feel when acting collectively in either violent or celebratory contexts. It’s present in all mammals, from humans to mole rats, and it’s released by the hypothalamus during activities as diverse as celebrating a football team’s victory with friends or during lactation by a nursing mother.

While a key ingredient in what Shakespeare would have called ‘’the milk of human kindness,’’ it can turn rancid when released by a group committing a violent act against someone they perceive as an enemy. It’s there in the stands for the winning goal of a game and in brawls between ultras leaving a stadium.

‘’Removing the human capacity for xenophobia and the cult or mob mentality would also remove the capacity for love and trust,’’ Wilson told TRT World. ‘’People will go for a sense of a belonging even if it gets them killed.’’

‘’There’s always this trade off. The more that you are closely bonded with the people around you the more horrible things you can do to the people who aren’t part of your group. The more you love your friends the more you hate your enemies.’’

The GameStop traders were able to find that collective rush through an app and a message board, but it evaporated quickly. The oxytocin and dopamine cocktail ran out. And so far there’s no political ideology that can find a purpose for young men alienated from a future modernity forgot to write for them, and there’s no politician yet who has found a way to keep the milk of human kindness fresh.