Lots More With Luke Kawa on Memestock Mania 2.0

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1:20Bloomberg Audio Studios. Podcasts. Radio. News. Tracy, do you think the meme stock thing is like already over already? I'm serious. Well, you know what? I'm looking at the chart of GameStop and it went up a lot and now it's coming down a lot. The thing I think is kind of funny is if you view the entire meme stock phenomenon from an efficient markets hypothesis, you get really interesting questions like, why didn't the market already price in the risk or the possibility of Roaring Kitty coming back on Twitter and tweeting a picture of a guy sitting up in a chair? That should have been priced in.

1:57Yeah, I totally agree. As you know, I am the world's biggest believer in the efficient market hypothesis. It's always priced in all the time. And for the first time in my life, at age 43, something has come along to shake my faith. And it is the fact that - Was it RFK? No, it is the fact that the market did not price in apparently the possibility that after like three years of radio silence, we would get a tweet of a guy leaning forward from the Roaring Kitty sending the stock high. And then, and then RFK Jr. tweeting that he was investing in GameStop. I have to completely rethink my fundamental assumptions about how all markets work based on the GameStop chart of the last 10 or so days.

2:44I'm completely revisiting all my core assumptions. It's good that the apes have you thinking. I did a deadlift. One, two, three. Hegemony. Hegemony. Okay, good. What two? Hegemony. Barges. This is an after-school special, except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S. Where's the best squid ink pasta? These are the important questions. Is it robots taking over the world? No, I think that in a couple of years, the AI will do a really good job of making the Outlaws podcast. and people are saying, I don't really need to listen to Joe and Tracy anymore.

3:22We do have... Cha-ching. The perfect guest. You're listening to Lots More, where we catch up with friends about what's going on right now. Because even when the odd lots is over, there's always lots more. And we really do have the perfect guest. Luke, what do you think? Why wasn't it priced in already? I guess my favorite way is to, you know, answer a question with a question. And I think the bigger one is why the heck if your management of your GME and you've seen your stock get memed before, how the hell do you not have like a shelf ready to go that says we can sell shares into this anytime?

4:01But, you know, as for why, you know, folks were expecting this, I would say look at what you have slash haven't gotten from, you know, be the Roaring Kitty Twitter account or anything from Keith Gill since, you know, let's call it mid 2021. Didn't participate in the book or the movie effectively made about him. It just seemed like, you know, I don't know if the, you know, the Roaring Kitty just kind of went into pseudo hibernation. And it seemed like, you know, nine lives over and was gone from the scene. So not something that was on anyone's radar, certainly of all the crazy things in markets that happened.

4:40This was not one when I was coming back into journalism that I was expecting to get hit over the head with. We are speaking with Luke Kawa, our former colleague at Bloomberg. We worked together with him for many years, and then he left us to join UBS and do serious financial jobs. And now he's back in journalism. He's a markets editor over at Robin Hood's Sherwood Media. So a very triumphant return to financial journalism. Well-timed, I guess. It's like great. It's like we're going to go to Robin Hood's media arm and immediately the GameStop thing happens. It's like fate, right? That's right. And the other reason we wanted to talk to Luke, other than the fact that he's fun to talk to, is he was one of the first people at Bloomberg who took what was happening on Wall Street bets fairly seriously.

5:27and I think was one of the first writers of our big cover story on Wall Street Bets when it actually started to take off. And this was way back in, let's see, early 2020. Is that right, Luke? Yep. Yep. That's the, I'd say, you know, late 2019, early 2020 was when we got the, you know, the prelude or the proof of concept to a lot of things that we would see in later years. And I love the transition from went to go do serious work and now he's back covering the memes docs. So yeah. Well, one of the things that I really liked about the way you wrote about the memes talk phenomenon and Wall Street bets at the time was like, okay, yes, there was this whole cultural phenomenon attached to it, where we get to throw around words like autists and apes and lots of profanity, which I'm not going to say on the show, because then we'll just have to bleep everything out.

6:17But you kind of approached it from a market's angle, which I think tends to get very forgotten nowadays. Everyone's just like, ha ha, GameStop isn't this silly. But when all of this first started happening, it was kind of an experiment in market structure. And I think people forget that. So the idea was that basically, if you bought a bunch of options on a particular stock, then market makers would have to go out and hedge their own risk and they might do that by buying the stock. And so you get this sort of like perpetual motion machine that effectively forces the stock to go up. Yeah, that's a that's a great explanation.

6:58I think like what where I had my kind of eureka moment, so to speak, was there's obviously Wall Street Betch was a place where people were pitching their their crazy option bets, their large positions, their YOLOs, what have you. Although like with some of the stocks getting memed several times now, I don't know if like YOLO is the way to describe it. You get two or three opportunities seemingly on a lot of these things. You only live once, but if you miss it, you get to live a second time. Exactly. But one of the things that really struck a chord with me was you saw like a lot of, you know, intrigue on maybe like smaller names or story stocks.

7:36Tesla was obviously a early favorite of the Wall Street bets community. But there was one user who one time made the argument, and this was after that, you know, I did a little publishing on the perpetual motion machine, as you have it, you know, the quote unquote forced gamma squeeze, if we're getting into the Greeks. But one person said, we should try to do this with Microsoft tomorrow in the pre-market. And I saw this, but I go like, OK, like, let's let's relax. You're going to meme Microsoft now. Like this is going to be like a thing you're going to try to do. Why not? Like, come on, like stick to your own knitting kind of stuff.

8:14Then there was the next morning a crazy amount of call activity in Microsoft and buying in the pre-market and Microsoft up. Like it was something like two and a half to three percent for no reason. And that's when I started to take it more seriously as a, OK, well, coordinated buying power at certain times through certain vehicles can even leave an imprint on, you know, what was then the, and probably still is now, the largest U.S. stock by market cap. So that's something that, you know, really blew my mind then and was something worth following up on as it became kind of even more coordinated, even more revolving around kind of, you know, certain stories.

8:53And then the success, the proof of concept grew to a point where you, you know, you get more and more power because if nothing else, this is a momentum play that just got, more momentum as it got more attention. It's so crazy. By the way, I know this is not the point. It's so wild to me that Microsoft is still the biggest company in the entire world, given it was the biggest company in the entire world, or more or less, decades ago. And so many different things that ostensibly would have disrupted it from the internet to whatever, Apple, et cetera, and yet still it. But that's a divergence. Joe, no one wants to talk about Microsoft.

9:31I know, I know. That's just one of those facts that still blows my mind. But that being said, all right, so you mentioned, you know, GME management should have had that shelf registration ready to go. AMC, which always seemed like, I guess I would say, played a little bit more cynically into the meme stock crowd than the GMC management. They did have that plan ready to go. They did do something because they got a little. They broke the emergency meme stock glass. Yeah, right. Took their plan off the shelf. Yeah. So, yes, what happened with AMC during this round was they had a they had a shelf offering that they had pretty much sold out of, so to speak, by by the end of.

10:07So just as it was starting, they had an opportunity to sell a little more into it. And I remember, you know, on the on the Monday or something going like, geez, AMC really, really blew this one, really blew this opportunity. And it's weird because, as you know, the CEO there, Aaron, has done a, I would say, a fantastic job in recognizing that to a certain extent, the shareholder base is a lot of the product, both in terms of integration into rewards that you get to go to the theater and also in terms of some of the more shrewd, let's call them, financing angles that have been litigated back and forth through the courts, but seem to have mainly served the purpose of raising more capital from AMC, from people that just wanted to see the stock go up and the company succeed.

10:52And then, of course, AMC, right after you think that even they kind of missed the window here, the next day they, you know, effectively I've called it, you know, they turned memes into a debt jubilee and able to issue borrush shares, trade shares for debt, retire effectively the debt. And that's one of my favorite parts about this is just watching the memes make things happen in real life for companies that is going to have a meaningful impact on their ability as a going forward concern in the months, quarters, possibly years to come. What was a little different about GME was that as this was happening, as this was starting, GME was already in its earnings blackout period.

11:34So, you know, typically that is that is something that is going to preclude you from coming forward. If you don't already have, you know, an existing shelf open to be able to sell shares at market, that's going to preclude you from bringing one to the market at that point, unless you're also willing to come forward with your kind of preliminary earnings results. So it's probably more likely that the effectively the choke point on GME being able to cash in more on this from the management perspective was just the, you know, I think it was five days it probably took for them to get those numbers together.

12:07So they were able to say, like, hey, here's our numbers. Also, yes, we want to sell another 45 million in shares if you'll have them at a price. But, you know, by that time, we had already seen a lot of deflation in the stock price by then. Yeah, I've said this before, but I think one of the nicer interpretations of the meme stock phenomenon is people basically treating the stock market, buying shares of a company that is very much struggling to maintain or achieve profitability as a giant GoFundMe for businesses that they kind of like or feel some sense of nostalgia for, which again, in 2021, when no one was able to go to the movie theater, that did actually make a big difference for AMC.

12:46Luke, I have a really important question for you as a fellow Redditor. Is it true that you may be a mod on WallStreetBets? And how did that rumor get started? Wow. I can say confidently, so I am not a cat and I am not a RAllStreetBets subreddit monitor. I am a mod on nowhere on Reddit. I have no clue where at all this got started. I think it may come from the era where I was, you know, back in 2020, where I was more kind of fervently having back and forth with folks there. And the thing I remember most vividly about that is I was probably, I think, the only one posting Bloomberg charts on Wall Street Bets.

13:28Because everyone was like, what is this chart background? A lot of E-trades and stuff of that nature. So I think that's maybe why I stood out to some folks back then. You would be a really good Wall Street Bets mod. So I'm just saying I would probably be even more inclined to pay attention to it if you were. But I will trust your denial. I don't think you would be dishonest with us. that you're not one of the people secretly running that page. Here's the other thing I'm thinking about, like with this sort of seemingly brief round of game, uh, meme stock mania over, like it all felt like, I don't know, people are saying like, Oh, what a stuck culture we have.

14:08We're doing this again. It's like, we know how the story begins. We know how the story ends. And so why not just like fast forward the tape and get through the entire process quickly? Like all of the ups and downs without this without the sort of awe and mysticism around it this time yeah i i would say this was a lot more of a of a cynical episode and i think if you just compare and contrast the you know previous rounds we've had you can a see it in the you can see it kind of in the raw numbers whether we want to talk about like how much total call volumes rose how much volumes rose, turnover, value traded, yada, yada, yada.

14:47All of that is very different from now to then. But it's almost kind of like a chicken and egg question there, because is there something about the story that was different? Is there something about the market structure that was different this time around? I would say yes, on both sides. I'll start with the story first. Heading into 2021, there had already been a small crowd, including Roaring Kitty, including Rod Alsman. I think you've had on in the past who are who are really making the the vigorous value case for GameStop that, you know, you have this one big last puff, so to speak, of the legacy business that was being priced as though it was going to imminently go out of business.

15:27But it probably had a lot more runway in terms of another full cycle of generating some some free cash flow. And then maybe you also have this big effective option on the loyal GameStop subscribers that you can maybe turn into and monetize a little bit better than you are. Couple that with also the high amount of short interest. So that was a story that started good, got even better when the stock forexed effectively over the final four or so months of 2020. And then you had Ryan Cohen coming in in early January. So there was actually like a lot of potential catalysts that were happening at that time.

16:05I think you also got another another round of stimmy checks. And on the entertainment side, I don't know how much pro sports we really had back on then. So all the stars really aligned for the story to be a lot better and that to be able to command a lot more mind share compared to now. Nothing's been happening in Game Sock. There's been really no change in the fundamental story. All that really happened is, you know, right before this, shares got back to where they were in January 2021, right before they went parabolic. So that's really all that changed this time. I would also say potentially something to highlight on the market structure side that may have changed a little bit.

16:45It's tough to quantify, and this is still somewhat of a more embryonic hypothesis on my end. But if you just want to compare the, you know, let's look at the peak in call volumes traded on GME at different times. At this, the call volume peak was about 650 ,000. And today, back in January 2021, that peaked at over 4 million. So one of the factors that goes into options pricing is effectively, you know, the more an option is in demand, the higher the implied volatility for that option, i.e. its cost, should be. What happened this time was we did see, in my eyes, for a lower amount of volume and for a lower move in the stock, some of those options, those lottery ticket options, you start to see the implied volatility jack up a lot faster than they had in the past.

17:39So that's a bit of a sign that, you know, maybe if GME didn't have the shelf ready to go, market makers had their playbook ready to go on how more or less they were going to respond to something like this happening again and build themselves a little in a little better margin of safety, I would say. So the worst story and better market mechanics probably are things that help this fizzle out a lot, lot quicker and just be a lot more about making a quick buck than any kind of grand story you can wrap around about sticking it to the man or sticking it to a particular hedge fund. Yeah, I think that's right, especially about the market makers being more prepared for this and also maybe even the hedge funds.

18:20And you see this discourse on Wall Street bets itself where people talk about how like Wall Street couldn't beat them. And so they decided to join them instead. And now you have a lot of hedge funds that are actively monitoring all sorts of social media. But Wall Street bets is certainly one of them or plugging into Discord servers and things like that to try to track sentiment. So in some ways, the big irony here is that I guess Wall Street bets has kind of become more intertwined with Wall Street itself. I think if you if you know that momentum is a factor, if you have seen this story play out before, I think there's a reason why a lot of the stocks with the kind of similar characteristics or have had these the similar history during previous rounds of retail mania.

19:06I don't think it's a surprise that, you know, to some extent they traded like a bit of a basket. That is that's something that suggests a lot more professional piggybacking at play here rather than just a more grassroots move in all of these names at the same time.

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21:24You troll too. You troll and you troll. But I don't troll. I don't troll either. But I don't troll. I did not realize this phenomenon that the inherent richness of the options as measured by the volatility had gone up so much faster in this whole phenomenon with the market makers just getting better. It's like, oh, we've seen this before. We're going to price them more when we sell these call options to end retail that we're going to make them pay more right off the bat because we've seen that playbook before. I find that really interesting. Well, the other thing that I noticed looking at Wall Street Bets recently is that like Roaring Kitty has basically been excommunicated from that subreddit.

22:07So when he tweeted, you know, someone made a post about it, but then the moderators came in and said, you can't really talk about Roaring Kitty. And if you want to talk about GameStop, then go over to Super Stonk or there's a dedicated GME subreddit as well. When did that happen and why? Like, why is Roaring Kitty basically not part of Wall Street Bets anymore? At least I can say that in terms of the the archives post, like they're they're still there. So the record of, you know, all of Roaring Kitty's position updates, all of that still there. In terms of the lack of GME, AMC, I think that is more a legal liability thing wrought on by, you know, that particular subreddit, Maud's opinions on what is tolerable, what is not.

22:59in the wake of, you know, a lot of people faced SEC investigations after 2021 and, you know, had demanded all their SEC demanded, like all their messages on Reddit, this, this and that, any other message boards, any discords scrubbing for that and, you know, at pretty amazing legal expense. So I think that's certainly an angle here in terms of, you know, those folks trying to cover some legal liability. Also, around the same time, I think there's been more of a divide or divorce among that Maud's community, of which I was never a part, including one that saw the effect of the first founder, Jamie Rogozinski, exit around during these times and in the wake of publishing his book and some question over trademarks, some questions over self-promotion, I believe, still in legal battles with Reddit over that to this day.

23:55So I think, Jess, with all the attention that came on the sub because of GME, AMC, and Roaring Kitty, they say there's no such thing as good press, but I guess when good press can lead to potentially high legal bills, then maybe that's a way where it can. I think you meant to say there's no such thing as bad press, but I actually think there's no such thing as good press is actually. I did mean to. Yeah. Yeah. No, I think that's probably true. Never talk to the media. I kind of believe that. Don't ever. No one. Everyone ignore that, especially future. You do realize what we're doing here, right?

24:27Well, we're media talking to media right now. But on other days, people outside of the media do talk to us. Why, though? Who talks to media? I would never talk to media. Don't. But don't. No one pay attention. Please, for the sake of this podcast, everyone who's listening, don't don't take that to heart. Ignore Joe. Okay. You know, the other thing, when the first round of meme stock mania happened, there was all of this sort of, I would call it like amateur anthropology or maybe amateur sociology is like men and they're gambling and blah, blah, blah. And you know, that faded. But now we have sports betting, which people talk about the explosion of crypto has been doing very well.

25:07Is that a thing? Did it like spread out? Did it metastasize to other areas or was there really sort of this fever pitch in 2021 with that stuff that we haven't really come back to? I'd say a little bit from column A, a little bit from column B here. I think if you see, you know, a lot of the accounts that are, you know, willing to post their, you know, sell Jamie to the moon. I bought even, you know, 100 percent into the move, bought more options type of folks. Those are also the same kind of people who their next tweet will be a coin I've never heard of or a like, yeah, a lot of a lot of altcoins that I've never heard of effectively that are also, you know, preferred vehicles of theirs.

25:52So I think like having it be more dispersed, more outlets effectively for you to speculate in, I wouldn't be surprised if that's something that helps kind of cool this round a lot more. But I really don't think it can be emphasized as much. the complete lack of a story. Like at least last time, my personal view is that nobody ever really cared about Roaring Kitty's story. If you look back at the streams he used to do, the last one he did, and he talked about this in front of Congress, the last stream he did in December 2020, stock's already up 300 % by this time in a matter of months, had 96 concurrent viewers.

26:32It isn't until the stock starts to move more in January and people, you know, Roaring Kitty effectively connects the dots that, yes, I'm also a deep effing value, that you start to see all of the interest in him pick up. It picked up because he was winning. People weren't interested in fundamentals. They turned the fundamental guy into their momentum catalyst. So that's all it was. And this time we started from that standpoint with nothing on the fundamental side. And that That to me is another just huge reason why this is just a really, really faint echo of what we've seen before. We can't even pretend there's a story.