MIKE GREEN: This is the Simplify ETF Thought Leadership Forum. As we look at 2020 to 2021, which is our first year at Simplify, we couldn't even begin to address this without talking about memes and meme stocks. And I'm excited to bring my friend Carson Block, Lily Francus, and of course, Kyla Scanlon who's here with me, to discuss this phenomenon that it really feels like something that has possibly never happened before.
Now, obviously, things like this have occurred. We have seen things in 2021 that are unprecedented, ranging from whether it's GameStop, to AMC to any number of things that have blown up various hedge funds that are otherwise thought of as responsible parties. I figured there is no group that would be better served to bring in here than these three. So, Carson, you are one of the world's best known short sellers, the rigor of the work that you've done starting with Chinese frauds, extending across to companies throughout markets.
You have a really interesting perspective on the general idea of what a short looks like. Should anyone be surprised by what's happened with some of the short positions and the short squeezes that have occurred in 2020? Or is this as unprecedented as it feels?
CARSON BLOCK: Well, there are definitely precedents for short squeezes. And it didn't go back much farther than this, but I think a good analog to what happened with GameStop is Volkswagen in 2008. Also, for some semi similar technical reasons, all of a sudden, the news broke that there was that the thing was the Porsche family actually controlled a lot more of the float than was thought. And all of a sudden, there was a race to cover, and the stock ripped. I think it went up like 8x within minutes.
And some very, very smart investors were caught on the wrong side of that, even Tiger Cubs were caught on the wrong side of that. The Germany's richest person, I guess, no longer was Germany's richest person after that, sadly, did commit suicide right after that happened. So, there's definitely precedent for this thing.
MIKE GREEN: So, when you think about that, and that is actually on a minute, the minute I said that, it jumped into my mind that we have seen things like Volkswagen, of course. But in some ways, the damage was actually much more limited this time around. So, that was a risk arb trade that was against a large corporation that had a number of positions. GameStop, which was the first indication of this, and Lily and I have talked offline about this, we've seen many of these things actually kick off in the earliest stages out of the election in 2020. It carried into 2021, where it got really, really crazy.
Lily, do you think the role of options and retail participation and options played a unique role, distinct from some of the stuff we've seen like the Wirecards or the Volkswagens where short squeezes have occurred before?
LILY FRANCUS: Yeah. The biggest, I guess, role you could understand options playing here is non-reportable leverage in the sense that they have a notional delta exposure to the underlying that's much greater than the amount that a retail investor would pay for. And I've had discussions with people, I guess you could call them the shoeshine boys in the 2020s, where you see this ethos in retail investors, where it's like, well, if I lose my money, or whatever.
And also on the other side, multiple people who made a lot of money off GameStop were talking in the millions or hundreds of 1000s. So, it's different in a way because it gives them access to these products where their downside is clearly very limited, and their upside is [?] infinite.
MIKE GREEN: One of the things that jumps out at me is in many of these situations, like the language that a professional option trader would use things like what is implied volatility, what is the level of skew, where are you actually buying these things, that tended to get lost because you were dealing with a relatively unsophisticated platform or interface, in which that information wasn't even available. So, if I went on Robinhood, and I, of course, did this and set up an account so I could understand some of what's going on. Like, there's no information about what you're actually paying for these options.
LILY FRANCUS: Yeah. I would say most [?] to these options essentially is a directional bet. I think most actual option traders who specialize in it more look at it as a volatility tool to actually take out and look on realized or implied volatility, there is some limited use, I would say, of using it as a directional tool. But it's really unique on the retail side, because UIs like Robinhood have made it very clear, it's like buy the calls if you think it's going to go up, buy puts if you think it's going to go down.
And what that's really done is it works when it works. And it's worked this past year a lot. It's also some people have had a hard reality is when they bought puts on GameStop at 350 and then puts have repriced.
MIKE GREEN: The dynamics around GameStop and AMC, etc. clearly was framed in the popular press as being tied to things like the WallStreetBets or WallStreetBets on Reddit, and the spreading of these memes and we can all turn into TikTok and hear various takes from people who are convinced that x, y, z is going to happen. Roaring Kitty a name, I think most professional investors never thought they would actually say out loud, figured very prominently in this type of dynamic.
And Kyla, you have played a role more on the good side in terms of spreading these memes and-- oh, yeah, I certainly hope so too. But more on the good side in terms of trying to spread some education and poke fun at this. But when you look at the meme culture of Gen Z, in particular, into the Millennials a little bit less I would suggest, do you think that this is actually a driver? Do you think that people are genuinely turning to TikTok for their investment advice?
KYLA SCANLON: I don't know if it's a good thing or a bad thing. But yeah, I do think that they are. I think that TikTok is just a really accessible platform for them to go to, and to just consume information. And oftentimes, the level of authenticity that you have with the creators is a lot higher than like a news platform. So, you're able to like to log on, you're like, okay, I see this person every day, I know how they communicate, and you're able to absorb the information the way that they're conveying it to you.
So, I do think that helps, but you do have like this distribution, where you have a lot of people who might be shilling coins on one side of the distribution, and it's pump and dump. And then on the other side of the distribution, you have, hopefully, the creators like myself, where we're more focused on the idea of education. But I do think that social media in general has become a place where people are going for information about the markets.
MIKE GREEN: And when they seek out this information, this feels so foreign to me in so many ways, and I think that's actually part of the problem that Wall Street-- that leads to long term participants are struggling with is like, are you serious, you turned to a 30-second TikTok for information about your investment future? Is it that they trust the creators? Is it the irreverence associated with it, the cynicism about the traditional channels? What do you think the gut driver is?
KYLA SCANLON: I think it's really a perfect storm of all of that. So, like, there was-- with GameStop happening, everybody was like, wow, we don't trust anybody. And you still see that show up in the WallStreetBets forums, where it's like, oh, my gosh, everybody's lying to us. This is a big Ponzi scheme. And so, I think TikTok and the creators on there, it's like, okay, this is just one person. I see them. I know how they interact. Whereas institutions themselves, so if you go invest with BlackRock, you don't really see BlackRock, you don't see a person attached to that unless you have a financial adviser.
But that's a whole different level that Gen Z people just don't have access to, because they don't have money. And so, you don't have these institutions really speaking to 17 to 27-ish years old, because they don't have the money yet, those people don't. So, institutions just ignore them. And so, they have to find other avenues to learn. And that ends up being social media.
And I think that just with the creative economy in general, that people really are seeking out some connection and the past year with the pandemic has really highlighted that because everybody has missed out on that human connection. So, people are really seeking out these individuals where they can learn from because they haven't either gotten that from institutions, don't trust institutions anymore and are just finding different avenues to get information that they want.
MIKE GREEN: So, Lily, you have approached this market from a very academic standpoint. Your background as a data scientist brought you forward in terms of your awareness. And you and I talked an awful lot about my theories in terms of passive and you've identified what you refer to as options dominance, which is effectively the idea that that large notional then requires hedging going in the opposite direction and can actually force market makers to do things in a market that has friction and low liquidity.
When you think about this educational process that Kyla is highlighting, you brought up a really interesting point, which is you've got to find loss. The most you can lose on an option is x. Is that upfront, like, is it effectively just a gambling dynamic, it's an attempt to change a life in a way that it's not going to kill me if I lose $500, or it's not going to kill me if I lose $5,000. But if I make a million bucks, that really changes my life. Is that a big driver?
LILY FRANCUS: Yeah, I think the biggest parallel would be like when you look at a business that's about to go insolvent. If you look at something like the [?] model, when you essentially view the equity as the call option from assets, you see this asymmetric upside versus downside, which is also why I'm sure it's Carson who could expound on perhaps the most dangerous time to short a stock is right before it goes bankrupt.
And basically, what happens is that many of these folks have savings, they have stimulus, and you look last year, and the savings rate in the US boomed, at the same time as lockdowns happened, online communities boom because we were trying to socialize with people. And with that really broad is you have this camaraderie where you're losing money together. But at the same time, you believe the system is rigged anyway.
So, it's really like you're trying to bet almost like a lotto ticket on getting to the next level of social strata. And you really do see this, especially on places like crypto Twitter, there's a huge degree of ostentatious wealth being shown. And what it really does specially for younger folks who have less money and would gravitate more toward these super high yield, super high-risk investment, you're essentially seeing it as a lotto ticket.
MIKE GREEN: So, Carson, you have familiarity with markets where there have been less sophisticated investors, you spent a lot of time in China, you spent a lot of time dealing with those types of dynamics. Is this behavior consistent with what we, if I go back to 2015 or 2014, like the stories we heard were, well, the Chinese are just gamblers. They want to gamble on stuff. Is this a reflection of that type of change in the US markets?
CARSON BLOCK: Yeah, it's interesting, because when Lily talked about lottery tickets, that really resonated with me, because when I first started doing this as an activist short seller in 2010, and these were total frauds from China, just the worst of the worst. And I would get so much vitriol directed at me especially over email. And I've tried to reason with-- and these were usually retail. I've tried to reason with them a little bit like, hey, don't be mad at me be mad at Chairman so and so who's lied to you and stolen your money.
And look, predictably, that seldom worked. Even after, in some cases, after the companies were actually informed there was an enforcement action against the management and companies for fraud, the same people would still come at me. And when I thought about it, I realized, okay, this is what it-- so I remember my first and my job in investment banking in 1999, when I was at CIBC World Markets, and I was miserable every day. And there were a few days when I would go in and stop at the coffee shop in the base of the building and I'd buy a lottery ticket because it was like 10 or 20 million.
And then I would spend my free thought moments fantasizing about going in and quitting the next day. And that's what I came to realize, like a lot of people who are punting on Chinese stocks are doing. Like there's some hole in their life and they're using, they're buying lottery tickets. And it was like I was taking those lottery tickets out of their hands, tearing them up in front of their faces, and just dropping them on the ground. And that's where I felt the vitriol came from.
Going back to China, you asked about that. When I first moved over there in 1998 right after graduating from university, I went over there to try to open up an equity research firm. And I came to realize that-- and this wasn't for fraud reasons, but there was just nothing investable literally in the domestic market in that time. And a big dynamic I felt was that the policymakers wanted to keep the markets that are hyperspeculative.
Because if there was this possibility that hey, you go into that brokerage firm tomorrow and you guess right or whatever, it can change your life. That kept people out of the streets. That was my assessment as a 23-year-old in 1998. So, I do think that that is a common thread through all of this.
MIKE GREEN: No, go ahead, Lily, please.
LILY FRANCUS: I was going to jump in. A big part of these, of what Carson said scams is the study of fundamental variance. And I posted about this on Twitter about bubbles, because I always find it hilarious that so many people are angry about bubbles, very few people try to understand what's going on. But basically, fundamental variance are this idea of a better tomorrow, where you see these firms that could be valued at zero or infinity and see a lot of this course in crypto currently, is what really powers investor sentiment, especially at the retail level.
Retail tends to be much more risk loving, especially at the sectors of demographics that invest heavily. And what happens is that the scams usually are the ones that promise the most. That's usually what happens. And that's what attracts people because even if there are red flags, usually, they're pretty priced pretty low, you can start with pretty quick investments, you usually grow them over time and lead to that emotional attachment Carson's talking about. And what happens is you might, in the back of your mind, note scam, but it still might not be a scam. And that's also what triggers when there is any news, which seems to validate that this company is legit, and it happens occasionally, then you see this hyper growth in prices, everybody piles in.
CARSON BLOCK: Well, I would push back on one thing there, which in micro-cap world, I think the more seasoned micro-cap retail, like I think they get that these things are scams, and they don't care. It almost doesn't matter that it's a scam to a lot of them. Especially if you live in a world in which enforcement is pretty sporadic, which is the world we live in, then I think the more seasoned retail punters are in on the job, whereas the newer to the game ones might not be. So, I agree with 90% of what you said, it's just that little corollary there where I don't know that it matters if it's a scam if there's no enforcement.
LILY FRANCUS: Yeah. I would say there are the investors, probably, I would put myself in that bucket, who take advantage of momentum, and have pretty [?] times where they're essentially looking for that pump, which, at that point, you don't really care about the fundamentals of the company, especially when there's sufficient liquidity. And essentially, you're buying this on the bet that other people will pile in.
MIKE GREEN: And I think that's actually a really interesting link. Because when I think about how people react to finding out that it is a fraud. So, Carson, you brought this up, and the perception is you're tearing up their lottery tickets. Not that they bought a bad ticket, or that it's somebody else's fault for lying to them, that you're effectively destroying their dream. What happens when they lose the money? Is there a learning process, or is it, well, numbers didn't come up this week, I'll try again next week?
CARSON BLOCK: I'd like to think it's the former, but I've had experience that tells me it's the latter. Look, I guess it's person by person. But there are some people I've received emails from over the years who, I don't know, these might be true, where they're saying, oh, my kid's college fund was all in this 200 million market cap, Chinese stock, and you destroyed that. I don't know. What does that person need to learn to make responsible financial decisions, and you don't have to be a seasoned investor to know that putting your child's college fund entirely in a speculative Chinese stock is speculative? So, I don't know.
MIKE GREEN: Your eloquence knows no bounds, Carson. I agree with that. So, Kyla, on that front, when you think about the communication and the information that's being shared, is there an element of learning or thoughtfulness around this or is it nihilism effectively? The thing that always jumps out at me is the dynamic of what's referred to as loss porn. So, I'm going to show my losses to demonstrate participation in the community.
I can't help but think about fringe religious movements, things like the flangeless who would parade through medieval cities whipping themselves and how much blood they drew was actually a sign of their commitment to the cause. Is this the same thing? Isn't it just a community that you're making a sacrifice in that if you lose, you demonstrate that you're really a member. And if you win, well, you've changed your life. So, you can't lose either way.
KYLA SCANLON: Maybe. I think the dynamic that WallStreetBets had at the beginning of GameStop was really interesting, because it was like this collective belief driving the value of an asset, which was just the fundamental reason why GameStop went up at the very, very baseline level. And it was, even now, you see with AMC, there'll be some comments where it's talking about