A year ago, meme stocks and growth stocks and the Robinhood crowd and the r/WSB community were flying high. These days it’s all tumbling. So what happened with all that, and what will be the lasting effect of the market from what we’ve just experienced. To learn more, we talked to Lily Francus, the Director of Quant Research at Moody’s Analytics, and Kyla Scanlon, a popular commenter on financial topics and the founder of a new finance educations startup, to learn more about the meme mania aftermath. The transcript has been lightly edited for clarity.
Points of interest in the pod:
How are things different than a year ago — 13:26
Why everything is just a meme — 17:24
Was buying meme stocks a political act? — 28:24
What are people trading these days? — 37:14
Why meme stocks are like lottery tickets — 48:09
Investment horizons and the compression of time — 50:19
Joe Weisenthal: (05:57)
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway: (06:09)
And I'm Tracy Alloway.
Joe: (06:12)
Tracy. You know, what was really fun was the GameStop mania from last year. Wasn't it?
Tracy: (06:19)
It's weird to think that was just last year. It feels like so long ago.
Joe: (06:25)
Yeah, it really does. So much has happened over the last year. I mean, we've had like a pretty big sell off in areas of the market that were really hot and it's just, it's been a long year. So many different things have happened over that time. So many new narratives, obviously tons of focus these days on inflation and so forth. It just feels like that was ancient history, but it really wasn't so long ago.
Tracy: (06:51)
Yeah. Plus a land war in Europe which we haven't seen for many, many decades, but yeah. Retail mania was this big thing that happened in early 2021. And I'm just looking at the chart of GameStop, because that was sort of the, flagship stock for meme stock mania. And it looks like if you zoom out now, it kind of looks like an earthquake, which in some sense, it kind of was. It was this thing that just shook up the entire market and people at the time were saying that this was like the end of capitalism as we know it.
Joe: (07:29)
Yeah. I think Matt Levine had some columns saying things like, “oh, if GameStop is still trading above a hundred in three months, you know, I have to retire because all of markets are broken” and I think it was still there or it definitely lasted a long time. And that's the other kind of weird thing about these sort of manias, which is like, you can identify them as mania sometimes in real time or say, this is ridiculous. They’re overvalued, but it's really hard to call the end.
Tracy: (07:56)
Yeah, I think that's right. But there was also this aspect of GameStop where people were treating it, you know — not necessarily everyone as there were plenty of people treating it as a speculative bubble -- but there were some people who just said, I like the company or I like whatever this stock represents to me and I'm gonna buy it— almost using it as a sort of like GoFundMe for the business.
Joe: (08:20)
I'll say there's something else that's really important in all this, which is that while that was the peak, you know, it really got started in the spring of 2020 when we had this explosion of people staying home, either they were working from home, a lot of people lost their jobs. And so you had this explosion of people getting into retail trading, getting into options trading, opening up a Robinhood account. And for the first time, like I remember the late nineties and the.com bubble, that was like the first time in basically 20 years in which it really felt like stock trading was part of the environment, part of the culture and something that people just talked about their individual stock holdings, in a way that I don't think had been the case for at least 20 years.
Tracy: (09:03)
Right. I mean, I remember there's a doorman who works at a hotel in New York who I know, who was asking me about Tesla options around that time. And that, you know, it's verging all on the famous JP Morgan shoeshine boy kind of thing. When the doorman starts asking you about what options you should be buying for Tesla. Yeah, it definitely was a cultural event.
Joe: (09:26)
It was a cultural moment. I'm really interested in like what became of that. And I have my suspicions, you know, my guess would be that a lot of people at that time have now lost money or lost their gains that they experienced during the pandemic. Maybe they're like disillusioned, trading volume is down. But I also have to imagine that there's at least some percentage of people that have done well. But also have used this moment to learn more and actually want to like further their education and become deeply interested in how the market works and how options are priced and how trading works and how to evaluate an investment. And so I suspect that at least some decent percentage of the people who got excited about the market from spring 2020 to spring 2021 have stuck around and furthered their knowledge to quite a degree.
Tracy: (10:15)
Yeah, absolutely. And this is something that you see on, you know, the classic message board for a lot of the retail trading, which is Wall Street Bets. A lot of the posts that go up on there are incredibly sophisticated trading strategies. And a lot of them aren't, I have to admit, but right. you can learn a lot by reading some of that.
Joe: (10:35)
I think you made an important point, some are really not very great and some are extremely great and some people have learned quite a bit and they've gotten really smart, much smarter than anything I know about how market mechanics and how to price volatility and all these things. So I think that like we don't know yet, the final chapter of this story about this new cohort of traders that came into the market starting at the beginning of the pandemic.
Tracy: (11:02)
That's true. But we're gonna try to get a checkup on what's going on with retail trading today.
Joe: (11:08)
Exactly right. So I'm really excited. We have two guests, two extremely great commenters who we have followed for a long time, who are gonna give us different perspectives on the world of what happened to the meme stocks, what's going on with retail trading. We're going to be speaking to Lily Francus. She's the director of Quant Research at Moody’s Analytics. And we're going to be speaking with Kyla Scanlan, the content creator, the founder of a new finance education startup. Awesome on Twitter and Instagram and TikTok and her newsletter. Al great stuff. So Lily and Kyla, thank you so much to both of you for coming coming on Odd Lots.
Lily Francus: (11:45)
Thanks. Glad to be here.
Joe: (11:49)
So why don't we kick it off and and both of you have been such great commenters over the last year or the last couple of years and built up significant audiences and like great insights into this world of meme stocks and retail trading and, you know, this sort of new cohort of investors, but maybe both of you can sort of in your perspective of how does right now — in spring 2022 — feel different than a year ago?
Kyla Scanlon: (12:24)
Yeah, sure. So I'll, I'll take it first and then Lily, I'll pass off to you. So for me I was still working at an institution back when GameStop kicked off in February. But I think you have noticed a little bit of a downturn, whether that be from people, you know, participating in discussions on Twitter or on Reddit. But I think the people that you see who have stuck around they're even more impassioned than they were back then.
So I think that you're seeing a decline in the number of people who might be participating, but the people who are still around are incredibly into AMC, GME, and you still do see these stocks continue to tick back up. And I also think that you're starting to see people get a little bit more interested in monetary policy. Powell has become a household name. And I don't think that was the case maybe, you know, two or three years ago where people knew the Federal Reserve President's name. So I think that's a big one as well. Yeah. Lily, what do you think?
Lily: (13:26)
Yeah. So I wanna echo Kyla's sentiment here essentially. I mean, you could see this pretty saliently in, you know, Google Trends or AppAnnie, if you've looked at those about the rise and fall of Robinhood, I mean, fundamentally you can't talk about the meme stock episode without thinking about Robinhood's impact on the options market in particular.
I mean, in my own data, you can see fundamental differences over time in the growth of options with a pretty dramatic change in their volumes, as well as impact they had on the markets when Robinhood essentially announced the trading of zero cost, zero transaction options. So I think that, you know, you could see now that there is definitely a decline in retail participation, especially in the options market. I think as you know, I discussed, this was something I speculated back in January, 2021, that when you look at these meme stocks, based on the fact that fundamentally they're trading well disconnected from stuff like fundamental or even, you know, kind of an understanding or future value of the company itself, then what you're seeing really is the evolution of something that kind of looks to be a cult. And I don't even mean this in a bad way or a good way, but you have this passion and core of people who believe fundamentally in this truth that is extremely heterodox.
So what happens is that no matter what you throw at them, whether it was Robinhood, you know, turning off the buy button or whether it was new earnings reports and GameStop, or whether it is the macro environment we're in now, you're still gonna have these people who have faith in this narrative that over time becomes a pretty dominant force. I mean, you see this in cryptocurrencies, you saw this 10 years ago in Apple, you saw it with Tesla. That fundamentally this group of people is a capital base that the company, if they do play their cards right, can draw on to eventually hopefully create value for their investors.
Tracy: (15:52)
So this is something that I've thought a little bit about, but it's almost like, you know, you talk about the disconnect between the fundamentals and the share price, and it's almost like the price becomes a token that is representative of an idea or people's idea of what that company or that business or that cryptocurrency or whatever actually stands for. And I wonder, what does that kind of meme trading or stonks, what does that actually mean? What does that mean to you? How would you define it? Is it that idea of, you know, a sort of a belief system getting wrapped up in a tradeable token that people are willing to throw their support behind, or how would you define it roughly?
Lily: (16:46)
So, and I'll pass it over to Kyla, you know, just because this is kind of a point I've talked about in previous podcasts, including with Jesse Livermore — the pseudonymous person on Twitter that works for OSAM research — And if you look at it, you know, and I've had discussions with portfolio managers, as well as retail investors on this, everything that trades fundamentally is an agreement for someone that this is the value and I will be willing to buy it from you. That is the only arbiter price of any asset, is that someone is willing to buy it from you at that price in the future. Or now, you know, I mean, if we're talking about market and spot prices, so they’re institutional memes. I mean, when you think about fundamental analysis, there is no law of the universe, like a law of gravity, that says stocks should trade at 20 times PDE.
Obviously we have models which kind of give us mathematical certainty that allows us to look at how the market is reacting and say, we disagree with it. That's where you get the idea of theoretical versus market pricing. But at the end of the day, even those models, the models of fundamental analysis, they largely depend on either assumptions being correct or the adoption of the model itself.
And this is something that Emmanuel Derman, for example, the famous option quant, has talked about as well with the advent of Black-Scholes in option pricing, you see that the assumptions of Black-Scholes start dictating market structure and, you know, fundamentals is obviously probably the most cohesive and long-lasting meme of the markets in the sense that we all agree that a company should be trading at a certain discounted cash flow evaluation. But it doesn't mean it has to, because at the end of the day, if I go to you and I'm saying, look, I will buy this from you at a value wildly inflated, you know, that is my prerogative. That is the market price at that juncture.
And you see this with a higher susceptibility, especially for these smaller companies like a GameStop because realistically with a GameStop or AMC retail, especially if they're highly educated, as well as newly enriched by, you know, the recent bubble and what we call the stock market, they have enough force that they could own a significant fraction of the float. And when that happens, you know, obviously you can have short sellers who can interact with the markets and try to restore what we've called efficiency. But at the end of the day, there's a reason why GameStop is still trading at $150 a share. We're talking now a year and a half later and you see these companies that I wrote it off, everybody else wrote it off. We were wrong. You know, it doesn't mean that the market and fundamentals are dead in any, but at the end of the day, everything that trades, trades on someone’s belief.
Kyla: (20:01)
Yeah. I would say that's a core driver of what's going on. Like I think GME, AMC, all of that, it's really emblematic of like a bigger thing. In my opinion, like it's not just about obviously a video game company or a movie company it's, you know, dissatisfaction with the institution or being upset about how things are playing out. And we were in the middle of a pandemic during that time. And I guess, I don't know if we're out of it yet, who knows, but I think there's this big loss of trust in traditional institutions and GME and AMC somehow were able to capture that, and that's like the premium that they sort of end up reflecting. It’s people being like, well, actually I'm pretty mad and I'm gonna buy this company to try and prove to you how mad I am.
And that's why it's still going up is because I think that narrative of this loss of trust in institutions or in like traditional structures, it's continuing to play out. And somehow AMC and GME and other meme stocks have sort of captured that narrative. And I also think that we are in the era of memification of everything where, you know, Elon Musk buying Twitter, for example, or even that like the idea coming through where everything is sort of meant to be laughed at, like nothing is real. There's a lot of financial nihilism. And so I think GME, AMC, etc., you can't really quantify that, right? Like this is all just speculation. But I think that that is also an element of what we're seeing, where people are just like, okay, what's going on? I don't know. So let me buy this stock because nothing makes sense anymore.
Lily: (21:31)
What's interesting is it kind of harkens back to the idea of credit. You know, when we look at firms that are very close to, let's say a default point, then fundamentally, you know, the basic model that we all kind of understand is the model where we treat the equity value as an option on the firm's continued survival.
And in a lot of ways, you know, that is the basis of how I viewed the meme stock trade, where you have these stocks, which, you know, fundamentally may be worthless or close to worthless. Or as I joked last year, I think at one point AMC had negative shareholders equity, but at the end of the day, you know, the core reason that one buys a stock is a belief that they'll make money from doing so. It isn't based on some ethics.
It isn't based on true financial calculations. And as you see these squeeze more and more, you know, you could almost treat these as an option on the continued meme value of this equity or of this asset. And I think, you know, one of my practical realizations from that is that there are disruptions to this meming, which you could say are stuff like earnings, where you kind of get this pressure to go back to reality, but then you see an asset like a Bitcoin, which has no fundamental value. There is no equivalent of a Bitcoin earnings. There is no equivalent of something that will directly imply a market price that can be arbitraged downwards. And that's when you see the longevity of these memes.
Tracy: (23:06)
Can I ask a follow up question just based on that? How do memes die?
Lily: (23:17)
Kyla? Do you wanna take this first?
Kyla: (23:19)
Yeah, sure. I mean, I don't know how memes die. I think that you see market cycles and it becomes really hard for memes to hang on during that time where as Lily just pointed out, like you have earning reports and if all of a sudden the company that you're putting all your net worth into is like maybe it's not a company. It's actually just like a, you know, a holding company first day. It doesn't really have any underlying value. Like that can be really difficult. So I think like everything sort of boils down to this idea of collective belief. And so if all of a sudden the collective belief behind whatever the asset is goes away, if people stop saying, if they just stop believing in whatever that ends up looking like, you're gonna see the stock price end up going down. Like, Robinhood's not really a meme stock, right? But like, you're starting to see people sort of rotate away from that because collective belief in whatever they were meant to do sort of rotates away too. So I think that's what I would say, it’s collective belief begins to die out. But humans naturally will just go meme another thing. So it's like, as long as the meme cycle continues, they're just gonna move on to something else.
Lily: (24:22)
Yeah. So I was gonna add to that I think there's a joke on Twitter that I treat everything kind of in the lens of option theory, because once you have a hammer, everything looks like a nail. But you know, you're looking at the attention economy where fundamentally all of these stocks, especially once they don't have a fundamental basis to trade on, are really based on this idea of future liquidity. Or you could say it's the greater fool theory or, you know, whatever kind of derogatory term ponzi scheme, those are all kind of analogous to each other.
These zero sum games where you assume that at the end of the day, someone is gonna be holding a bag. I've argued previously last year, looking at credit analysis, that it's a bit more muddied in the sense that, you know, once you have these stocks, that meme, if they have a base that's essentially rabid enough, they can actually conduct at the money offerings, which will turn into a capital for the firm, which assuming a good management and, you know, management that's actually aligned with the vision, you could maybe see a pivot.
You could actually rescue a firm that way fundamentally just because they have this new capital injection when they wouldn't have been even in the market for refinancing their debt before. But memes inherently are time limited in the sense that attention is fleeting. Obviously you have individuals like Elon Musk who are very, very talented at staying in basically the news cycle. And I do think fundamentally that a significant fraction of Tesla’s value is due to the fact that Elon can command this attention continuously. I think you're seeing that when we thumb our noses at individuals like Elon and be like, why is he doing these crazy stuff? SEC should come get him, etc. But you're seeing that the Overton window of how CEOs act with the environment has shifted toward him, not away from him. You could argue this kind of started with basically the Tea Party and Trump as well. But at the end of the day, it's become a powerful force in the capital markets, even with this macro environment, that's become more unfavorable.
Joe: (26:47)
So I wanna ask more about the politics. So I remember my thinking a year ago when all this was like really reaching its fever pitch. And I was like, I'm totally cool with people trading or speculating or gambling with their own money. It's cool to do whatever you want. I don't have any issues with people wanting to be part of like a fun club. And if it's the GameStop club and the apes, that looked really fun to me.
The only part that offended me was wealthy, successful influencers telling their follower on Twitter and elsewhere — and I won't name any names — but telling their followers on Twitter and elsewhere that buying AMC or buying GameStop was itself a political act.
And maybe some traders made money, but it's not obvious, other than that one or two hedge funds that lost money, that this was some giant strike against elite institutions. And so it bothered me that big time influencers were telling their listeners that buying these stocks was a powerful political act. But I'm curious both of your perspectives, was there a political logic behind it?
Kyla: (28:42)
I can go first and then Lily, I'll pass enough to you, but I mean it's super difficult to figure out what exactly it was or what people were thinking. I think there was a lot of rug pulling, to use that term, people saying, okay, everybody go and buys this. I can sell some of my shares. I think that to the point of like, okay, this is going to be a way to stick it to the man. This is a way of representing politics. This is a way of conveying your beliefs to the broader world. I think that, like this gets into the idea of crypto sort of being religion, right? Like a lot of people treat Bitcoin kind of as religion. And I think that you sort of saw that with AMC and GME and you still sort of do, to Lily’s point around not a cult, like a cult essentially.
Not that religion is always a cult, but there's threads between all of that stuff. And so I think to your point around, like, “why would wealthy influencers say like, Hey, you know, go and buy this? I do think there's this horrible trend that's always existed where people are like, oh, you go and buy this thing. It's essentially a pyramid scheme. Like you go buy this thing and then I'm going to sell it once you buy more and then I'll make money off of you. But I also think that it was this thing where people thought that they could sort of make a difference. And so I think a lot of people probably got wrapped up than that in terms of like what it represents from a political perspective. I don't know. I think it was mostly a money grab though.
Lily: (30:08)
Yeah. I mean, I'd add to that. I mean, look, there probably is a contingent, which, and, you know, excuse my language. I mean, to give an example, you know, the Soviets used to call them ‘useful idiots,’ where there are people who probably did believe that it was this true battle and I'm not trying to, you know, discount what they viewed it as, but fundamentally I've talked to institutions, I've talked to traders and prop traders that day. They made a lot of money off of people. Like realistically speaking, I think maybe you could argue Melvin Capital had a really bad quarter on it, but at the end of the day, most hedge funds as well as prop firms jumped into the mess, made a lot of money off of retail backs primarily. I mean, paying spread. I remember in January, the spreads were abysmal when, you know, trading GME, especially on the options side.
And it was kind of coopted by this contingent of grifters. I mean, we know of some pretty famous ones who basically took this, you know, retail cause célèbre and made it about them. They basically encouraged what was essentially a manic frenzy without regard for, you know, consumer protection, without regard for thinking of people who could lose money off of this. And I do not wish those people well. I think that, you know, that is kind of one of the lowest forms of operation. You know, it isn't to say that there weren't true issues that were amassed by the GME debacle. I think, you know, I was one of the first people to my knowledge on Twitter to break the news that Robinhood had turned off the buy button because I was actually informed by someone in one of the trading groups that I was part of. And I said, this is really bad. I do not understand why they did that. And you know, that is a true issue. But at the end of the day, I don't think that the individuals involved in those decisions were punished in any way. In fact, you could argue that Robinhood had a fantastic quarter due to the GameStop and GME frenzy, and made quite a bit of money off of, again, normal people.
Tracy: (32:23)
So speaking of people taking advantage of retail traders, how do we feel about CEOs and companies themselves tapping into the meme phenomenon? And Kyla, you already mentioned Elon Musk, but, you know, AMC for instance, has done phenomenally well by playing to a certain base and really like leaning into memes and stonks and crypto and all of that, is that the smart thing to do in a market where memes can lead to actual inflows of real money or is that taking advantage of, you know, a, a certain fandom or base?
Kyla: (33:13)
Yeah, I think it's sort of a tough one because theoretically it's just free marketing, right? Like if you try to memeify your stock, you're just doing marketing, but I think the difficult part becomes when you sort of encourage behavior that might not be very good for the people who own your stock. Like, oh, hold no matter what, even if like the company isn't doing very well. And I think that kind of gets into this whole thing where the stock is sort of separate than the actual company itself, like there's the AMC, the company, and then there's AMC the stock and they don't seem to be the same thing. And so I think that, you know, people can do whatever they want with their money, but there is this aspect where you have to be an informed consumer. And I think that CEOs have a responsibility, you to tell people the information both good and bad, and you know, they can lean into the memeification of things because that's just how life is. And Elon Musk doesn't have a PR team for a reason because he theoretically does all his own PR on twitter.com and it seems to work okay. Tesla's the OG meme stock. But I do think that there is a level of responsibility that I wish was, you know, underscored a little bit more sometimes from leaders of companies when they try to become meme stonks.
Lily: (34:35)
Again, I'm gonna be a bit more, I guess, sharp with my criticism here. BEfore I begin, this is my own personal view. I'm not speaking on behalf of, you know, either my employer or anybody else here. We have a long history of laws on consumer protection. We have accredited investor laws, and it's just mindboggling to me that because it trades on the secondary markets, that these CEOs can get away with this. You know, I think realistically there's a line between informing the public and presenting unbiased facts and, you know, doing something like, you know, basically making memes about — I think one that I remember in 2020 was the ‘short shorts’ that Tesla started selling.
And it's just like, you know, look, I'm a 26 year old, I'm aware that there's been periods of froth in the markets, but what are the regulators doing here? You do see basically that small fishes are being prosecuted for pump and dumps because that's pretty much well established to be on the side of ‘not okay’ in the markets. But, you know, it's just impressive to me that you have ETF providers and funds that are more regulated on what they can say to the general public than the CEOs of some of the largest companies on earth.
Joe: (36:14)
I want to pivot a little bit about what the cohort of people who are maybe trading a year ago or started to two years ago are doing now. And of course, Kyla, you're launching a new finance education startup and Lily, you ran for a while this really great Discord page, where there were some extremely sophisticated conversations. I used to like lurk in there and I didn't understand a bunch of it because it was like really smart people talking about options pricing strategy. That was extremely impressive. And so I'm curious, where do you see the people who are still trading? Not the people who have lost, but the people who are still trading, what are they interested in now? And like, what do they wanna learn about? And have they changed how they trade at all?
Lily: (37:14)
I'll just go first. Pretty brief, but I've been out of the woods on the retail side for a couple months. So I couldn't say specifically what's captivated, the retail mindset. I would say that, you know, I do have a good knowledge from individuals still in the space that there is still a pretty dedicated cohort of traders. I think that everybody just assumed that, you know, when the tide washed out with liquidity, from bond yields going up that oh, retail would be destroyed instantly. You know, I'm sure a lot of people lost money. I mean, realistically I've seen portfolios, I've seen the carnage in growth stocks, but I do think that a lot, you know, what makes a difference — and that's always the saying, ‘this time it's different,’ — is the per perennial, you know, usually the top of the market in a lot of cases.
I mean, look, you're still seeing crypto, especially in the private markets, command insane valuations. You're also seeing that we have a new generation of traders who are native to the internet. They're experts at getting new information and news. And you're seeing the advent of tooling that previously, if we're talking 10, 15 years ago, wasn't really available nor financially, you know, within reach of all but the richest retail investors. So you're seeing that with this democratization of information, it isn't to say that retail isn't playing with negative edge still, but you are seeing that it is becoming more and more possible to be competitive in the markets. And you know, there is a recent paper that actually Matt Levine mentioned where, you know, you could see that there was a correlation between retail interests and stock performance. So fundamentally it's hard to argue that retail investors didn't see success in the 2020, 21 period.
A lot of people assumed the tide would wash out just like 1999, 2000. From my own perspective, I am seeing people hanging onto money. I am seeing a lot of people who became nouveau riche and, you know, they are getting more and more sophisticated. You know, my conversations and even my backgrounds started in these trading Discords very much similar to the old days of let's say like a nuclear finance, where you see these dedicated quantitative people start taking their talents from, you know, CS from mathematics, from other fields that demand pretty similar skillsets and start looking at the markets and saying, ‘Hey, why don't I try this?’ And I think that a lot of them will give up eventually. I think the churn rate is extremely high and I've observed that myself. But I do think that this is the market that is gonna birth a new generation of traders and a new generation of funds that will look pretty different than the previous generation.
Kyla: (40:20)
Yeah, I totally agree. And anecdotally I post on TikTok every single day. So going to the throes of the devil, right? And the questions that I get asked and the comments that are left, are completely different than they were about a year ago. People are a little bit more attuned to monetary policy, as I mentioned a little bit earlier, and they're just sort of thinking about the broader financial universe. So like, I don't have as much insight on what traders are doing, but it just seems anecdotally that people have become really interested in — which they have the right to be like, we're all economic entities. And we should all kind of be interested in what's going on economically and in the markets, because it does impact us — nd so I have seen people like really become interested. I get a lot of like really, really good questions.
And to Lily's point about the paper that Matt Levine mentioned, like there's over 21,000 Discord investing servers. And so the idea that, you know, 21,000 servers are just gonna shut down because all of a sudden the Fed's gonna raise rates. Inflation is high, like all that stuff. I don't think that's necessarily going to happen. I do think there's an element of stickiness to this. And people are just genuinely interested in sort of this like big being that is the financial markets. And I think the way that it sort of entered into, because I'm like the cusp of Gen Z. So I'm a zillennial, I guess — the older edge of Gen Z. Ad Gen Z is like the way that they learn is sort of through watching TikTok videos or doing different things like that. And I think that we've had sort of the gamification of finance and that really allows people to become a little bit immersed as well. So I don't think that you see sort of like the same level of frothiness, but I do think that you see people who are sticking around and are just genuinely interested in what the markets are doing.
Lily: (42:09)
I think it's also, I've been more clued into the crypto landscape, especially over the past six, seven months. And you know, it's interesting because it's almost native for their trading mindset to be clued into retail chatter. You know, I think fundamentally if you look at a crypto trading role, obviously there's systematic strategies, but when I'm talking to traders, especially for smaller funds, there's a role now for individuals to essentially just sit on Discord and Telegram all day, whether they're involved in the NFT space, you know, part of me is wondering, I'm like, when you tell me that, I'm like well, this is kind of an anomaly in time and I don't know how transferable those skills will be later. But the other part of me in is like, is this kind of just a paradigm shift where you see that historically retail has been trying to get the crumbs of what the institutional are giving off. And now you're seeing the converse, where you're seeing institutions go on these niche trading Discords just to get some insider information before that, you know, token goes 100X.
Tracy: (43:18)
Yeah. I mean, I've actually written about this before, but if you think about something like crypto, if it's driven purely by sentiment, which it is, and by flows, then actually, you know, the person who's sitting in the Discord chat or the guy who's like sitting in his mother's basement, spending all his time on the internet is probably gonna have a better handle on where that's going than an institutional investor in, you know, a white tower bank or something like that. But that said, one thing that's interesting to me is that, you know, at the height of the meme and phenomenon, people were getting really, really upset. And we mentioned this in the intro, but people were like, ‘oh, this is the end of capitalism. All our markets are gonna stop working. They're making fun of fundamentals and the financial industry,’ and all of that.
But actually it seems like the two groups of traditional finance and the retail investor/crypto, it feels like they're sort of coming together or at least taking bits of each other and incorporating them into their behavior. Because the other thing that's happened this year is you see a lot more crypto people talking about the Fed and what do bond yields mean for Bitcoin? And on WallStreetBets, you see lots of people talking about the Fed and what's gonna happen with interest rates and things like that. So it kind of feels like that body, that group has moved more in the direction of Wall Street.
Kyla: (45:01)
Yeah. I would agree that they, I think there's a knowledge that you kind of have to have a broad understanding, or it's at least good to have a broad understanding of everything that's going on. And I think to Lily’s point earlier about all these different tools that are being developed, you can kind of get a lot of information that was previously only allowed to Wall Street, like there are sites like Quiver Quantitative, which are really valuable. You can get different subscriptions to different news outlets or different data aggregators. And so I think that maybe the two are starting to converge, but I also think the resources and the toolings that they use are starting to converge and that's sort of reducing the information asymmetry that used to exist.
Lily: (45:44)
Yeah. I mean, I think that, like I said, it's really hard to, with a crystal ball, see what the longer term impact will be here. I do think that there is culturally and this could be tied almost to this idea of a failure of capitalism, although this is probably ironically the most capitalist thing that could happen, is that more people have been, you know, clued in, especially with inflation and the growth of wages to income inequality in the country.
And, you know I've kind of, I touched on this briefly last year, but it's kind of worth restating that what you're seeing is this almost nihilistic tendency, especially among those who are younger, who are, you know, less enriched by the traditional system where they're kind of like ‘eff it,’ you know, I'm going to gamble my money here because it is my way to cross the chasm from a diminishing middle class to the land of the rich, you know, you kind of see this, I think someone brought up that this happened in Iran as well, where you saw that a lot of the population started day trading.
And I do think, you know, in one respect, people are getting more informed about the financial markets and economics on average, which could only be beneficial for us as a society. I think that obviously the world at large is dictated by the flow of capital, despite how people wanna believe, you know, it's different, it's never different. And being more informed about how the markets work and how markets interact with governmental policy, international policy is fundamentally important to being successful in life. So I do think that is a benefit. The downside of course, is you're seeing this occur because of an erosion of trust in traditional, you know, intermediaries like the news, like banks, like these basically cornerstones of what we consider a functional society. So I don't know how basically it ends, but you know, it is kind of concerning and sad in a way that this is kind of the ethos that has been adopted, especially by my generation, I guess. I don't know if Kyla is technically a different generation.
Tracy: (48:09)
It’s people kind of treating stocks and crypto like lottery tickets, right? If you think you have that future income growth, well, why not just spend your money on a chance to get it?
Lily: (48:21)
Exactly.
Joe: (48:22)
Well, and also, Tracy, I think about something you've talked a lot about like, you know, you've written a lot about China and the ball of money and like the trading speculation in China, at least for years, seemed to like put the U.S. to shame where you'd have retail day traders and housewives buying like iron nor futures, which basically no retail in the U.S. trades, but it does really feel, if you feel like the economy itself is rigged, that you're never going to be able to buy a home, that income isn't gonna be able to outpace inflation, a burden of student debt, if your perception is that stocks are rigged, then crypto itself might seem like the ultimate strike back.
Lily: (50:19)
I just wanna add here and then I'll pass it over as well to Kyla and Tracy. You know, I recently saw a friend of mine. Who's also of our generation. She's a 24 year old, just got her first job as the designer. And you know, she was telling me when I talked to her, she's like, my dream is really to own a house. And it's really sad in a way that this dream of home ownership has become so much insurmountable to the average American where something — basically a home with a white picket fence and a dog and two kids. It's like, how do you even afford that at this point? America may be better off even still than other nations, which have seen the explosion of real estate prices even more than what we saw over the past two years. And I think that, you know, this may be the fundamental check and the fundamental cost of, you know, quantitative easing that started in a global financial crisis basically 15 years ago. At the end of the day, people are looking at the markets right now as a way to, like I said, skip the chasm where it's like, this is your shot. And you're kind of seeing this, even in the Discord, especially in the discourse of crypto Twitter, where you see this compression of time. Basically Buffett or the traditional value investor, the way that you look at investing, is it a long time horizon? You are less susceptible to the fluctuations and follies of the market if you are investing for 30 years versus for 30 seconds. And I think that because there's this general nihilism and unease, and we've seen this volatility the past year, people are thinking hand to mouth here with the markets. It's basically I have this one shot, I need to invest. Now you're seeing the deterioration of even doing due diligence, not only at the retail level, but also at the venture level when you're seeing the innovation of stuff now like pre-idea investing. So everybody has kind of adopted this ethos. So that time itself is compressed down to years, months, days, and nothing good can come out of that.
Kyla: (52:41)
Yeah. I think we also have this broad problem of economic fragmentation. So I think the leader of the IMF, I don't remember the exact title, came out and was like, yeah, the world is increasingly economically fragmented. And I know Zoltan [Pozsar] has spoken a lot about that, where, you know, sanctions, whether that impacts the reserve currency and how the dollar is going to respond to all that. But I think on an individual level, like we sort of experience that fragmentation and I think a lot of people are trying to sort of get some sort of grip on reality because we keep on having things that it sort of exists in the tail end of the distribution happening like a pandemic, a war, like a lot of things have happened. And I think a lot of people are like, wow, like life is kind of crazy, I better go and figure this stuff out. And the stock market and this like get rich quick narrative, in some essences, the gambling aspect of it, I think are people just trying to like figure that stuff out? Because there isn't that promise of, you know, work 40 years and have a home and have two and a half kids or whatever. That's just not something that is feasible anymore for the average person. And so you almost have to like, to Tracy's point, lean into that lottery ticket of the stock market, because otherwise there's not a lot of other options.
Tracy: (54:00)
What do you think is gonna happen to retail trading over — this is such a broad category — but where do you see retail investing going over the next year or so? Because in some respects it feels like the easy gains are gone in crypto. You know, the idea that you're gonna put like a thousand bucks into Bitcoin and become a millionaire a few years later seems farfetched nowadays. Although maybe you could do it with another point who knows, and then you have the pressure of liquidity tightening, interest rates going up. A lot of the growth stocks seem to have gotten the air kicked out of their tires. Uh, we're recording this the day after Netflix earnings and that is down massively and that was a big sort of pandemic stay at home play. It just feels like there are all these pressures building on the kind of things that are typically popular with retail investors. How do you think that will end up playing out?
Kyla: (55:01)
Yeah, I mean, I'll pass off to Lily but I think that we're gonna see people still will be involved in the market. Like I think the meme, I guess, of long termism, like just stay on the market and you'll be fine for a couple of years, it’ss gonna stick around. But I think like, so we are recording this today after Netflix. II do think that Netflix falling is really interesting because that could be a sign of regime change where one of the FAANGs is going down, right? Like the tech era is potentially sort of deteriorating and a lot of people are just throwing money at tech and that's kind of like, you know, crypto has essentially become the Nasdaq to a certain extent as well. So you're starting to see all these correlations pop up. So I do think that we're gonna see people invest still, but like what they're investing in, I think will be an interesting question and sort of how that PN L plays out over the next 10 years. Will the stock market continue its March upwards? I'm not sure. But that could be interesting. Yeah.
Lily: (56:01)
I think I'm reminded here of, you know, the story of Mark Cuban. Basically he sold Broadcast.com to Yahoo in the late 90s and he was actually paid in Yahoo stock and the reason he was still a billionaire after the tech bubble crashed was he was strategic. He bought puts basically and now he's still quite a billionaire. You know, he invested in the next generation of tech and I think you you're gonna kind of see that basically from whatever the remains of this bubble period is as well. You're going to see that despite the, you know, vitriol of many who have been much longer in the markets, I think a substantial fraction of the nouveau riche will hold their net worth from, you know, this current period. I think they will be the new billionaires that fund the innovation of tomorrow.
I think, from what you've seen in the tech bubble and what happened later, yes, there was a lot of froth. There was Pets.com famously and their IPO. It crashed. A lot of people lost money, but those people who made money and held on funded the next generation of tech companies, which turned into the Googles, the Facebooks, the Netflixes. I guess Apple, Microsoft were already still there. But you're not gonna see this money go away.
I think there's gonna be demand for retail investors, especially those who did make it, for more sophistication, as well as portfolio managers and wealth management solutions, which are really tailored toward what they're interested in and what they believe in. I think that, you know, and I've talked about this even on Twitter, I think there's a lot of people who are gonna have a lot of net worth locked up in something pretty much a illiquid who are looking for these strategic solutions to protect their wealth, to make it last for a long time. I think they're a lot more savvy on how the market works and how cycles work than a lot of people give credit to, and think that this market, if there's savvy individuals, especially in those spaces, can really be capitalized on.
Joe: (58:20)
Kyla, and Lily, I think that's a good spot to leave it. That was absolutely fantastic. I really appreciated getting both of your perspectives on this and that was a great conversation. Thanks to both of you for coming on Odd Lots.
Joe: (59:13)
I thought that was great. It was sort of like unexpectedly poignant in a way that I didn't anticipate.
Tracy: (59:30)
Yeah, I was ready for lots of meme jokes, but it got kind of dark. I mean, so this is also something I've been thinking about. So I feel like the lightest way or the most optimistic way to view the retail trading phenomenon or, you know, the meme investing/stonk thing is as a sort of GoFundMe for companies. So for whatever reason, you like this company, you don't really care about the share price versus the fundamentals you wanna show your support for whatever you think it represents. So you buy into it. At its darkest, I think it's A) prone to manipulation, but B) also goes to this idea of the economic disparity that both Lily and Kyla were talking about, and this idea that people see stocks basically as an escape plan from, you know, a life of economic dreaminess, which is incredibly depressing.
Joe: (01:00:30)
You know, it's interesting, so obviously the origin of this moment being March, 2020, and that was a time people were stuck at home or they were at home, or maybe they were laid off and suddenly they have time. But March, 2020 was a period of existential dread, and people were worried about death and sickness at the time in a way that they weren't expecting. Great Depression levels of anxiety. The stock market had crashed. People were worried about their employment prospects. So it's notable that this sort of like enthusiastic financial nihilism came out of a period of extreme economic uncertainty.
Tracy: (01:01:28)
Totally. And lots of people just rethinking their lives versus the kind of life that they would like to have. This went to a really depressing place. Shall we leave it there?
Joe: (01:01:40)
Yeah. Let's leave it there. No. I just thought, you know, the other thing, and obviously it’s negative, but there are some really interesting positives about this idea of equalization. There’s the proliferation of newsletters, the proliferation of quantum computing power that used to be something that only people who had access to mainframe at a major bank would have. So it’s not all bad. And there are some really interesting developments, as Kyla pointed out, people are getting deeper, they're deepening their financial interests and wanting to learn abouthow monetary policy works and wanting to learn about how the fundamentals of analysis works. So it’s not all negative.
Tracy: (01:02:34)
Democratization of finance is a terribly overused and misused term. But I think it might actually apply in this case, the idea that you're getting more people into this realm who are learning about it is somewhat heartening, I guess as long as they're able to sort of...
Joe: (01:02:56)
Well, and then the other thing I'll just add is, you know, Lily made this point about crypto specifically you as well, which is that in crypto, the chat is the signal. And so it's not even a matter of like, can you get access to the same information as the pros? It's like, if you're there chatting, you have the signals, you have what the pros want. And so you there is this sort of like inversion of the typical relationship. And again, I don't know where like Have value. It's like I don't know exactly where it's going with informationally a very different market than what people were used to before.
Tracy: (01:03:57)
Well, this is the old flows versus pros argument, which is that if you have an asset that is driven purely by flows like a meme stock, or a cryptocurrency or a token of some sort, then really the guy who's spending all his time on the internet who's, you know, eyeball deep in memes and on the Discord chats is gonna have a much better handle on that sort of sentiment than someone who's not spending all that time. So yeah, in that respect, it is sort of a reversion of power from Wall Street to Main Street.
Joe: (01:04:30)
So it's not all bad. There are some exciting things happening in the aftermath of the meme stock mania. Let’s leave it there.
You can follow Lily Francus on Twitter at @nope_its_lily and Kyla Scanlon at @kylascan.