- Warren Buffett’s right-hand Marie Antoinette
- Millennials’ sweet revenge for Panic of 2008
- Epicenter of a financial-cultural-social earthquake
- Normalizing “naked” short selling
- Stand and Deliver: Redditors expose paper silver?
- Team Biden toys with UBI
It was September 2010. The hangover from the “Great Recession” was only starting to wear off. Official unemployment was 9.5% — way higher than the current 6.7%. And Warren Buffett’s right-hand man was having a Marie Antoinette moment.
“You should thank God” for bank bailouts, said Berkshire Hathaway vice chairman Charlie Munger to a group of students at the University of Michigan.
“Hit the economy with enough misery and enough disruption, destroy the currency, and God knows what happens. So I think when you have troubles like that, you shouldn’t be bitching about a little bailout. You should have been thinking it should have been bigger.”
But how about bailouts for everyday folks walloped by the crisis, say, young jobless adults struggling beneath crushing loads of student debt?
“Now, if you talk about bailouts for everybody else,” said Munger, “there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies.
“At a certain place, you’ve got to say to the people, ‘Suck it in and cope, buddy. Suck it in and cope.’”
As our founding editor Addison Wiggin put it in these virtual pages, “Let them eat cake, Charlie. A$hole.”
What made Munger’s remarks so galling was the way he and Buffett benefited from those bailouts.
Knowing the bailouts were coming sooner or later, Berkshire Hathaway cut a series of sweetheart deals with most of the biggest banks in early fall 2008 — lucrative arrangements that were off-limits to retail investors like you.
Just one example: Berkshire invested $5 billion in Goldman Sachs in exchange for preferred shares yielding a 10% dividend.
The millennials listening to Munger that day were likely unaware of the details behind these deals. But they knew Wall Street had feathered its nest at their expense during and after the Panic of 2008… while they were destined to live in Mom’s basement after graduation, jobless and deep in hock.
Fast-forward a little over 10 years… and we imagine at least one or two of those students are tasting sweet revenge with their shares of GameStop Corp. (GME) — which leaped 400% last week.
GameStop and everything connected with it is more than a financial phenomenon. It’s a cultural and social one, too — worthy of our entire 5 Mins. today.
Yes, we’ll get to the wild action in silver — which could be the fulfillment of metals bugs’ dreams. Along the way we’ll also call out a blatantly illegal activity Washington will do nothing to stop (it’s probably not what you think). And we’ll even tease out a possible endgame that spells much higher taxes and health care costs for older generations.
First, we stand back and marvel: A buncha pissed-off millennials have brought the terms “short selling” and “short squeeze” into the popular lexicon.
Frank Holmes, longtime friend of The 5 and chief of the U.S. Global funds family, reminds us how we got here: “A number of hedge funds, including Melvin Capital and Maplelane Capital, took out short positions in GameStop, whose sales were lagging even before the pandemic killed foot traffic.
“In response, anti-Wall Street organizers on Reddit urged readers to buy GameStop options en masse to catapult its shares ‘to the moon.’ This in turn forced Melvin and others to buy GameStop shares at much higher prices to cover their positions, leading to multibillion-dollar losses…
“To my knowledge, nothing like this has ever happened before in capital markets, where millions of small traders, many of them using their $600 stimulus checks, worked in tandem to cripple wealthy institutional investors, leveraging their very own trading strategies against them.”
And rubbing it in via electronic signage, it seems…
As seen on Reddit…
This morning, corporate media are agog at the news that Melvin Capital lost 53% on its investments last month — shellacked by the Redditors buying GME and other heretofore down-and-out names.
“I was in my early teens during the ’08 crisis. I vividly remember the enormous repercussions that the reckless actions by those on Wall Street had in my personal life, and the lives of those close to me,” reads a post on Reddit’s WallStreetBets forum — the epicenter of this financial-cultural-social earthquake.
“We lived off of pancake mix, and powdered milk and beans and rice for a year.”
Addressing Melvin Capital specifically, the poster writes, “You haven’t learned a single thing since ’08. And why would you? Your ilk were bailed out and rewarded for terrible and illegal financial decisions that negatively changed the lives of millions… This is personal for me, and millions of others.”
You can find post after post after post like that on WallStreetBets invoking 2008. Along with stories of people who’ve paid down their student loans with their recent profits…
And not everyone is hiding behind online anonymity to make this point. Myron Sakkas, an 18-year-old British college student, tells the BBC that the target in the GameStop battle is “the people that were responsible for 2008 and were never held responsible.”
The fury was cranked up to 11 on Thursday when several brokerages — including millennial favorite Robinhood — restricted buying of GME and other names bid up by the WallStreetBets crowd, like AMC Entertainment Holdings Inc. (AMC).
GME’s share price took a momentary spill as a consequence. Sakkas was disappointed, but not surprised: “When ordinary people try to make money in a system where only rich traders can make money, that’s what happens.
“They support a capitalist free market only when it works for them. What we saw today was not a free market and it forced an awful lot of people to lose an awful lot of money.”
Melissa Holdren, a nurse from Massachusetts, was so outraged she bought shares of AMC as a gesture of solidarity. “If you’re worried about market volatility, why are you only blocking one side of the transactions?”
And again, the 2008 allusion: “In general we need to rethink a lot of our financial structures. After the 2008 crash… it became clear that a lot of the financial market was divorced from reality in a way that I don’t think is healthy.”
“It’s no coincidence that millennials treat the stock market like a casino, and see cryptocurrencies as their ticket to financial freedom,” observes our acquaintance Demetri Kofinas, host of the Hidden Forces podcast.
“Investing in Bitcoin isn’t seen by my generation as a speculation — it’s seen as a ticket out of a system that is structurally disadvantageous to us, and which is built to extract our income in the service of debts owed to the previous generation.”
He was speaking early last week, before GME et al. supplanted crypto as “a thing.” But the same logic applies.
Elites from the boomer and silent generations have knocked out one rung after another of the economic ladder millennials wish to climb.
The Panic of 2008 wrecked their initial career prospects. It took years for them to secure jobs as baristas and Uber drivers — which still sorely underutilized the degrees they were scratching to pay for. And then even those jobs went bye-bye with the pandemic and lockdowns.
So the last attainable rung of the ladder is the Wall Street casino… and both Wall Street and Washington are keen to knock that one out, too.
“GameStop has prompted more pearl-clutching than any news story in recent memory,” writes independent journalist Matt Taibbi. “Expert after grave-faced expert has marched on TV to tell Reddit traders that markets are complicated, this isn’t a game and they wouldn’t be doing this, if they really understood how things work.”
The pearl-clutchers infested Twitter too — to wit, New York magazine business columnist Josh Barro…
“Fundamental value,” heh.
We heard the same thing from Sen. Elizabeth Warren (D-Massachusetts), likely the incoming chair of the Senate Subcommittee on Financial Institutions and Consumer Protection.
She says regulators must examine the trades in GME and similar names and make changes to ensure that markets “reflect real value, rather than the highly leveraged bets of wealthy traders or those who seek to inflict financial damage on those traders.”
Puh-leeze. We saw similar hand-wringing like this last spring as millennials with time to spare and money to burn were bidding up shares of struggling airlines and bankrupt companies like Hertz. And as we said at the time, the Federal Reserve has been distorting the “real value” of financial assets daily since 2008… and routinely since 1987.
Oh, and the Redditors know damn well the risks they’re taking. They post screenshots of their losses on WallStreetBets nearly as much as their wins. “Loss porn,” they call it. So the “it’s for your own good” argument won’t fly.
If Sen. Warren and her kind are serious about markets “reflecting real value,” then they can enforce existing law against naked short selling.
There’s nothing wrong or unethical about conventional short selling: You borrow shares from a broker and sell them immediately in hopes of buying them back later at a lower price. Once you do that, you return the shares to the broker and pocket the difference. Lather, rinse, repeat.
But in naked short selling, you skip that crucial first step of borrowing the shares.
“In the regular world, if I try to sell you something and take payment for it, and then don’t deliver you the product, I go to jail,” says Jim Bianco of Chicago-based Bianco Research. “But on Wall Street, if I sell you some stocks and you pay me for those stocks and I don’t deliver you those stocks, oh, that’s just a ‘failure to deliver’ — we’ll see if you’ve got the stocks tomorrow to deliver to me.”
Illegal? Hell, yes. Enforcement? Nonexistent. Because scores of Wall Street players do it.
And that, Mr. Bianco said over the weekend on the Financial Sense podcast, is how Wall Street’s “pros” sold short a total of 61 million GameStop shares… when only 50 million shares actually existed. The amateurs on WallStreetBets called BS when the regulators wouldn’t.
And the amateurs are the problem?
Now they’re moving into silver — which could get real interesting real fast.
The spot price of silver has jumped 15% since Wednesday — when a WallStreetBets poster identified SLV, the big silver ETF, as potentially “the world’s biggest short squeeze.”
As we write, the bid on the white metal is $28.24 — close to a six-month high. But that’s just the futures price. If you want real metal in your hand, you’ll pay much more — if you can get any at all. (“Tight” is how our friends at Hard Assets Alliance describe their supply this morning — and they’re second to none at sourcing product for retail customers.)
The Redditors’ objective here is more complex than with the short bets on GME and such: “Buy SLV shares and SLV call options to force physical delivery of silver to the SLV vaults. Also buy physical silver bullion. The best possible thing would be to take physical delivery in the futures market if you have access to do so.”
If you’re a longtime reader, this will sound familiar: It’s the perennial wish of gold and silver bugs that someone would “stand for delivery” of physical metal when a futures contract expires… instead of rolling that contract forward or taking a cash payout.
Nearly five years ago our Jim Rickards laid out several reasons why such a scenario was unlikely to materialize. The most persuasive reason is it’s illegal for the gold market’s biggest players — banks, dealers and hedge funds — to do so. A rogue hedge fund manager who stands for delivery might quickly find the full weight of Uncle Sam’s prosecutorial resources crashing down on him.
But a rando Redditor whipping up his compatriots? Who’s acting not in secret, but for all to see on the internet?
That could well be the proverbial black swan triggering the “Zero Hour” scenario for precious metals that we’ve been entertaining in this space since 2013.
But let’s say the feds step in and kick out that last rung of the millennials’ ladder — either with legislation later this year or “emergency” regulations imposed tomorrow or next week. What then?
Scroll back up and soak in the righteous rage of the WallStreetBets crowd.
The Biden administration and a Democratic Congress would almost surely authorize some sort of massive handout — to keep angry throngs of young adults off the streets and in their apartments, continuing to order DoorDash and binge on Netflix.
We’re talking a handout way bigger than the “stimmy” checks to date, or even the ones the politicos are haggling over this week.
Maybe it would be “universal basic income” — monthly checks funded by money printed out of thin air.
Or maybe it would be hard-core wealth redistribution of the sort being mooted in the United Kingdom.
In the spring of 2018, we took note of a British think tank report. It proposed the government grant everyone 10,000 pounds — about $13,500 at the exchange rate then — upon reaching age 25.
A “citizen’s inheritance,” the researchers called it.
How did they propose to pay for it? With a vast expansion of the estate tax… and higher health insurance premiums on the over-65 crowd. That would be the way to achieve “a fair deal across the generations,” said the study’s sponsors.
Yes, it’s just an idea sitting on a shelf right now. But in a crisis? Such ideas can become reality in a hurry.
Just a word to the wise if you’re older or wealthier.
Or not so wealthy. The threshold for that estate tax? Any inheritance larger than $168,750 would be up for grabs.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Oy, and we haven’t even gotten to the potential risk of a financial “contagion” spreading beyond a handful of hedge funds currently licking their wounds… and infecting Wall Street at large.
Or the social media censorship that’s suddenly being extended from the political into the financial realm.
We’ll dive into those matters as the week goes on, even as we try to resume our usual multi-topic format. Back tomorrow…
