SIO277: The GameStop Fiasco, with Phil Ferguson

Transcript

This transcript was generated automatically and may contain errors — the audio is the record.

0:00:29 Thomas: Hello, and welcome to Serious Inquiries Only, episode 277. I am Thomas, and I am joined by a guest, Phil Ferguson. How you doing?

0:00:38 Phil: I am doing better than I deserve, I guess. I'm going to steal that from Dave Ramsey.

0:00:42 Thomas: Oh, that's... I'm not the biggest Dave Ramsey fan, but... Okay, good.

0:00:46 Phil: No one should be. That's the problem.

0:00:50 Thomas: Yeah, it's maybe not don't listen to Dave Ramsey he's not great anyway yeah um we are actually here well everybody already knows what we're here to talk about let's face it this is The only thing that could take over Bernie memes, like the only things that could take control of the internet net back from Bernie memes, is this GameStop fiasco.

0:00:53 Phil: Yeah, that's a tool and it can be used poorly or it can be used very well. Yeah.

0:01:13 Phil: What do they call stock memes now? So that's a whole new invention.

0:01:15 Thomas: Yeah, stonks.

0:01:19 Phil: Stocks.

0:01:21 Thomas: You, of course, have the Phil Ferguson show. You're at skeptic money on Twitter and already people were asking if we could do something on this topic.

0:01:28 Phil: I saw that.

0:01:30 Thomas: And I was like, good news. We already are because I have a lot of thoughts. I have an account. I did go to business school. I was an accountant. I took finance as a part of my curriculum, but I'm obviously not an expert and it's been 15 years, so I'm rusty. But I know enough to know that a lot of people are wrong on the internet, but it's hard because dipping into that conversation, it's such a big topic and everyone has their different angle that they're going at it with that anything you say, you get cast as, you know, you're either one side or the other, like you're pro hedge fund. It's a mess. So rather than do all that, why don't we just first start with breaking down what's happening. So start from the beginning. Good luck.

0:02:03 Phil: Yeah. Yep. Well, as You said, "My podcast is The Phil Ferguson Show. I've already talked about this topic just a couple of days ago, and I've already found out that a few of the things that I said there were wrong." So, you know, I can learn too. So I'm going to go real basic here, and we're, first thing I'm going to start with is everybody calm the fuck down, okay? Because the posts that I've seen on my wall and on your wall, people are nuts. It's like, I made the comparison, it's trying to explain how a pizzeria works to a person in QAnon Yeah.

0:02:48 Thomas: I do understand that. I want. So I'm, I think a lot of this is that. And again, we haven't even started explaining it. But since you brought it up, I just want to say this first. First. I get that, you know, obviously so much of this comes from a real feeling of being fed up with the status quo. And I don't know where you're coming from, Phil. I'm certainly, you know, unabashedly progressive. I agree with Elizabeth Warren and AOC on all this stuff. And like, I getthat. Like, I absolutely get that. And a lot of people wanted to fuck over a hedge fund and are happy about it. I also get that and that's fine with me. I mean, maybe you'll change my mind or something, but

0:02:57 Phil: Yeah yeah but But I normally tell, I normally tell people that I'm progressive enough that I think Barack Obama was the best Republican president we've had in 50 years. So let's go to GameStop. I'm going to assume everybody knows there's a store called GameStop, and they sell new games and gaming equipment and used games. And it used to be a place where you could go and buy that brand new cartridge or disc, and you you could go browse through games that you're like, "Oh my God, I haven't played that in 20 years." And you buy it for two or $3. So, you okay. Retail is a tough business, and the world is changing in such a way that GameStop looks like it's going to be the next Radio Shack, where everything they sell is now quicker and easier to get online. Almost all new new games get downloaded. Almost all new game systems get bought in a big box store, or for those like me who don't want to go outdoors anymore to meet other humans, from Amazon or some kind of place like that.

0:03:29 Thomas: Yeah,

0:04:28 Phil: And the shit just shows up on your front door, front porch from a guy with brown shorts on. And so all of this added together in GameStop is hurting. They're losing a lot of money. They've closed a lot of stores in the last year or two. And last year, and I can't remember the guy's name off the top of my head. It's not really relevant to the story, but a guy who helped found a company called Chewy and Chewy specializes in pet products.

I know because we've had boxes of litter, 50 pound box of litter show up at our house, and cat food and dog food and toys, toys and leashes, anything you ever want to have to do with an animal, you can order almost all of it on Chewy. You can set up automatic things. And his hope was that he could take GameStop and somehow change it enough that, either with dramatically limited stores, maybe a much greater online presence, they could continue to sell games. And he really wanted to establish a great, great place where you could go and try a game. You could go to GameStop like you used to be able to and test out a brand new game on a machine virtually online, and then buy it from GameStop.

0:05:00 Thomas: I

0:05:47 Phil: And so that's created a... He bought enough of the company that he got three seats on the board of directors. That's something you get when you have ownership of a company.

0:05:53 Thomas: Heard it was what, like 12.9% of the company or something like that. Uh, yeah,

0:05:58 Phil: Yeah, I don't know the number, but to get three seats, it would definitely be more than 10%. And if you're going going to play, you have to go over 10% because there's a different SEC regulation for how you're registered and what you haveto declare. So if you're going to go in, you want to go in over 10%. But 12% could be okay. And maybe the other board members said, hey, we don't know what the fuck we're doing anyway. So bring three people. And so there was optimism, new optimism that GameStop was going to become a new thing, is going to morph like a caterpillar into a a butterfly.

0:06:02 Thomas: Yeah.

0:06:29 Thomas: Which I think is silly, but fine. They're going to try. I get it.

0:06:33 Phil: Yeah, yeah, it's possible. I mean, people thought they were going to bring back MySpace. So sometimes things happen, sometimes they don't. And the stock drifted up from its lows of $3 and $4 to the teens and around $20. Well, there are hedge funds. Now, I am no big fan of hedge funds, matter of fact, if listeners want to hear, they can go back to my show three, four, eight, back in July of last year, where I had the author Rosemary Batty and her and a co-author wrote an entire book about private equity and hedge funds and how they fuck up America.

0:07:11 Thomas: Hmm. I haven't read that. I'll have to check it out.

0:07:13 Phil: And these companies have, yeah, they, uh, it's the book's called private. I think it's called Private Equity.

0:07:19 Thomas: Just to go for a basic question, how would you define a hedge fund exactly? What makes up a hedge fun?

0:07:21 Phil: Uh So for me there's multiple things about it that really, really bother me, uh, so a hedge fund is usually set up by a handful of very wealthy people, and they will put in what's called seed money, and so the goal of a hedge, hedge fund might be to squirrel up a billion dollars so that they can start buying things, so they can have access to buying full companies that you and I could never do as a investor.

0:07:50 Thomas: Yeah. I've only got like half a billion is the problem. It's a paltry sum. It makes it hard to do anything.

0:07:57 Phil: That's right, they might put only 5% of that money down. And then what they do is they go out and they get partners or investors, people who invest in the hedge fund. And they put so little money down, but yet they maintain control of all of this money. Then they take this money and they try to do clever things with it that can dramatically increase the value. And they promise to be so good that all of the new investors have to pay 2% a year plus 20% of whatever is made as profit. So if the hedge fund makes 2% or 10% in one year, you would pay 2% as your ongoing 2% fee and another 2% of your 4% now total because they did really well.

0:08:52 Phil: If they make 20%, you would pay 2%, plus another 4%, 6%. We get the idea. Things that they might do is go buy a company, company, probably the most well-known example in the last couple of decades, Kmart. A hedge fund went and bought Kmart, and what they did, and they do this a lot with retail companies, is they split Kmart up into two different companies. One of them was Kmart Retail. The other one was Kmart Real Estate. It turns out that Kmart owned almost every piece of land that a Kmart store sat on. It often owned the entire parking lot and sometimes even the land around it that was or was not yet developed with a McDonald's or a Wendy's or some independent standalone store.

0:09:41 Phil: And then the retail company started charging higher and higher rental rates to the Kmart stores that previously paid no rent at all, which is part of the model of how they could be so affordable. And Kmart eventually went bankrupt. Came out retail, went completely bankrupt, and they screwed people out of debts, pensions, everybody they owed money to. And they walked away And the hedge fund maintained ownership of all of the land. And so they made a considerably large amount of money while screwing an endless long list of people and debtors and costing tens of thousands of people their jobs.

0:09:59 Thomas: Yeah. Yeah, absolutely. And fuck hedge funds. And this is similar to when we covered what, you know, Mnookin did with Ceres, right? It's like you take the.

0:10:32 Phil: Well, okay. So you may not know, but the guy, Mnuchin, who did Sears, he was the guy in Kmart as well. So after he got done screwing Kmart and ripping it all apart, they issued new stock for Kmart, restructured it. And so there were a lot of people who thought, oh, my Kmart stock has come back from the dead and it's worth something now. No, the Kmart stock you owned last year is worthless. Zero. The new Kmart stock, a new issue, a new IPO for Kmart raised billions and billions of dollars. And they took that and they figured, hey, we've made so much money with one failing retailer.

Let's buy another one. So Kmart bought Sears, then changed its name to Sears Holding and started breaking apart Sears the same way it had just done with Kmart. And he sold Craftsman. They sold sold Kenmore. They sold all the brands they could. They sold the Discover card. They started pulling all the things that are valuable out of Sears, but leaving all the debt and all the money that's owed behind with Sears. And then they bankrupted Sears and the 50,000 employees were at risk of losing their pensions for the entire rest of their life when they retire.

And that had to go to the Pension Benefit Guarantee corporation, which is a semi-quasi business of the United States government that makes sure your pension doesn't go to zero, but you might only get 60 cents on the dollar. Anyway, so clearly no fan of these types of businesses.

0:11:17 Thomas: Yeah, I Yeah, that is absolutely horrifying, predatory shit, and fuck hedge funds even more, if I didn't already say that enough. I mean, it's awful, and that's something that we certainly, on opening arguments, we've covered, and we hope that this new administration can work to stop stuff like that. Now, this is where you're going to have to correct me if I'm wrong. I think you can draw a contrast between something like that, which is fucking awful, and taking a short position on a stock, with some caveats. That's, and um, this is one thing that I just, you know, I just wanted to correct. It's hard because I saw a lot of people with misconceptions and I just wanted to say that like, there's nothing intrinsically wrong about shorting a stock. Some people, in my opinion, Phil, you can let me know what you think, but, uh, you Know, this hedge fund took a large short position on a stock now. If that's all they did, that's one thing.

0:12:52 Thomas: If, if you're, if, you KNOW, people are out there alleging that they're doing other stuff to try to manipulate the stock price, they're trying to coordinate with other hedge funds to, you know, reduce demand and GameStop, whatever that might be, that could totally be wrong. I haven't seen evidence of that. I've seen allegations of it. The best evidence I saw was someone said, like, this guy in his newsletter said that GameStop was too high. And it's like, yeah, okay, that's not really anything. I mean, anyone can say something in a newsletter about a stock that they think is too high? So, all that aside, Phil, I guess we should first just start with the definition of what shorting stock is.

0:13:28 Phil: Yeah. Yeah, and you can do that or I can do that. What do you want?

0:13:30 Thomas: Yeah. I mean, essentially you borrow shares that you don't really have, but you essentially usually borrow them from like what the brokerage you're using or whatever, you know, like whatever, however you buy and Sell and trade your stocks these days and they sell them. And then your expectation is that the if the stock price is going to go down, what what you think you're going to do, what the plan is, if you're trying to be a trader who's going to make, you know, make money on this transaction is you buy the stock back later when the price is lower and all you do is return the stock and therefore you you essentially pocket the profit.

And with short selling, it's usually a leveraged position. And that's something that I'm going to be, you know, a little more rusty on, but maybe you can, you can explain, but essentially it's like when you have the equity in your house and you leverage that to, you know, it, it actually very similar to, to selling a house. I think, in um, that you're, you, you don't own your entire house. You haven't paid off your whole house, you know, your whole mortgage.

0:13:42 Phil: Yeah.

0:14:30 Thomas: And yet if you sell it, once you pay off the loan, you get all that profit. It's actually very similar to that in my opinion. How did I do on short selling?

0:14:39 Phil: I think it was delightful. The one thing that I would do just to make it clear that there's a lot of components to the system and you didn't really go into that part. And that's cool because you gave a really good summary of how a short might work. And so there's an investor. Cool. There's an investigator that can have an account. Awesome. They have that account somewhere that could be a bank. It could be Merrill Lynch. It could be at Robinhood.

0:15:07 Thomas: Robinhood. Yeah.

0:15:07 Phil: Yeah, exactly. Thank you. You read right into that. And that person is normally acting as a custodian, hopefully a qualified custodial, which is a higher legal standard, but they may not be able to do everything you want Robinhood because a lot of that is done through a clearing house where the actual trades take place. And so that clearing house might be Pershing, it might be Fidelity, all kinds of other companies. The one that Robinhood uses is a concern to me because they pay Robinhood for the process of clearing all their trades. And you might think, that sounds like work.

0:15:53 Phil: Why would they pay to do somebody's work? They do that because they might have a fraction of a second to understand and collect all of that data and use it themselves before they actually clear the trade. And so part of this is driven by people wanting to get stuff for free that is not free. There's costs involved in executing trade and tracking it and reporting all the data and information, but people want it for free. So free has to be covered somewhere that you don't see. You're still paying for it. You just don't know it. That's one thing in my mind. So when you want to short a stock, if you're at a company or a brokerage firm that has shares of stock, you could borrow one from them or a hundred.

0:16:42 Phil: And you say, okay, you have a hundred shares. Give me those hundred shares. I will give you the money for them. They're currently at, let's say $30 a piece. Lease, a hundred of them would be $3,000. And as you mentioned, you might be able to do this on leverage where you don't borrow a hundred shares, but you borrow a thousand. But let's just keep it simple. You borrow a 100 shares for $3,000 and you go sell them on the market for 30 bucks. And you've now sold the shares and you promised the brokerage firm that in 30 days or or 60 days or 90 days or less, you will pay them back. And your hope is that you sold shares that you borrowed for $30 and hopefully at some future point in time, you can buy them for 12.

0:17:29 Thomas: I think, correct me if I'm wrong, I think just the fact that you're borrowing the stocks could put you in a leverage position because it's like when you've bought, so you're not borrowing the a hundred stocks and then forfeiting over the equivalent money for that. You know, like the factthat you're leveraged is you probably have to have some amount of money that you're good for within, you know, in your relationship with the brokerage.

0:17:31 Phil: Yeah. Right, and it depends on who is doing the borrowing. So if I borrow 100 shares that are worth $30 a piece, as a small fry, nobody or somebody with bad credit, they're gonna say, no, you have to give us all 3000 upfront, but a person with, yeah.

0:17:55 Thomas: Yeah. Yeah, and so the leveraging comes in like, you Know, if you have good credit, or however the relationship works, you might only have to put up a certain amount of money, 100 bucks or whatever, it might be some fraction of it in order to borrow the larger amount of shares. But similar to when you, you know sell your house, you you can keep all that profit if you somehow are successful with it. And so the other downside that I'm sure you're about to get to too, is your potential for losses is infinite as they keep saying.

0:18:34 Phil: And the other thing to keep in mind is because someone would say, why would I lend you shares? Well, because I'm paying you an interest. So I don't, yeah,

0:18:41 Thomas: Yeah. That's the part. I know I had someone, it's so funny. It's so hard because I know everyone's in different places on this. Some people are hearing what we're saying and they're like, yeah, you idiots, we know all this. And other people are like, oh, I've never thought about this. It's hard because when we're commenting online, oftentimes we're, you or I, I won't speak for you, but I was just speaking to a subset of people I I saw that were very, very wrong about short selling and what it is and what it involves. And then, you know, it's hard because people took that to mean I was talking about the entire, you know red subreddit of wall street bets or something.

0:18:52 Phil: It is.

0:19:14 Phil: Yeah.

0:19:14 Thomas: So the only reason I brought it up is someone was like, why would someone do this? Why would someone lend you shares to blah, blah. And I was like yeah, that's the part that makes the most sense of all of this. That's the point you want to be. You want to in the position where you're just lending some shares taking on no no risk, and charging interest. That's some nice, easy, risk-free, for the most part, income.

0:19:31 Phil: Well, of course. Yeah, yeah exactly. You hedged your bet there just like they do that. You know, when I lend You these $3,000 of shares I might ask for 3,000, I might ask for some smaller amount and there's regulations and rules on all of this and what the limits are. But not only do you have to give me $3,000 worth of shares back, or at least 300 units of shares, 300 shares back. You have to pay two and a half percent interest on your short-term loan for 60 days.

0:19:34 Thomas: Yeah. Right. Right.

0:20:03 Phil: And so you as a short seller, so you have, not only Do you have have to be right in the direction of the stock that it goes down. You have to be right big enough to cover the pain and hassle and the interest that you paid on the loan. And all of that has to happen within the certain number of days that your contract is for, because if it goes down to $3 five days after your contract expired, it doesn't fucking matter.

0:20:17 Thomas: Yeah. Right. Oh, really? Oh, there's that part of it. Oh, so it could dip all the way down. That's something I forgot. Now that you say it, that rings a bell. So the timing, I thought that was all kind of nebulous and optional and dependent on your relationship with the brokerage. Am I wrong? Is it more consistent and

0:20:32 Phil: Yeah. Yeah, yeah.

0:20:48 Phil: Almost always always, there's a contract that includes what the interest is, what you're paying, what you have to pay back, when do you have pay it back, all those things, because I don't want to give you an open-ended loan that you can pay back in 100 years.

0:20:56 Thomas: The timing of it? Yeah. Well, hypothetically, I know this is getting a little complicated, but let's say you had the timing of the contract that was, you know, 30 days or 60 days and the stock has just dipped, you know, a ton right now. Could you, if you had the means, could you just buy back the stock separately like at that moment and lock in the gains?

0:21:05 Phil: And I yeah.

0:21:22 Phil: I'm not aware of any short contract that would prohibit you, and again, I don't know everything, that would forbid you from doing the execution early. So if you buy the shares for 30 and the next day they're $5, but your contract is for 90 days, you could say, why in fuck would I wait 89 more days?

0:21:28 Thomas: Yeah, yeah, yeah. Just buy buy them and sit on it yourself. Even if you can't return them for the 90 days or whatever.

0:21:41 Phil: This shit's worth, right? Well, yeah, you can always do that even if there was that limit, but you would return them, give them back, get your money back, possibly reduce the amount of interest you have to pay. You pocket the money and you go to the next gamble. I mean, trade, whatever. Whatever.

0:21:57 Thomas: Yeah, it is. It has absolutely is gambling. I think that's, and you know, you, you I don't know where you're coming from on this, but this, this is gambling short.

0:22:02 Phil: Well, yeah. And the problem can be that the most you can make is if you put in $3,000 and the stock goes to zero, you give back the shares at $0 and you get your $3.000 back. So the mostyou can make as a hundred percent. So that's the limit. So there's an upside limit, but there is not a downside limit.

0:22:27 Thomas: Yeah, there is an upside limit, but it is a hundred percent of your leverage position. So like, if you are somebody who let's say you have great credit and, and the, whatever your brokerage allows you to borrow a lot lot more than maybe you have the cashflow for, like you, you could turn that leverage into quite a hefty profit, even though you're right. It is capped, but like, um, you know, it's, it, okay.

0:22:47 Phil: Yeah. I don't know what the leverage amount is. So let's just say it's two, because I'm pretty sure it's bigger than that. But in that case, you get $3,000 worth of stock for $1,500. When the stock goes to zero, you hand the stock back in, they give you $3.000. So because of leverage, you're absolutely right. If you're leveraged two to one, it's no longer 100% profit, it is 200% profit with a leverage. But it

0:23:13 Thomas: And when we're talking about a hedge fund that has billions of dollars, I mean, it.

0:23:18 Phil: Becomes real money.

0:23:19 Thomas: Yeah. Yeah. It's, uh, it'S something that you or I could do for fun if we wanted to gamble, um, which I can't remember if I've actually shorted a stock or just done a, uh what a put or whatever, you know, like I back in my 20s, I did some of this just for fun and I gained like $10,000 and then promptly lost it and was like, well, I'm done with that.

0:23:31 Phil: Yeah.

0:23:40 Thomas: And so I don't do that anymore.

0:23:40 Phil: And let me wrap up this theoretical short, and I want to talk about some probabilities. But if you sell the shares at $30 and they go to $60 and your contract ends, you now are compelled to pay $60 for the stock and then give them back to the company. So you spent $6,000 on the $3,000 you originally invested and you lost $6,000 in total, or actually you've lost 3,000, you've lost 100%. But if the stock goes to $300, from $30 to $30, you would have to pay $30K. So now you can lose 10 times the amount you originally bet. And the trick is there's no upper limit on the amount of money you can lose.

0:23:51 Thomas: Yeah.

0:24:12 Thomas: Yeah, you can lose so much. Yeah? Yeah.

0:24:31 Phil: Normal stock purchase is the opposite. There's no limit on how much you could make a la Tesla stock. And there is a limit on how muchyou can lose, which is 100%. So a short purchase has higher expenses and a higher risk reward profile. So you

0:24:37 Thomas: Right. Right? Mm-hmm. I think it's I think it's worth saying this is also true of a long position. You know, people talk about shorting a stock as though that's the only thing. You can also do the same thing, but with a long position. You can do this. You can say, wow, I think GameStopper, I wouldn't recommend it. I think some other company is dramatically undervalued. I'm going to do the samething in reverse, right?

0:25:06 Phil: Could, and your limit to loss without leverage is 100%, but your limited returns or gains is unlimited. I mean, so the potential you could make almost theoretically an infinite amount of money. So I think long is the way to go. I don't ever do shorts and That may actually cause me to not know some little pieces. So please forgive me about that in advance. That's not my world, that's shorts. Now where it becomes a big problem and how this Reddit community started started to engage is that if you go out and buy, or if you get a hundred friends to go buy shares of GameStop, can become very clear to an organization hedge fund that has shorted a $30 stock that the price is never going to go below 30. It's just not going to fucking happen in the timeframe that you have left to execute your contract. So you have a couple of options. One, you have to choice. I hate to use the word options because it has other meanings, you have a couple of choices. One is to let it ride and see how much you're going to lose eventually.

0:25:10 Thomas: Mm-hmm. Mm-huh.

0:25:21 Thomas: Yeah. Right.

0:26:12 Phil: The other is you can go out on the street early, like we talked about before, and the price goes from 30 to 50 to 60 to 70. And you say, holy fuck, I am going to get wiped out. And you go on the market and you buy the shares you need to return at $60 or $70. And and you've lost a ton of money, but you're now out of the game. So a lot of hedge funds and a lot of sophisticated investors can do multiple different things to block that infinite loss. So they might have a trigger set that once they've lost a certain amount of money they will automatically buy the shares on the market. So they've created a system to limit their losses or they have bought calls, which you were hinting to where they have bought the right, the option to buy the shares at $70 at some point in the future from somebody else.

0:27:09 Thomas: Right. So you can essentially limit the amount you could lose.

0:27:13 Phil: Right. So you can play both sides of the game. So when Reddit is doing what they're doing, thinking that they can completely wipe out companies, hedge fund companies it's possible if they weren't protected correctly um yes

0:27:28 Thomas: Right. Well, the other part of this is, and again, correct me if I'm wrong, but along the, like, Let's say you're somewhere in that 60-day contract, maybe you're day 10, maybe or whatever, you're in the middle of it, and the price has gone up a lot. If you are in a leveraged position, then the brokerage can then ask you for more? They're like, the price is so high, you have to put in more money in your account, essentially, put more collateral. Yeah, go ahead.

0:27:47 Phil: Yes anytime anytime you're Leveraged there is a maximum leverage ratio that the lender will allow you, long or short. And so if they've leveraged you two to one and they say when you get to four to one, you got to cough up more money. So in our example, where you got $3,000 in stock and you put $1,500 down, when that stock on the market is worth $6,000, the lender says, "Hey, wait a minute, you only put $1,500 down. It's now worth $5,000. Your ratio is too low. You have to put in more money right now, today." And often companies will have the ability in the contract that you signed or agreed to that they can force close your position.

0:28:40 Thomas: Yeah.

0:28:41 Phil: And so if you're not a sophisticated person and you have a short, you may find out that you've lost all this money and you're thinking to yourself, that's okay, it's a little blip. The price will go back down later and I'll have an opportunity within my 60 days to make money on this deal. And the broker calls you and says, you've got to put this money in now. You can add cash. You can do a wire transfer. For, you can sell other assets that you own within that account. Or if you go, I just don't have the money and the broker goes, fine, we'll fucking cut you off. And they force sell your positions and now you owe them money period.

0:29:18 Phil: And well, the short squeeze comes in from you being smart enough to say, Hey, I sold all these at 30. It's now worth 60. I don't want to experience an infinite loss. I limit myself to 100% loss and I go out on the market and I start buying up shares. However, if many people have shorts, and this is one of the things that this stock was the number one highly most shorted stock available in the United States of America. So when you go to buy shares, there might not only be a limited supply, but there might be a mad rush of other idiots trying to cover their shorts. And so everybody is now rushing into buy and you think you're going to cover yourself at 60. And then you put in a trade and it doesn't clear. So you go for 70. It doesn't clear. You go for a hundred. It Doesn't clear you go for 200. And now you can finally buy the shares because it's just a simple supply and demand thing. There's only so many shares and

0:29:18 Thomas: And so that's where the short squeeze comes in, right?

0:29:34 Thomas: Yeah.

0:30:21 Thomas: Yeah. Yeah, but

0:30:21 Phil: You're, but, but if those companies, it Can, and if you, you had options. So for, you could get a short and you pay the cost to rent the shares, and you think you're going to make this much money if the stock goes down. But at the same time that you do this short, you also do a call option, a purchase option, where you say, okay, if the stock happens to explode to 60 bucks, I'm going to pay $1.50 per share in advance to somebody else that gives me the right to buy all of their shares for 60 bucks. The person that owns the stock at $30 says that $60 price is never going to fucking happen. So I get to hold my shares plus make $1.50 for every share. So they'll write a contract, you pay them the buck 50. So you have an exit strategy before you even go short.

0:30:22 Thomas: They can be traded back and forth.

0:31:11 Phil: And a lot of sophisticated investors are going to have those protections built in. So when I heard that this company lost, you know, $2 billion, $3 billion, dollars, I, for the life of me, can't figure out how that's possible because at the time they were probably buying the shorts, the entire market cap of GameStop was a billion dollars. And so if you lost a hundred percent, you'd have to come up with another billion if you bought every share and every share was not even available, as you cleverly pointed out on your Facebook post about about the float. Because a lot of shares aren't available for trade for whatever reasons. And I don't want to get into that.

0:31:52 Thomas: Yeah, it could be the company owns them and they're restricted or people. Yeah, that kind of thing.

0:31:55 Phil: Yeah. So even if every share was available and it looks like it was 40%, the company was worth a billion. If you bought every share on the market, it's 400 million. If you sold them at a loss of 100%, you have to come up with another 400 million, there's no way that you lost billions of dollars. So I think what happened and why a couple of these hedge funds lost billions of dollars is that they had other short options, other short positions on other stocks, and all of them are going bad for them.

0:32:27 Thomas: Well, I thought it was just the fact that we, I mean, we already talked about the infinite loss possibility. I mean if the stock price went up 1,800%, hmm, yeah,

0:32:28 Phil: So yeah, but they would have had insurance. They would have a call. They would have something to protect them. They're not going to try to make 20 or 30%, but allow themselves to lose an infinite amount of money. It's just not going going to happen. That's a mistake that a brand new person says, okay, I'll buy this short and they put a thousand dollars down. And then the next thing they know, their thousand is gone and they owe 2000 more dollars that they don't have. And they get fucking wiped out.

0:32:50 Thomas: Right, right.

0:33:06 Phil: These guys are smarter than that. They can still fuck up and you can still manipulate the system, which is what is done. Now, the additional part beyond the short squeeze, and you may or may not know about this is called the gamma squeeze.

0:33:20 Thomas: This I don't know. Yeah, please teach me what a gamma squeeze is.

0:33:22 Phil: Okay. And So the gamma squeeze and what a lot of these Redditors did is they took it to the next level. So instead of me going buying stock at 30 or 40 or 50 and putting pumping up the price, what I do is I go out and I say, hey, I want to buy a call for a hundred shares and you want to get a price that's what they call out of the money. So you say, I'll buy, I'm going buy a hundred shares or I want the option to buy a 100 shares at $100 a share.

0:33:58 Phil: And so someone might say, why would you want to do that? Because if you think the price is going to go to $200, if you have a contract that allows you to buy at $200 you can make a lot of money but you don't even have to buy the stocks right now. All you have to do is maybe put 10% down as a fee to have this contract. And the person selling you the contract at the time they sold the contract is thinking to themselves, well, there's no fucking way this stock is going to go to $100. We're just going to scoop money off this dumb ass who wants to buy the option of buying the stock if it's over $100, it's never going to be over $10. So we'll just pick up this free money. And this is a lot like some of the stuff that happened in the movie, the big short, which I would recommend to everybody, not just because it's financially accurate. It's a good fucking movie.

0:34:39 Thomas: I love that movie and the book. Yeah, yeah.

0:34:46 Phil: So when Now, the person that sells you that short, theoretically, would be another person who owns the shares and wants to sell a short or an option. But when there's a limited supply of the stock, there's no one to write a contract to take your money to give you the option. And this is where comes in the nefarious, evil, believed to be evil market makers. Every single stock that is traded on the U.S. stock market, maybe with the exception of pink sheets, but I don't even think it's an exception there. There is somebody that's called a market maker. Most stocks have a couple of market makers and really big stocks may have many market makers. And so what they do is they step up and they say, hey, you want to buy the opportunity to buy this stock that's trading for $30 for $100, and everyone thinks you're nuts and doesn't want to take your your money, will take your money for the purpose of creating liquidity within the market. And so they will write the contract to allow you to buy these shares if the price gets crazy.

0:35:54 Phil: Generally, when that activity is small in relationship to the percentage of shares that are available, the market maker might write that contract naked because they're doing a lot of these and they don't own all the stocks, and sometimes not even any of the stocks. That

0:36:10 Thomas: There isn't regulation about that? I mean, that is something that, yeah.

0:36:13 Phil: There is. And I'm at the edge of my knowledge, so I don't want to guess what the holding requirements are. But when a stock starts to get crazy, what they say is, okay, you want to put down $1,000 for the opportunity to buy a stock that's currently trading at $30. You want to be able to buy it at $100 because you're nuts. Okay, we're going to take your $1,000 fee to write this contract. And you know what? We're just going to cover our own asses and we're going to go out and buy the thousand stocks. Because if it goes to $200, we just hand them over to you. We lost on the upside, but we made $100 plus the $100 per share plus the the $1,000 fee that we charged you at the beginning. And the market maker's goal is not to make money.

0:37:03 Phil: It's to provide liquidity, but they have to generally make enough money to cover the effort and the cost of creating liquidity.

0:37:11 Thomas: So this is definitely out of my depth now. Who are these market makers? What is that? Who is that entity?

0:37:15 Phil: Well, it can be like Merrill Lynch, Fidelity. It's all the big names you know in the brokerage services industry. One of the people who is not a market maker is Robinhood.

0:37:18 Thomas: Huh.

0:37:27 Thomas: Robinhood, yeah, okay.

0:37:29 Phil: Right, so Robinhood turns over all these orders to, I think they're using a company, Citadel or Webull or something like that, to clear all these trades, and they are a market maker for this stock, or somebody else is a marketmaker for the stock, and they have to do all the processing and open new accounts and find stock to cover, and how many shares do they want to have, do they, they want to have 100% coverage or 10% coverage. And at some point, this causes a gamma squeeze because you, as an individual investor, you're not just pushing up the price by paying more and more and more for the stock. You're pushing up, at a highly leveraged way, the demand for the shares because you don't have enough money to buy a hundred shares.

0:38:20 Phil: So you bought an option to buy those 100 shares at a ridiculous price. And at some point, the market maker says, wait a minute, we may have to cover the other side of this trade and we're going to get fucked. So the marketmaker goes out and buys 100 shares on the market. So I'm not dependent on a lot of small people buying 100 shares. A lot of small people can cough up $1,000 and compel the market maker to go buy 100 shares, and so you have the short squeeze and then you have the gamma squeeze where the market makers.

0:38:51 Thomas: Yeah, I'm going to, let's, I feel like this has been really complicated, and let's Try to, which, thank you for that, but we got to try to make sure we brought everybody along. Long. I'll try to summarize in a layperson way. The short squeeze is about, for essentially, now I've seen it described both both ways, is a short squeeze merely what's happening when the price has gone up and too many people have short positions. And so therefore they all have to buy the stock to cover their short positions or whatever, or different people. But is it can it also be a verb? Like, is a short squeeze something that the Reddit sub thread is trying to

0:38:55 Phil: Yeah, that's correct.

0:39:32 Phil: Well, in our society, we make everything a verb. Now it's like a English and I'm bad at English. So it means I made grammar mistakes or something, but yeah. So right.

0:39:37 Thomas: Do? Like. Yeah, they're trying to create a short, whereas, OK, so the gamma squeeze isn't about forcing it's about just putting it's really complicated. I'm just trying to wrap my head around. It's about putting pressure on just the market for shares, like just making it so that that everybody you're buying, you know, whatever positions you can, whatever options positions you can rather, so that there's just this squeeze on the fact that people need shares, like different entities need these shares to cover all this different stuff. And so therefore that, that wreaks havoc. And, and so what does that do exactly? Does it just drive the price up further?

0:40:09 Phil: Absolutely. It just drives the price even higher. It's like throwing gasoline on a fire under the right circumstances. Normally Normally the system works in a certain way, but normally there aren't 10,000 people who have money to burn apparently by buying options to buy a stock at a ridiculously high price.

0:40:16 Thomas: Right. Okay. Yeah. I think it's hundreds of thousands or maybe millions. Now the subreddit it swelled 3 million additional members this week.

0:40:34 Phil: It could be, well, I'm assuming a small part of them actually have the stones and The money to go do this because the problem is that if you buy this thousand dollar option and and the stock hits that price, you could go buy the stock, but you don't have the money. Well, then you fail to execute your option and your money is gone. And there are people who, you know, they're sharing the Joker meme where he's burning the giant pile of money and they're saying, it's not about the money, it's about the message. Okay.

0:40:42 Thomas: Yeah, no, sure. Yeah.

0:41:01 Thomas: Yeah yeah that gets posted everywhere on my threads now.

0:41:09 Phil: Yeah. I get the sentiment. I do. I don't want to be involved in an activity where I'm putting, even if it's only only a thousand dollars where it's just going to disappear on me. I'm not interested in that, but that, you know, it's okay.

0:41:12 Thomas: Yeah well okay that's that Let's, that, that'll be a transition over to the kind of the moral side of the of the thing, which I also want to talk about. I just want to make sure we've covered the facts.

So a lot of, if I'm trying to summarize the basic thing, uh, somebody, I think it's one of the prominent posters or investors in the the Reddit community, in that subreddit Wallstreetbets, which is a dumpster fire, by the way, it's shit posters, it's it's there's a lot of commonality with the same kind of people who are, you know, honestly are like Reddit slash the Donald, you know, it's a, a, that there's no reason that when I did my post Sargon sent all his followers at it, it's alotta the same people and I, get I'm not saying that everybody who is cheering on, you the Reddit is that, I'm not saying that, I'm just saying there's a lot of overlap there. And if you go, I want to make this point, it's very important to me. If you go to that subreddit, what you will find is a whole lot of, uh, sexist, homophobic, uh, ableist language. That's actually, and

0:41:29 Phil: Yeah. Yeah, right.

0:42:21 Thomas: I'm Not saying it's different. It's well, no, I, I just, I am a Reddit user.

0:42:21 Phil: We knew that it's Reddit. Yeah

0:42:27 Thomas: It all Reddit all depends on the subreddit. It All depends. Depends. Subreddits are heavily moderated, and they can either be amazing or, if they are not heavily moderative and they have a certain ethos or whatever, they can be terrible. So I very much, I think Reddit is maybe the best social media thing there is, actually, if you stick to the right subreddites and you actually moderate them. It has heavy moderation, it can, rather, like the subreddits that are successful do. Anyway, and I'm not saying this is like, oh, a few bad actors on the subreddit. It's actually, you it's within the memetic language of the sub reddit, like the R word and other, you now, other homophobic slurs. They're part of their like memetic language of that reddit. Like they actually, I just went there now and there's like, here's a a guide to all the lingo we use and in it are a bunch of slurs and that's the language they use.

So this is not, it's very important. I'm not saying that disqualifies what might otherwise be a noble venture. I am not saying, that's a separate question. So separate question as to whether or not what they are doing is right, you I just want to, I think that what can happen is a lot of people and especially if you are somebody, for example, who is gay or or if you're Jewish, by the way, there's a lot of anti-Semitism, it's frustrating when a bunch of horrendous language and people get,

0:42:27 Phil: Fair enough.

0:42:54 Phil: Right.

0:43:50 Thomas: Gets papered over because they're part of a quote-unquote noble cause, possibly. Yeah, go ahead.

0:43:55 Phil: Well, and it can also be that one thing they're doing is a noble cause and another thing is not. Well, one of first questions I posed when this came up, And of course, I just get flamed on because people don't understand that just because I'm asking questions doesn't mean I love hedge funds, because if you study my podcast, you would never come to that conclusion. But one of the things I warned people is that the person or people that started this, that maybe do actually really want to hurt the hedge funds, but what if they also already own a lot of stock and it's a double win for them?

0:44:00 Thomas: Yeah. Mm hmm. Yeah. Or like there may be hedge funds involved on both sides of this. It's like, yeah, yeah.

0:44:38 Phil: Absolutely, because one hedge fund could think it's going to go up, one thinks it's gonna go down. And maybe one of the hedge funds or one of the independent people that own 5,000 shares at a stock said, hey, what if I tell people they can screw the man and they screw the man and I accidentally make a million dollars? Well, you don't know who you're helping and who you are hurting. You don't now who is pulling the strings. You are behaving like a puppet that has the moral virtue in your mind, virtue, that you are doing the right thing. And so it takes away some of the caution you might have, some of skepticism you might or might not have to say, why am I doing this? Who gets helped and who gets hurt? Because if your goal is to hurt hedge funds, are they protected? Are there other hedge funds that you just made millions of dollars for? I don't know. I don'T have the answer to that. I

0:45:31 Thomas: I want to make sure everyone understands, or that we've at least done our best to make the situation make sense. So the somebody in this Reddit to reset, reset all the way back. Somehow they started the idea that this one hedge fund, let me know if you have the better details. I think it's one hedge fund had massive amounts of short positions on GameStop, and they wanted to like stick it to that hedge fund, which, fine.

0:45:56 Phil: Don't think it was that specific. I think they picked the single stock that had the highest short positions because it's the most likely successful candidate. So the hedge funds that happened to be shorting GameStop were really unlucky because they're hedging and shorting and doing all kinds of other crazy and creative things with every other business. But so many many people had shorted GameStop that it became the easiest place to go to create a short squeeze.

0:46:05 Thomas: Okay. I see. Yeah. Yeah.

0:46:30 Thomas: Gotcha. Okay. I thought I had read that they specifically noted a disclosure or something that told them that this hedge fund, one way or the other, that was the idea. Now, I want to, you know, I guess one thing we have to cover, there's so much, I'm sorry that this is a little bit helter skelter, but there's just so much information involved in this. I want to go back to my original point of shorting is not by definition a bad thing, in my opinion.

0:46:38 Phil: Might be wrong. Yeah.

0:46:58 Thomas: I get that we – people may have fucked over a hedge fund. I can't say it enough times. Great. We're anti-hedge fund here, both of us. That's not a problem. But being the most – if in fact GameStop was, and I think you're right, it was just the most shorted stock and they could tell – is that publicly available? Are you able to just kind of find out how many people are shorting a given stock?

0:46:56 Phil: Correct. Well, Yeah! Oh yeah! There's companies that track that.

0:47:21 Thomas: Okay. Gotcha.

0:47:21 Phil: It may be for a fee, but it's publicly available.

0:47:24 Thomas: Right, right, right. So, um, I think the reason GameStop, in addition to these hedge funds, might've been the most shorted stock is it honestly makes a whole lot of sense to short GameStop right now. And I could imagine I'm, could definitely have seen being just a normal dude and thinking, hey, you know, I feel like GameStop, it's the year 2021, 21, you can download every game you want on the PlayStation and Xbox store, the Switch store. Why do we still have a GameStop? Yeah, I think this company is going to go under. I'm going to take a short position on this. I could see that just being a thing a normal person does. So like my point is that, yes, obviously there are hedge funds doing that and they were now fucked over. I have to imagine there are a lot of just normal people doing that. Don't you think? Am I wrong on there? Yeah,

0:48:11 Phil: Absolutely, absolutely, there's a lot of people who are shorting the stock and one of the side effects might be there's an a lot regular people who buy and sell and trade stocks and think that this is the next Radio Shack that they haven't bought the upside protection that a hedge fund did, and they're crying every day begging and praying for this to stop so they can get out because every every time it goes up, they lose more money. They lose more money. And a lot of them, what will happen is they're going to get that short call or they're going to get the margin call, they'll call it.

The margin call from the broker and said, you've exceeded your margin, cough up more money, and some can and some can't. And then the ones that can, can't at a higher price, or when the price dipped down, they got out. But there are the possibility that hundreds, thousands, tens of thousands of individual people are also getting fucked. It's kind of like the one scene in the Batman movie where some people just want to watch the world burn and the people that want to just burn the system down, they're going to burn anybody and everybody that's in there. It doesn't

0:48:28 Thomas: Yeah. Yeah

0:49:24 Phil: Matter if it's you or me or it's just some idiot who bought a thousand shares.

0:49:23 Thomas: Which yeah and I just all I want to do is point that out like It might be fine that it's someone's calculation that, like, yeah, there's going to be, uh, you know, a certain amount of, it, collateral damage, but these hedge funds will get fucked, and maybe the people who are shorting GameStop, they're probably okay anyway, so fuck it, that might be your call, that's fine, I just want to emphasize that, like, there are a lot of people out there with the conception that this is only something an evil hedge fund does to try to ruin the world. Not true.

0:49:56 Thomas: Anyone can take a short position if you have an app. And so I also want to emphasize, somebody linked a study that was done. This is actually kind of interesting, in 2020, as a result of COVID, it says six European countries implemented short-selling bans thinking that they would, you know, they were trying to do this to like limit the downsides of the market during COVID and like what would happen. And there's a study done and actually shows that it had negative effects because it

0:49:30 Phil: Yeah. Right. Yeah, Yeah. Right. Yeah. The short,

0:50:27 Thomas: Increased.

0:50:27 Phil: The short selling provide, provides more information to the market in, in normal quantities, but maybe it needs to be restricted or limited somehow, but I don't know.

0:50:35 Thomas: Oh, sure. Oh, Sure. Yeah. I, okay. So I want to make sure I'm making a clear point. I'm, I'm only making the point that, and because I see a lot of people posting about it and it's hard because I'm talking to different audiences here. There are going to be people who are, who already understand this and think I'm talking down to them or something, or I'm misunderstanding them. It's hard because we, you and I, you know, when we're, we see a lot of people making comments at us and a like probably not an insignificant percentage had no, absolutely no idea what short selling was and assumed it's like a way that hedge funds bankrupt companies. And I wanted to talk about that because short, taking a short position on a company by itself again, correct me if I'm wrong, uh, expert Phil, that doesn't bankrupt a company. That doesn't, that's just a bet you're making.

0:51:22 Phil: So from, from, and again, you know, there's a simplistic answer and then there's the more nuanced answer. In general, the, the price of A share of a stock, whether it's 50 or 30 or 20 or a hundred or a thousand, is generally irrelevant to the performance of the company because the company made all the money at the IPO, the initial public offering of that stock.

0:51:30 Thomas: Yeah, exactly. Uh, perhaps we should have made that point. Yeah. They do. They offer the stock. They sell the stock out. You know, that's when they get the influence flux of money. Now the company might hold stock. And I know you were probably about to say this too, that the company is going to hold its own stock. It will definitely have an effect on the company, but like the, the mere, I'm just saying, even going back from all that, just taking a short position on a stock doesn't reduce the stock price. If it did, it would be free money and every company would be bankrupt.

0:52:13 Phil: Right. Right now, now the problem with one of the things is that if these hedge fund companies put out big, well-known and well-read reports and promote the fact that they're shorting, is that now influencing the market? But yeah, if the company has what's called treasury shares, shares that they've held in reserve. They might think of that as easy money to borrow. And if they want to do a new project, go sell those shares on the market. If the price is $400 instead of $4, they can make way more money and be better able to do things. So there is merit to it in the smallest of way, but generally

0:52:20 Thomas: Sure. Maybe.

0:52:51 Thomas: Well, there's merit to what? The idea that if the price is higher, it's going to help the company. That's not really the point I'm making, but yeah, sure.

0:52:52 Phil: Right. It could because the moral argument is that by continuing to push down the price, you might be limiting the company's ability to have finances to continue its operations by selling its own shares.

0:53:08 Thomas: Oh yeah, Sure. I know this is where, and you said generally, and I agree with that. This is, I'm trying to stake out of like the principle of short selling in itself does not do anything. It does not reduce the stock price. It might be, and I'm all for slapping the hell out of hedge funds if they're doing this. A hundred percent. If they're taking other actions and maybe colluding in some way and maybe that fucker on CNBC or whatever, you know, like that whole gimmick where they're trying to announce a bunch of shit on TV and profit off of that, like that could all be totally bullshit and we should find a way to stop that. And I'm all for that. But I just want to highlight the fact that merely taking a short position does not doom a company. If it did, it would just be free money. Every hedge fund could just bankrupt every company by

0:53:19 Phil: That's correct. That doesn't

0:53:57 Thomas: Taking massive short positions on it. It may have some effect, like you say. But the other thing, the other side of it, I did want to talk about this because I read an interesting article about what this means for GameStop now. Like, yeah, GameStop, now their share price is ridiculous. Ridiculous. Like it's through the roof, but that doesn't mean the company is sound per se. Like it doesn't, it's yeah.

0:54:19 Phil: Affect how much money they've made or lost because their business model doesn't work.

0:54:23 Thomas: Yeah, and, and they, they may not even, I've seen that they, you know, they might not even be allowed to sell that stock they had right now. Even if, let's say they did, like, let's they're sitting on a bunch of stock, the company isn't, they sell it. That doesn't. Do you think that's going to like fix the problems with the company and now Now the workers will be fine. I can't help but think, I know, I hate to say this, and this is going to be a somewhat inflammatory. This really sounds like ethics and gaming journalism to me, like in Some way, there are parallels. I think this is a far more just cause in general. I want to emphasize that.

But what I'm seeing now, if you go to the Reddit right now, which I did, and again, trigger warning on foul, the shitty language they use, that's really offensive and shitty, you'll see people doing all these posts and you don't know who they are because it's Reddit, and they are still posting about holding on, you know, buying shares, buying shares, and they're posting screenshots of having bought shares. We don't, you don't know for sure that those are real.

Maybe 80%, maybe 99% of them are real, but what's to stop somebody, a bad actor, even somebody involved in a hedge fund, even some Wall Street, shitty bro, that's like, "Oh, this is awesome," of trying to use the availability heuristic of making it

0:54:24 Phil: Yeah it right

0:55:36 Thomas: Seem like everybody's buying it in this subreddit. That's three million people and just cashing out on it.

0:55:42 Phil: There, there's nothing to stop you, and that's why all of this is so dangerous. And it's one of those things that, let's say you have an actual well-intended person who wants to take down a hedge fund, okay, we have a soft spot for that. They invested a hundred dollars and they pulled a thousand dollars out. Now the next fund, the next next target is announced. Just because you won a bet the first time doesn't mean you win a bet the second time. If you put money on a horse and you win twice in a row on the same horse, that doesn't make that horse a good investment to you, maybe to the owner of the horse, but not to you as the better. It was a bet and you won. And that's what we are looking at for a lot of people. You bet and and you won. You could bet again and win. But what if the third time you said, "I made my 100 turn into 1,000, turn into 10,000."

0:56:32 Phil: And you put the 10,000 down and it goes to zero. And you might say, "Yeah, that's okay. I started with 100. I don't care." But there are other people who didn't start with 100 and parlay it. There are a lot of people who are just normal people doing investing, trying to come up with a clever strategy that saw a situation like an airline stock or a movie theater and said, "There's no way these guys are going to survive post-pandemic. It's just not going to happen. I'm going to short the stock." You jump in there and fuck innocent people while they're just stuck without any way to get out of it, other than getting a margin call and getting pushed out of the game.

0:57:12 Thomas: It's, it's tough because on, what, what I see happening, and I want to make sure I fully justify my inflammatory comment of ethics and gaming journalism. What I see happen is a whole lot of people trying, there are people who want to assume or want it to be the case, and maybe they're right, I don't know, that in their mind what's happening here is a bunch of people, like millions of people, are seeing a chance to fuck over a hedge fund, and they are buying one share of GameStop each and saying, "I don't care that I'm losing this money."

Like, that is the fairy tale version of this. And that's what people think is happening, that they are all, every person is buying buying one share out of the goodness of their heart to fuck over this hedge fund. And they don't care that they're losing the money of that one share. If that were all that's happening, you know, yeah, that's, that wouldn't be that much harm. Honestly, that's a hedge fund that lost billions of dollars. I don't really think there's evidence that that's what's happening. I think that there's going to be a mixture of things happening.

There's going be a lot of that, but then there's gonna be all kinds of people thinking, oh shit, I can take advantage of this situation. Like, let's keep pushing this thing. And what I'm going to do is I have bought maybe it was last week or whatever. Maybe it's going to be a little different now, but maybe it Was a week ago when this first started picking up or even earlier than that.

0:57:46 Phil: Right.

0:58:29 Thomas: I can't remember when it really first started.

0:58:30 Phil: Well, and there's also going to to be the inrush of people who, as evidenced by your wall and by my wall, a lot of people who don't really understand what's going on. And they say, I want to help. And so they rush in and they buy 10 shares at $300. And when it goes back to 30, they lose 90% of their money. And they go, what, what happened? I thought I was screwing the man.

0:58:43 Thomas: Yeah yeah yeah and the the issue is that you know if you were a bad actor who bought some shares a little bit earlier and then you're seeing that you can leverage people's goodwill to make a ton of money off of it, what's gonna stop you? And then the minute someone like you or I tries to say like, hey, there could be some real danger here, then all of a sudden guess what it's about the janitor who who works at GameStop, you know, like, oh, you just want this company to die. Yeah. Ethics and gaming journal. Journalism. But in the end, I don't mind if, you know, it will be a good effect if this gets everybody to look at regulating Wall Street. Now, I'm skeptical that it'll go well. You know, could be that this fucks over retail investors and doesn't do anything to hedge funds and that will suck.

0:59:13 Phil: Yeah, yeah. Yeah. Cause, Yeah. Well, I'm optimistic. I hope that this has gotten enough attention and maybe that's the good part of it, it's gotten enough attention that some regulators will want to hold hearings and ask people, but maybe yeah

0:59:48 Thomas: But I, it sucks. I know you're almost out of time. I wanted to ask you about the Robin Hood and the other apps and other other people like entities somehow blocking the buying of.

0:59:52 Phil: Okay So, so real quick, when I was talking about, uh, the market makers, some of them were getting to the point where they were having to buy so many shares at so such a high price to cover themselves so they don't get screwed in case the stock goes to 600 to a thousand to five thousand, that they were burning through their financial reserves, reserves for the ability to make the market function. And so they had to say, and it wasn't Robinhood unilaterally, from what I understand. It was all the people that were using a couple of different market makers that said, stop, love of God, stop. We can't handle these new accounts. We can'T.

1:00:32 Thomas: So it's the sort of the parent company of Robinhood says we can't handle.

1:00:38 Phil: No, no, no. It, it, it's another service that Robinhood uses to, to facilitate the transactions.

1:00:43 Thomas: Oh, I've seen it. Yeah. Okay. I've seen it represented both ways. I wasn't sure.

1:00:47 Phil: Yeah. Cause Robinhood is tricky because it's not owned by, well, anyway, Anyway, I don't want to go into that, but it's the market makers. It's the actual people who facilitate the actual trades.

1:00:48 Thomas: Sure. So they're telling Robinhood we literally cannot do these transactions if you let them go through your app.

1:01:02 Phil: So there's two possibilities. That's one, that we literally can't do it. Or two, we don't wanna do it anymore because it is so laborious and painful and costing us money. And because as the market maker, if you have to run out and buy shares at $300 to cover someone getting an option, When that option expires, you still own those fucking shares at $300. And when the demand goes away, they get killed.

1:01:08 Thomas: Yeah?

1:01:34 Thomas: So what's your opinion on what Robinhood did, because justifiably, I see a lot of people pissed that like they were holding shares, couldn't sell them or couldn't buy them or whatever. I can't remember what I think.

1:01:34 Phil: Yeah, yeah. I think that what they should have done was said, we're no longer going to take options. If you want to buy the shares one for one from somebody with your money, go for it. And not restrict new positions. What they should have said was, we're going to go to straight cash only. So, hey, you want to play the game? Then you take the risk. You take 100% of the risk, none of this options, no leverage, no nothing. If you want to go buy $10,000 of GameStop at $400 a share, good on you, mate. Fuck yourself, you go buy whatever you wanto buy, but I'm not doing it with my money and the market maker is not going to do it with their money.

1:01:57 Thomas: Right. Right. Yeah. So I guess this really comes back to your lesson as a takeaway that, you know, there's a reason Robinhood might offer free trades, you yeah

1:02:34 Phil: Well, and part of it is that they actually literally get paid money to give all your information to somebody else. And you could say, I don't care, but it's important.

1:02:44 Thomas: So fuck Robin Hood you know And it sucks what they did, and it sucks that what the, you know, the you're saying the the market makers did or whatever, um, I think it's safe to say that people, I think, are justified in feeling screwed over that hedge funds were able to execute transactions while they were blocked from doing so, don't you think?

1:02:47 Phil: Yeah.

1:03:02 Phil: If that was the case, but if the hedge fund wanted to go buy a new position, they might be blocked the same exact way if they use that clearinghouse, but they might've used a different clearinghouse or they have automatic connections to 10 clearinghouses. So when one of one or two of them freak out and can't do it anymore, but they probably weren't buying. But the funny thing, and I've seen this in other places, and then I got to go and we could always do this more later.

1:03:14 Thomas: Interesting yeah we will we will definitely yeah

1:03:31 Phil: These same hedge companies who could have gotten fucked hard when the price went from $30 to $60 to $100, they now go in and they buy brand new shorts on the stock at $400. Dollars. And so all the individual people who end up losing all their money, the hedge funds could end up making more than they ever planned on making when the stock goes from 300 back to 30 eventually. So at some point there's an end point to this game. There's not an infinite amount of money, an infinite number of dumbasses who want to go in and just burn down the world.

1:03:44 Thomas: Yep yep yep uh yep and with that I'm so sorry that kept you so long but I really Appreciate your time, Phil Ferguson, the Phil Ferguson Show. Um, we will do something more, maybe with Opening Arguments, we'll see, once there, there's more of a legal, uh, you know, regulatory angle that I just wanted to respond to this because there's so much, I know that was a lot to process, everybody. Hopefully it was useful information. Thank you so much for coming on the show, Phil.

1:04:07 Phil: Oh no, my pleasure.

1:04:28 Phil: Grazie. Thank you so much. Right. Bye.

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