January 28, 2021 • 26 mins
Stephanie is joined by early Bitcoin investor and Galaxy Digital CEO Michael Novogratz to break down what’s behind the multi-day surge of GameStop stock - and why it could be a sign that the whole system needs an overhaul.
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Speaker 1 (00:00):
The amount of debt that the baby boomers have created
is never going to get paid back, and who's supposed
to pay it back? Gen Z and millennials, You've polluted
our planet, You've screwed up our financial system, and we're
cigarette And so this is literally these young kids fighting back.
It's like a giant middle finger to the system. Now
we've got a whole universe of day traders that are
(00:22):
out there, both in crypto markets and the equity markets. Uh,
and they're making money and they're having fun. It's a
story that started in a Reddit chat room. It then
took Wall Street on by storm, and now it is
all everyone is talking about. No one predicted the first
big business story of would be about a sleepy little
(00:45):
video game retailer that's been in decline for months, if
not years now seeing its sack price go from thirty
to forty dollars over a matter of days. Why because
a bunch of day traders who found one another on
social media platforms and chat rooms, figured out a way
to take on the system, push head funds out, drive
(01:08):
up the markets. All. Well, we're kind of in between
administrations and don't even have the next SEC chair confirmed
I'm Stephanie Rule, MSNBC anchor, NBC News Senior correspondent, and
this is Modern Rules, a podcast from NBC Think and
I Heart Radio. We need to explain this story, so
(01:31):
I brought in the one and only Mike Novogratz. He
is the CEO of Galaxy, the digital currency firm, former
co founder of Fortress, who has a deep understanding of
this cultural divide but also knows a lot about finance.
Michael novograts I am reaching out to you today because
(01:53):
the general news audience needs some help and understanding what
in the world is going on. Last summer, when we
saw riots break out after George Floyd died, it wasn't
just about racial injustice, it was about economic injustice. Two
weeks ago, the capital riots again. It was this anti
establishment movement, and now somehow the same spirit is playing
(02:15):
out in the last few days in the stock market.
It's all coming together with a company that I often
would compare to like the radio shack of video game stores,
game stock, and it is the robin Hood traders, the
little guys versus the establishment. Can you tell us the story?
Take us back? How did we get here? But listen,
we've got here over a year period, right, since two
(02:39):
thousand and eight, the medicine that central bank governors and
Ministry of Finance chiefs or Department of Treasury heads a
gift to sick economies are more fiscal and a lot
more monetary. Let's say we don't know what fed governors are.
Economy was sick in the financial crisis. They pumped money
into the system, and they put interest rates at zero,
(03:01):
which meant wealthy people could borrow money to start businesses
and buy houses. But savers weren't making any money, and
you had to put your money in the stock market
because it was the only game in town. Since two
thousand and eight, we have grown the money supply, right,
the amount of dollars in circulation five as and so
if you think about if we're sitting around the table
and there's an apple and we want to buy the apple,
(03:22):
if you give everyone five times as much money, the
apple gets a lot more expensive. And so assets alas
is stocks, bitcoin, uh, you name the asset art has
gone up in value. Well, who owns assets? Rich people?
The medicine that our government officials continue to give the
(03:43):
sick economy keeps extending the gap between the Hauzard and
have nuts. It got wildly supercharged because of the pandemic.
So the pandemic to two things. It's stop the economy.
And so the only response that Chairman pal that had
the head of the Fed minute at that time new
was to throw tons of money at the problem. And
(04:04):
we increase money supply faster than we have since World
War Two. We grew up a deficit of four four
trillion dollars. Trillion dollars used to be a lot of money,
and now we're throwing a trillion dollars around like their
match sticks. A trillion dollars is five percent of GDP.
It's a staggering amount of money. And so running the
biggest deficits we've ever run postward world Ward two, and
(04:26):
that money is being recycled into the hands of really
wealthy hedge fund managers. But also you know young robin
Hood traders who are taking their stimulus checks there as
their extra savings, and they're stuck at home. They can't
go to bars and chase girls. Uh, they're stuck at home.
There in further computers, and this is almost like addiction.
So when we face pandemic crisis, the FED comes in,
(04:49):
they pump money, they stabilized markets. But for the average
small business, they were dependent on Congress stepping in and
helping them, and the FED did a whole lot more So,
how much did that worsen splinter this economic divide. It
wasn't like demand went away. It just meant all that
(05:09):
business was going to target in Walmart and Amazon. Listen,
you know, in the middle of a crisis, often you
use the most blunt instrument you have, and you know
Monastery supplies the blunt dissinstrument and buying everything. And the
FED literally bailed out hedge funds, build out the financial system,
part because the chairman felt he had to, right, there
was no alternative in his mind. Congress could have made
(05:31):
a lot more distribution to individuals and less to corporates. Right,
there was lots of decisions made in that even the
p p P the way that was done, Uh, they
tried their best. It wasn't that effective. Lots of wealthy
business and took advantage of the p p P when
it was really meant for small businesses. But it's really
hard in a fast moving environment when it felt like
(05:52):
the world is collapsing, and so the drug they know
how to use his monetary policy. When they gave stimulus,
when they had tended unemployment, we had Mitch McConnell saying, well,
we have to end that because people are getting paid
so much money they don't want to go back to work,
when that wasn't the case for the American poor half
our country has no savings, and we've got fifty million
(06:14):
people who are food and secure, while the mega rich
got mega richer, and the pretty rich we're buying second houses.
That's exactly what's happening, and that's why we're seeing you know,
we saw the riots after George Floyd, which racial justice,
but if you looked around l a beat the rich,
there is this growing friction and growing i think uncertainty
(06:37):
in our economic policy and our political system and social
and civil society. We saw civil society breakdown in d C.
It's really complicated, and now the genie so far out
of the bottle it's hard to figure out how it
gets back in. This is also generation right, this is
the younger generation. It's Gen Z and millennials flipping the
(06:58):
bird at the baby boomers. It's saying to the baby boo,
you have taken way too much debt right in a
lot of ways. It's why crypto was created. Crypto came
in two thousand and eight after financial crisis. It was
a middle finger to the system. And it's the same
guys who are doing Robin Hood that we're kind of
the spirit of the original crypto revolution, and we're seeing
it now growing up in this thing we called the
(07:18):
centralized finance right a peer to peer. We want to
cut out Goldman's actually want to cut out the NASDAC,
We want to cut out all the middlement, all the
red tables, and so all of these things are kind
of lining up in their screening for systems change. This
one episode of going after shorts and hedge funs syendemic
of this same idea that the system is geared to
(07:40):
the wealthy, it's geared to the rich, it continues to
play to their strength. All of that needs to change
or we're going to have the revolution. And these are
like the first arrows that are being thrown, and you're
seeing lots of them in different in different places. You know,
Donald Trump arrow and the the Robin Hood Trader arrow
and the Black Lives Matter protest arrow three completely different.
(08:02):
You know, socio economic groups to complete in different communities,
but all really at their core complaining about the same
thing they are in that Black Lives Matter is saying
down with the white male patriarchy that keeps me down.
The MAGA movement while it's not actually what Donald Trump
(08:23):
ever did. Is this anti establishment movement, and then the
financial arm of it is this defy this this decentralized
finance where these young people and correct me if I'm wrong,
are sick and tired of having to go to the
toll takers opening up that account at JP Morgan giving
(08:45):
Citadel the chance to to go for I mean, when
when an average person on the street wants to get
in on the Airbnb I p o. By the time
they're able to buy that stock the rich guys are
selling are the ones selling it to them. So walk
us through sort of how this robin Hood trader came
to be and how this is played out Listen, I mean,
(09:06):
in lots of ways, right, robin Hood and companies like
it brought stock trading uh to young people. You've decided
for a robin Hood account and you funded with you know,
a thousand dollars or five hundred dollars or fifty dollars
and you can, you know, buy stocks. You're actually not
buying stocks, you're buying derivatives of stocks, right, You're trading
(09:27):
against robin Hood. And then robin Hood is you know,
buying and hedging in the stock market. That order flow
gets thrown through big order folk processing. But mostly it's
it's allowed this casino called the stock market, and it's
introduced it to all these young people that didn't really
participate in the past. And so in some ways it's
a great thing, right, it's the democratization of finance. It's
(09:49):
giving people a chance. The regulators have to be somewhat
nervous and that you know, two people know what they're doing,
and that feels patronizing. And someone says that, Michael, you
and I both came from the bank king world. You
can say all the terrible things you want about them,
but they're highly regulated, right, They've got strict rules around
anti money laundering, around k YC. Know your client, you
(10:11):
can't call a ninety two year old woman on a
fixed income and say can I interest you in a
derivatives transaction? But in this decentralized world of finance, you've
got so robin Hood isn't decentralized. Robin has still centralized.
I would say it's the same spirit of what the
decentralized world is coming to. Robin Hood is literally just
allowing people a cheaper way to access the stock market
(10:34):
and a sexier way, and that resonated with latical generation
gen Z and millennials. You know, the same type trading
happens on TV and merrit Trade and the Trade and
other electronic platforms. Okay, and let's go back to the kids.
These are not necessarily finance experts. This is people are home,
they've got a little money, or they're they're not spending
(10:55):
it going out to the horse chasing, girls are betting
on games, and so they said, I'm going to get
my adrenaline rush from trading stocks or I'm gonna make
a living. You know what's so interesting when I started
getting into crypto in two thousand and fourteen fifteen, the
shocking amount of information and work that was done on
Reddit and on Telegram and on Twitter. The crypto lives
(11:17):
on Twitter and can I remember sitting with my daughter's
boyfriend and his friend and they knew more about crypto
than I didn't. I thought I was a professional, so
people are educating the heck out of themselves. My son
Nacho was the one who told me about this Reddit
chat room that was going after games stopped four nights
of week. Doesn't that feel at all dangerous to you
(11:37):
that those are the platforms where this information is being shared.
You worked at Goldman Sachs, I worked at Deutsche Bank.
Before a research report could go out from either of
our organizations, they were scrubbed, scrubbed, scrubbed again, and four
lawyers then cleaned them up. You know, there's a lot
of thought that's going to be done. I'm sure in
the next few months in the in the CFTC office
(11:59):
and in the s SEE office. Gary Gensler, is you
going to take take his job? And it's like, WHOA
A lot to think about, right, even mark of manipulation? Right?
I can't call four hedge funds up and say, dudes,
you know this guy short, let's all squeeze is short.
That would and me in jail when it's happening in
the masses. Who knows where those rules are. Someone's saying, hey,
I think you know this is a good vibe and
(12:21):
we should buy it, and everybody short the market that's
not necessarily colluding, but it feels like collusion, and so
we might need a whole new set of regulations to
deal with this. Listen, what's going on is really bad
for capital markets and the people that are participating. Some
are making a ton of money. This is going to
end in tears because these stocks will collapse at one point,
(12:42):
the retail stocks that have been squeezed game stop, they
will all collapse. They might not collapse tomorrow, they might
not collapse three days, but they will collapse. I will
literally bet you my shoes, my pants, and my in
my shirt. I want you to keep all those on.
When I even think back to the financial crisis, there
was a lot of badhavior and wrongdoing, but I can't
think of any participants that we're excited about destroying the markets.
(13:07):
When I wake up and I see someone as brilliant
and powerful as Elon Musk with the kind of like
Etsy tweet and he's laughing as people are scrambling. Elon
Musk likes to use Etsy and then they're buying it up.
Elon Musk isn't going to care if the markets are destroyed.
(13:27):
He's gonna get on his rocket ship and go to
Mars and our capital mark literally and our capital markets
are going to be decimated. Like I said, regulators have
their hands full. And unfortunately we're in between these you know,
we're just transitioning. You know, Gary hasn't been approved yet
as the SEC chaired the CFCC, And I think this
has come out so fast, Right, they will have an answer,
(13:51):
they will what it will be the right answer? I
don't know, but like it's imperative at disappoint that these
guys are gonna do something. And listen, we have these
correlated risk unwines all the time, and no one ever
feels bad for the hedge fund manager who just loses
his shirt. The capital markets thing is is a more
important question than the individual hedge fund manager. And I
(14:11):
think this is part of what happens when you allow leverage.
This is this is in lots of waye chairman pals Mouth,
and he knew he was doing this. He's created a bubble.
This is a bubble of monumental proportions. Right, we're debasing
the dollar as fast as we can. He might be
the only option he has, Right, how are we going
to pay all this debt that we just keep running
we're gonna run up the debt and deficit, and then
(14:33):
when we decide to cut the deficit, we're gonna cut
social programs from the poorest people who are going to suffer. Again.
Here's the real issue, Stephanie. We need a new paradigm.
We had one that was called globalization. It worked for
a long time. It's stopped working, probably in two thousand
and thirteen fourteen. We didn't realize it until Brexit happened
in fifteen and then Trump and sixteen, and since then
(14:56):
we haven't come up with a story and narrative that
people can rally around. And so we've got populous left
and populous right. No one's really come up with good
solutions to deal with How do we structure our capitalist
economy in that is a little more egalitarian and still functions.
(15:16):
Do you have to burn the house down? I'm an
institutionalist and I'm gonna send you know like so I'm
hoping the house doesn't get burned down. Think of Uber
Like Travis Pilaschia, right, he broke every rule in every
borough he tried to start Uber in until the citizens
of that county, state city said we want Uber change
(15:37):
the rules so he can function. And so every once
in a while you do have to push and break
a little glass to change things for the better. And
so there's this balance, I think between not breaking our
institutions and forcing them to change. We'll be back after
the break. Don't explain to us technically how this game
(16:13):
stopped thing played out. There are people that are participating.
They figured out who was short, They bought lots of
out of the money call options. Right, the Internet is
an unbelievable network, and light minded communities find their way
onto Twitter pages or Telegram chats or these Reddit chat rooms,
and people started realizing if you buy way out of
(16:34):
the money calls, the dealers who sell them to you,
who sell them systematically to get short prices that they
never think would happen. And so these young traders are
using that playbook on individual stocks that are owned by
hedge funds, and all of a sudden, as it starts working,
then hedge funds start saying, hey, who short this? Who
(16:57):
short that? Oh, this guy is in trouble, is also
long this, let's sell that. And you know the unfortunate
side is these are hedge fund managers that have been
stock pickers for long periods of time that have great
track records that you know, maybe they got too complacent,
you know, their assets size was too big, their shorts
were too big. But it wasn't like this is like specific,
(17:18):
let's pick on this guy because this was Hey, these
guys are some molic of a system, and we're going
to go after the system. And listen, they're young, guys,
have a ton of fun, like when you make money,
it is unbelievably thrilling, and so there's a bro culture
that's part of this that listen, it will end in tears.
But right now, these guys are having time in their lives.
(17:39):
They have true leaders like Shama who wants to be
the governor of California, and Elon Musk. I will say
in their defense, they do have to turn on financial
news every day, where you know, sort of established money
managers are mocking the Robin Hood traders. You know, so
there is some aspect of it where they're sticking it
to them, but to any of them actually believe in
(18:00):
game Stock as a company. No, No, this is a game.
I mean, it's kind of interesting it's name in game Stock.
This is just a game. Even Tesla, you can tell
the Great Tesla story. But Tesla's valuation is nothing. You know,
it's a religion. It's like it's a belief system. Now
it's not a valuation, it's a company. If you're a
twenty seven year old kid or a twenty five year
old kid, and you wouldhered a lot of money, and
(18:20):
the rules are you can invest this money, but you've
got to not do anything for twenty years. Are you
gonna buy long bonds at one and a half? Probably not.
Are you leave it in cash with the deteriorating dollar,
probably not. Are you gonna buy the stock market which
is at the highest valuations we've ever seen? You know,
it's really scary, like where you're supposed to put your money.
(18:41):
So you're buying bitcoin, You're buying story stocks that other
people are buying because the alternatives are really crappy. When
we were young, you could put your money in saving
his account. When I first got to Wall Street rates
for seven seven percent, and everyone believed in the US dollar. Also,
when you and I were young, we moved to New
(19:01):
York and we worked in banks, and we had to
pay rent, and we were going out socially and we
were buying clothes. We were going to supporting events. Young
people in the last year moved home with their parents
because everybody can work from home, so they're living rent
free but not socializing. They're not going on trips, so
they are sitting there with much more disposable income than
they normally have. And so listen, this won't last. The
(19:24):
vaccine is gonna get rolled out. People are gonna move
back to the city's kids want to go out. I've
got three, you know, twenty something kids, and they are
ready for the you know, the next chapter. You're acting
like it's your kids who want to go out, when
anyone who knows you here, Michael, it's you. This is true.
I'm ready, and I think things will normalize. But I
think these are good lessons for all of us to
(19:46):
realize that we do need systems change. The status quo
isn't working, and thinking it's gonna work, and it's not
anyone's fault per se, right, we have there's so many
factors that have gone into the spinequality gap. It's technology,
its globalization, it's political shifts. But when you put them
all together, we have a world where the haves and
(20:09):
inhabitants are too far apart how do we gradually get
back to a place that's more balanced. You've had a
lot of the Wall Street community talk about, you know,
multi stake over capitalism, so talk is good, actions better.
I think some of the ideas are just stating and
they're getting there, but the macros haven't moved yet. And
(20:29):
COVID made everything worse. It just accelerated all the bad things.
The system is designed for the rich, for the institutions.
Think about yourself, how hard was it for you to
make your first buck? When you're rich, it's easier to
get richer. It was still relatively hard back then to
make your first book. You know, I was called a
(20:51):
grub steak. How do you get your grub steak so
you can then gamble, so you can then invest, even
buy a house. The first hundred thousand dollars you ever say,
the first fifty is the hardest you'll ever say unless
you get really lucky, and most people don't get lucky.
I don't think that's changed now. And then what's changed is, Wow,
if you have a whole lot of money and you
(21:12):
have access, you're compounding that at a stunning rate. Games
stopped traded twenty billion dollars yesterday and today already it's
traded twenty two billion dollars twenty two billion dollars of turnover.
I have a public company that you know is a
too and app billion dollar market cap that probably trades
(21:33):
a million fifteen million dollars on a normal day. You know,
some people want to take a bet, some people want
to get out of a bet. Now, we'd like it
to have a lot more volume, but like twenty two
billion dollars, it's the number one traded asset in the
world right now. Game stuff. So it's just this game.
All of this is legal. All of it's legal. Listen
you you you might have the regulators look back and say, hey,
(21:55):
we need to change something, but there's no way they're
going to go after a hundred thousand young kids. Are
we to be that naive? Like it really just is
a hundred thousand young kids on Reddit going yeah, bro,
let's get this. That's how it started. And it's this.
I mean, they're they're not all young kids. I'm sure
there's some adults in there as well. And then the
hedge funds get engaged, right, smart hedge funds are sharks.
(22:18):
Who's short? What look at Bed, Bath and Beyond or
a MC. These stocks have exploded dead business models that
people were short. There was an ethos of selling broken
business models that aren't gonna work, and so people had
big shorts because they had huge conviction that fundamentally they'd
be right over the six months one year, and they
(22:39):
never really expected that this hive of bumblebees would come
and create so much electricity and energy that it would
push things to the point where they had to stop
out of their positions. Leave us something to think about
for people who are not crypto experts, who are not
markets experts, who are just turning this on and say,
(23:00):
what I think, how should we think about what's happening today?
I would stay away from trading these markets if if
I was you know, normal everyday you know mom and dad,
are you know, not working in a hedge fun business.
With the financial market business, it's really really dangerous out there.
This is like one big, you know, poker game that's
(23:20):
become the biggest poker game right now. Game stops not
worth seven billion dollars at one point, you know, the
CEO is gonna say, hey, I'd like to sell some
stock up here. I'd like to sell as much stock
as humanly possible up here, and that will collapse the price,
and slowly but surely, all these longs will get unwound
and it won't last. It will be gone. Will game
(23:42):
stock will be talked about in the same way. You know,
Porsche Mercedes, that giant squeeze that happened ten years ago
was talked about. People will forget it unless you got
killed in it, and then you'll remember it for a
long long time. Uh. And it's why ted Amritrade stopped
training in it today. Uh. They just said, hey, well
we're it's too risky for our customers. You know, we're
(24:02):
at insanity levels. My last question you yourself, I love
the game. At any point over the last week, have
you wanted to trade game stop? I traded a little
bit today. It does a tidy amount just for the
good I know, you got me. You got me. We're
sitting here in the professional environment, and you know this
(24:25):
is what we do for a living. It's just an
unbelievably dangerous game. Be careful, all right, Michael, thank you
so so much. I really really appreciate it. Awesome. Be well, Stephanie,
h that was a lot, you know, Normally we try
(24:45):
to keep this podcast pretty brief and leave you some
time to think. Well, today, I'm not leaving you much time.
Michael had a lot to say, but there is a
lot to think about, and after listening to all this,
after watching the markets, after watching the last year that
we had, it's extraordinary to me. We saw all different
small groups and individuals pulled together this year and push
(25:08):
large scale movements and protests and now here we are.
A whole bunch of people over the last year, especially
in the last week, have found a way to drive
the markets. They've driven government, they've driven industry, and now
they've driven finance. But when you have Elizabeth Warren and
(25:30):
a whole bunch of people on Wall Street agreeing and
calling for more regulation, things are going to change. I
am sure there's going to be more scrutiny, more regulation.
What I'm not sure of is when these musical chairs stop,
who's going to miss their chair? Because on this trade,
I'm just not sure who's gonna lose, and I don't
(25:50):
know who's going to get blamed. I'm Stephanie Rule and
you're listening to Modern Rules, a podcast from NBC Think
MSNBC and I heart Rating. This podcast is hosted by me.
Stephanie Rule. Mike Biette, and Katrina Norvell are executive producers.
Meredith Bennett Smith is Senior editor for NBC Think and
our editorial lead. The podcast is engineered and edited by
(26:13):
Josh Fisher. Additional production support provided by Charles Herman, Rachel
Rosenbaum and Lauren Wynn, and special thanks to Katherine Kim
are Global head of Digital News right here at NBC
News and MSNBC. For more thought provoking analysis, visit NBC
news dot com slash thing
The amount of debt that the baby boomers have created
is never going to get paid back, and who's supposed
to pay it back? Gen Z and millennials, You've polluted
our planet, You've screwed up our financial system, and we're
cigarette And so this is literally these young kids fighting back.
It's like a giant middle finger to the system. Now
we've got a whole universe of day traders that are
(00:22):
out there, both in crypto markets and the equity markets. Uh,
and they're making money and they're having fun. It's a
story that started in a Reddit chat room. It then
took Wall Street on by storm, and now it is
all everyone is talking about. No one predicted the first
big business story of would be about a sleepy little
(00:45):
video game retailer that's been in decline for months, if
not years now seeing its sack price go from thirty
to forty dollars over a matter of days. Why because
a bunch of day traders who found one another on
social media platforms and chat rooms, figured out a way
to take on the system, push head funds out, drive
(01:08):
up the markets. All. Well, we're kind of in between
administrations and don't even have the next SEC chair confirmed
I'm Stephanie Rule, MSNBC anchor, NBC News Senior correspondent, and
this is Modern Rules, a podcast from NBC Think and
I Heart Radio. We need to explain this story, so
(01:31):
I brought in the one and only Mike Novogratz. He
is the CEO of Galaxy, the digital currency firm, former
co founder of Fortress, who has a deep understanding of
this cultural divide but also knows a lot about finance.
Michael novograts I am reaching out to you today because
(01:53):
the general news audience needs some help and understanding what
in the world is going on. Last summer, when we
saw riots break out after George Floyd died, it wasn't
just about racial injustice, it was about economic injustice. Two
weeks ago, the capital riots again. It was this anti
establishment movement, and now somehow the same spirit is playing
(02:15):
out in the last few days in the stock market.
It's all coming together with a company that I often
would compare to like the radio shack of video game stores,
game stock, and it is the robin Hood traders, the
little guys versus the establishment. Can you tell us the story?
Take us back? How did we get here? But listen,
we've got here over a year period, right, since two
(02:39):
thousand and eight, the medicine that central bank governors and
Ministry of Finance chiefs or Department of Treasury heads a
gift to sick economies are more fiscal and a lot
more monetary. Let's say we don't know what fed governors are.
Economy was sick in the financial crisis. They pumped money
into the system, and they put interest rates at zero,
(03:01):
which meant wealthy people could borrow money to start businesses
and buy houses. But savers weren't making any money, and
you had to put your money in the stock market
because it was the only game in town. Since two
thousand and eight, we have grown the money supply, right,
the amount of dollars in circulation five as and so
if you think about if we're sitting around the table
and there's an apple and we want to buy the apple,
(03:22):
if you give everyone five times as much money, the
apple gets a lot more expensive. And so assets alas
is stocks, bitcoin, uh, you name the asset art has
gone up in value. Well, who owns assets? Rich people?
The medicine that our government officials continue to give the
(03:43):
sick economy keeps extending the gap between the Hauzard and
have nuts. It got wildly supercharged because of the pandemic.
So the pandemic to two things. It's stop the economy.
And so the only response that Chairman pal that had
the head of the Fed minute at that time new
was to throw tons of money at the problem. And
(04:04):
we increase money supply faster than we have since World
War Two. We grew up a deficit of four four
trillion dollars. Trillion dollars used to be a lot of money,
and now we're throwing a trillion dollars around like their
match sticks. A trillion dollars is five percent of GDP.
It's a staggering amount of money. And so running the
biggest deficits we've ever run postward world Ward two, and
(04:26):
that money is being recycled into the hands of really
wealthy hedge fund managers. But also you know young robin
Hood traders who are taking their stimulus checks there as
their extra savings, and they're stuck at home. They can't
go to bars and chase girls. Uh, they're stuck at home.
There in further computers, and this is almost like addiction.
So when we face pandemic crisis, the FED comes in,
(04:49):
they pump money, they stabilized markets. But for the average
small business, they were dependent on Congress stepping in and
helping them, and the FED did a whole lot more So,
how much did that worsen splinter this economic divide. It
wasn't like demand went away. It just meant all that
(05:09):
business was going to target in Walmart and Amazon. Listen,
you know, in the middle of a crisis, often you
use the most blunt instrument you have, and you know
Monastery supplies the blunt dissinstrument and buying everything. And the
FED literally bailed out hedge funds, build out the financial system,
part because the chairman felt he had to, right, there
was no alternative in his mind. Congress could have made
(05:31):
a lot more distribution to individuals and less to corporates. Right,
there was lots of decisions made in that even the
p p P the way that was done, Uh, they
tried their best. It wasn't that effective. Lots of wealthy
business and took advantage of the p p P when
it was really meant for small businesses. But it's really
hard in a fast moving environment when it felt like
(05:52):
the world is collapsing, and so the drug they know
how to use his monetary policy. When they gave stimulus,
when they had tended unemployment, we had Mitch McConnell saying, well,
we have to end that because people are getting paid
so much money they don't want to go back to work,
when that wasn't the case for the American poor half
our country has no savings, and we've got fifty million
(06:14):
people who are food and secure, while the mega rich
got mega richer, and the pretty rich we're buying second houses.
That's exactly what's happening, and that's why we're seeing you know,
we saw the riots after George Floyd, which racial justice,
but if you looked around l a beat the rich,
there is this growing friction and growing i think uncertainty
(06:37):
in our economic policy and our political system and social
and civil society. We saw civil society breakdown in d C.
It's really complicated, and now the genie so far out
of the bottle it's hard to figure out how it
gets back in. This is also generation right, this is
the younger generation. It's Gen Z and millennials flipping the
(06:58):
bird at the baby boomers. It's saying to the baby boo,
you have taken way too much debt right in a
lot of ways. It's why crypto was created. Crypto came
in two thousand and eight after financial crisis. It was
a middle finger to the system. And it's the same
guys who are doing Robin Hood that we're kind of
the spirit of the original crypto revolution, and we're seeing
it now growing up in this thing we called the
(07:18):
centralized finance right a peer to peer. We want to
cut out Goldman's actually want to cut out the NASDAC,
We want to cut out all the middlement, all the
red tables, and so all of these things are kind
of lining up in their screening for systems change. This
one episode of going after shorts and hedge funs syendemic
of this same idea that the system is geared to
(07:40):
the wealthy, it's geared to the rich, it continues to
play to their strength. All of that needs to change
or we're going to have the revolution. And these are
like the first arrows that are being thrown, and you're
seeing lots of them in different in different places. You know,
Donald Trump arrow and the the Robin Hood Trader arrow
and the Black Lives Matter protest arrow three completely different.
(08:02):
You know, socio economic groups to complete in different communities,
but all really at their core complaining about the same
thing they are in that Black Lives Matter is saying
down with the white male patriarchy that keeps me down.
The MAGA movement while it's not actually what Donald Trump
(08:23):
ever did. Is this anti establishment movement, and then the
financial arm of it is this defy this this decentralized
finance where these young people and correct me if I'm wrong,
are sick and tired of having to go to the
toll takers opening up that account at JP Morgan giving
(08:45):
Citadel the chance to to go for I mean, when
when an average person on the street wants to get
in on the Airbnb I p o. By the time
they're able to buy that stock the rich guys are
selling are the ones selling it to them. So walk
us through sort of how this robin Hood trader came
to be and how this is played out Listen, I mean,
(09:06):
in lots of ways, right, robin Hood and companies like
it brought stock trading uh to young people. You've decided
for a robin Hood account and you funded with you know,
a thousand dollars or five hundred dollars or fifty dollars
and you can, you know, buy stocks. You're actually not
buying stocks, you're buying derivatives of stocks, right, You're trading
(09:27):
against robin Hood. And then robin Hood is you know,
buying and hedging in the stock market. That order flow
gets thrown through big order folk processing. But mostly it's
it's allowed this casino called the stock market, and it's
introduced it to all these young people that didn't really
participate in the past. And so in some ways it's
a great thing, right, it's the democratization of finance. It's
(09:49):
giving people a chance. The regulators have to be somewhat
nervous and that you know, two people know what they're doing,
and that feels patronizing. And someone says that, Michael, you
and I both came from the bank king world. You
can say all the terrible things you want about them,
but they're highly regulated, right, They've got strict rules around
anti money laundering, around k YC. Know your client, you
(10:11):
can't call a ninety two year old woman on a
fixed income and say can I interest you in a
derivatives transaction? But in this decentralized world of finance, you've
got so robin Hood isn't decentralized. Robin has still centralized.
I would say it's the same spirit of what the
decentralized world is coming to. Robin Hood is literally just
allowing people a cheaper way to access the stock market
(10:34):
and a sexier way, and that resonated with latical generation
gen Z and millennials. You know, the same type trading
happens on TV and merrit Trade and the Trade and
other electronic platforms. Okay, and let's go back to the kids.
These are not necessarily finance experts. This is people are home,
they've got a little money, or they're they're not spending
(10:55):
it going out to the horse chasing, girls are betting
on games, and so they said, I'm going to get
my adrenaline rush from trading stocks or I'm gonna make
a living. You know what's so interesting when I started
getting into crypto in two thousand and fourteen fifteen, the
shocking amount of information and work that was done on
Reddit and on Telegram and on Twitter. The crypto lives
(11:17):
on Twitter and can I remember sitting with my daughter's
boyfriend and his friend and they knew more about crypto
than I didn't. I thought I was a professional, so
people are educating the heck out of themselves. My son
Nacho was the one who told me about this Reddit
chat room that was going after games stopped four nights
of week. Doesn't that feel at all dangerous to you
(11:37):
that those are the platforms where this information is being shared.
You worked at Goldman Sachs, I worked at Deutsche Bank.
Before a research report could go out from either of
our organizations, they were scrubbed, scrubbed, scrubbed again, and four
lawyers then cleaned them up. You know, there's a lot
of thought that's going to be done. I'm sure in
the next few months in the in the CFTC office
(11:59):
and in the s SEE office. Gary Gensler, is you
going to take take his job? And it's like, WHOA
A lot to think about, right, even mark of manipulation? Right?
I can't call four hedge funds up and say, dudes,
you know this guy short, let's all squeeze is short.
That would and me in jail when it's happening in
the masses. Who knows where those rules are. Someone's saying, hey,
I think you know this is a good vibe and
(12:21):
we should buy it, and everybody short the market that's
not necessarily colluding, but it feels like collusion, and so
we might need a whole new set of regulations to
deal with this. Listen, what's going on is really bad
for capital markets and the people that are participating. Some
are making a ton of money. This is going to
end in tears because these stocks will collapse at one point,
(12:42):
the retail stocks that have been squeezed game stop, they
will all collapse. They might not collapse tomorrow, they might
not collapse three days, but they will collapse. I will
literally bet you my shoes, my pants, and my in
my shirt. I want you to keep all those on.
When I even think back to the financial crisis, there
was a lot of badhavior and wrongdoing, but I can't
think of any participants that we're excited about destroying the markets.
(13:07):
When I wake up and I see someone as brilliant
and powerful as Elon Musk with the kind of like
Etsy tweet and he's laughing as people are scrambling. Elon
Musk likes to use Etsy and then they're buying it up.
Elon Musk isn't going to care if the markets are destroyed.
(13:27):
He's gonna get on his rocket ship and go to
Mars and our capital mark literally and our capital markets
are going to be decimated. Like I said, regulators have
their hands full. And unfortunately we're in between these you know,
we're just transitioning. You know, Gary hasn't been approved yet
as the SEC chaired the CFCC, And I think this
has come out so fast, Right, they will have an answer,
(13:51):
they will what it will be the right answer? I
don't know, but like it's imperative at disappoint that these
guys are gonna do something. And listen, we have these
correlated risk unwines all the time, and no one ever
feels bad for the hedge fund manager who just loses
his shirt. The capital markets thing is is a more
important question than the individual hedge fund manager. And I
(14:11):
think this is part of what happens when you allow leverage.
This is this is in lots of waye chairman pals Mouth,
and he knew he was doing this. He's created a bubble.
This is a bubble of monumental proportions. Right, we're debasing
the dollar as fast as we can. He might be
the only option he has, Right, how are we going
to pay all this debt that we just keep running
we're gonna run up the debt and deficit, and then
(14:33):
when we decide to cut the deficit, we're gonna cut
social programs from the poorest people who are going to suffer. Again.
Here's the real issue, Stephanie. We need a new paradigm.
We had one that was called globalization. It worked for
a long time. It's stopped working, probably in two thousand
and thirteen fourteen. We didn't realize it until Brexit happened
in fifteen and then Trump and sixteen, and since then
(14:56):
we haven't come up with a story and narrative that
people can rally around. And so we've got populous left
and populous right. No one's really come up with good
solutions to deal with How do we structure our capitalist
economy in that is a little more egalitarian and still functions.
(15:16):
Do you have to burn the house down? I'm an
institutionalist and I'm gonna send you know like so I'm
hoping the house doesn't get burned down. Think of Uber
Like Travis Pilaschia, right, he broke every rule in every
borough he tried to start Uber in until the citizens
of that county, state city said we want Uber change
(15:37):
the rules so he can function. And so every once
in a while you do have to push and break
a little glass to change things for the better. And
so there's this balance, I think between not breaking our
institutions and forcing them to change. We'll be back after
the break. Don't explain to us technically how this game
(16:13):
stopped thing played out. There are people that are participating.
They figured out who was short, They bought lots of
out of the money call options. Right, the Internet is
an unbelievable network, and light minded communities find their way
onto Twitter pages or Telegram chats or these Reddit chat rooms,
and people started realizing if you buy way out of
(16:34):
the money calls, the dealers who sell them to you,
who sell them systematically to get short prices that they
never think would happen. And so these young traders are
using that playbook on individual stocks that are owned by
hedge funds, and all of a sudden, as it starts working,
then hedge funds start saying, hey, who short this? Who
(16:57):
short that? Oh, this guy is in trouble, is also
long this, let's sell that. And you know the unfortunate
side is these are hedge fund managers that have been
stock pickers for long periods of time that have great
track records that you know, maybe they got too complacent,
you know, their assets size was too big, their shorts
were too big. But it wasn't like this is like specific,
(17:18):
let's pick on this guy because this was Hey, these
guys are some molic of a system, and we're going
to go after the system. And listen, they're young, guys,
have a ton of fun, like when you make money,
it is unbelievably thrilling, and so there's a bro culture
that's part of this that listen, it will end in tears.
But right now, these guys are having time in their lives.
(17:39):
They have true leaders like Shama who wants to be
the governor of California, and Elon Musk. I will say
in their defense, they do have to turn on financial
news every day, where you know, sort of established money
managers are mocking the Robin Hood traders. You know, so
there is some aspect of it where they're sticking it
to them, but to any of them actually believe in
(18:00):
game Stock as a company. No, No, this is a game.
I mean, it's kind of interesting it's name in game Stock.
This is just a game. Even Tesla, you can tell
the Great Tesla story. But Tesla's valuation is nothing. You know,
it's a religion. It's like it's a belief system. Now
it's not a valuation, it's a company. If you're a
twenty seven year old kid or a twenty five year
old kid, and you wouldhered a lot of money, and
(18:20):
the rules are you can invest this money, but you've
got to not do anything for twenty years. Are you
gonna buy long bonds at one and a half? Probably not.
Are you leave it in cash with the deteriorating dollar,
probably not. Are you gonna buy the stock market which
is at the highest valuations we've ever seen? You know,
it's really scary, like where you're supposed to put your money.
(18:41):
So you're buying bitcoin, You're buying story stocks that other
people are buying because the alternatives are really crappy. When
we were young, you could put your money in saving
his account. When I first got to Wall Street rates
for seven seven percent, and everyone believed in the US dollar. Also,
when you and I were young, we moved to New
(19:01):
York and we worked in banks, and we had to
pay rent, and we were going out socially and we
were buying clothes. We were going to supporting events. Young
people in the last year moved home with their parents
because everybody can work from home, so they're living rent
free but not socializing. They're not going on trips, so
they are sitting there with much more disposable income than
they normally have. And so listen, this won't last. The
(19:24):
vaccine is gonna get rolled out. People are gonna move
back to the city's kids want to go out. I've
got three, you know, twenty something kids, and they are
ready for the you know, the next chapter. You're acting
like it's your kids who want to go out, when
anyone who knows you here, Michael, it's you. This is true.
I'm ready, and I think things will normalize. But I
think these are good lessons for all of us to
(19:46):
realize that we do need systems change. The status quo
isn't working, and thinking it's gonna work, and it's not
anyone's fault per se, right, we have there's so many
factors that have gone into the spinequality gap. It's technology,
its globalization, it's political shifts. But when you put them
all together, we have a world where the haves and
(20:09):
inhabitants are too far apart how do we gradually get
back to a place that's more balanced. You've had a
lot of the Wall Street community talk about, you know,
multi stake over capitalism, so talk is good, actions better.
I think some of the ideas are just stating and
they're getting there, but the macros haven't moved yet. And
(20:29):
COVID made everything worse. It just accelerated all the bad things.
The system is designed for the rich, for the institutions.
Think about yourself, how hard was it for you to
make your first buck? When you're rich, it's easier to
get richer. It was still relatively hard back then to
make your first book. You know, I was called a
(20:51):
grub steak. How do you get your grub steak so
you can then gamble, so you can then invest, even
buy a house. The first hundred thousand dollars you ever say,
the first fifty is the hardest you'll ever say unless
you get really lucky, and most people don't get lucky.
I don't think that's changed now. And then what's changed is, Wow,
if you have a whole lot of money and you
(21:12):
have access, you're compounding that at a stunning rate. Games
stopped traded twenty billion dollars yesterday and today already it's
traded twenty two billion dollars twenty two billion dollars of turnover.
I have a public company that you know is a
too and app billion dollar market cap that probably trades
(21:33):
a million fifteen million dollars on a normal day. You know,
some people want to take a bet, some people want
to get out of a bet. Now, we'd like it
to have a lot more volume, but like twenty two
billion dollars, it's the number one traded asset in the
world right now. Game stuff. So it's just this game.
All of this is legal. All of it's legal. Listen
you you you might have the regulators look back and say, hey,
(21:55):
we need to change something, but there's no way they're
going to go after a hundred thousand young kids. Are
we to be that naive? Like it really just is
a hundred thousand young kids on Reddit going yeah, bro,
let's get this. That's how it started. And it's this.
I mean, they're they're not all young kids. I'm sure
there's some adults in there as well. And then the
hedge funds get engaged, right, smart hedge funds are sharks.
(22:18):
Who's short? What look at Bed, Bath and Beyond or
a MC. These stocks have exploded dead business models that
people were short. There was an ethos of selling broken
business models that aren't gonna work, and so people had
big shorts because they had huge conviction that fundamentally they'd
be right over the six months one year, and they
(22:39):
never really expected that this hive of bumblebees would come
and create so much electricity and energy that it would
push things to the point where they had to stop
out of their positions. Leave us something to think about
for people who are not crypto experts, who are not
markets experts, who are just turning this on and say,
(23:00):
what I think, how should we think about what's happening today?
I would stay away from trading these markets if if
I was you know, normal everyday you know mom and dad,
are you know, not working in a hedge fun business.
With the financial market business, it's really really dangerous out there.
This is like one big, you know, poker game that's
(23:20):
become the biggest poker game right now. Game stops not
worth seven billion dollars at one point, you know, the
CEO is gonna say, hey, I'd like to sell some
stock up here. I'd like to sell as much stock
as humanly possible up here, and that will collapse the price,
and slowly but surely, all these longs will get unwound
and it won't last. It will be gone. Will game
(23:42):
stock will be talked about in the same way. You know,
Porsche Mercedes, that giant squeeze that happened ten years ago
was talked about. People will forget it unless you got
killed in it, and then you'll remember it for a
long long time. Uh. And it's why ted Amritrade stopped
training in it today. Uh. They just said, hey, well
we're it's too risky for our customers. You know, we're
(24:02):
at insanity levels. My last question you yourself, I love
the game. At any point over the last week, have
you wanted to trade game stop? I traded a little
bit today. It does a tidy amount just for the
good I know, you got me. You got me. We're
sitting here in the professional environment, and you know this
(24:25):
is what we do for a living. It's just an
unbelievably dangerous game. Be careful, all right, Michael, thank you
so so much. I really really appreciate it. Awesome. Be well, Stephanie,
h that was a lot, you know, Normally we try
(24:45):
to keep this podcast pretty brief and leave you some
time to think. Well, today, I'm not leaving you much time.
Michael had a lot to say, but there is a
lot to think about, and after listening to all this,
after watching the markets, after watching the last year that
we had, it's extraordinary to me. We saw all different
small groups and individuals pulled together this year and push
(25:08):
large scale movements and protests and now here we are.
A whole bunch of people over the last year, especially
in the last week, have found a way to drive
the markets. They've driven government, they've driven industry, and now
they've driven finance. But when you have Elizabeth Warren and
(25:30):
a whole bunch of people on Wall Street agreeing and
calling for more regulation, things are going to change. I
am sure there's going to be more scrutiny, more regulation.
What I'm not sure of is when these musical chairs stop,
who's going to miss their chair? Because on this trade,
I'm just not sure who's gonna lose, and I don't
(25:50):
know who's going to get blamed. I'm Stephanie Rule and
you're listening to Modern Rules, a podcast from NBC Think
MSNBC and I heart Rating. This podcast is hosted by me.
Stephanie Rule. Mike Biette, and Katrina Norvell are executive producers.
Meredith Bennett Smith is Senior editor for NBC Think and
our editorial lead. The podcast is engineered and edited by
(26:13):
Josh Fisher. Additional production support provided by Charles Herman, Rachel
Rosenbaum and Lauren Wynn, and special thanks to Katherine Kim
are Global head of Digital News right here at NBC
News and MSNBC. For more thought provoking analysis, visit NBC
news dot com slash thing
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