Episode 157 - Financial Tsunami on the Horizon
Max and Aaron talk about the vast changes our economy and government would undergo if Bitcoin wins. They also discuss Gamestop and Generational Theory.
Links
Book: The Fourth Turning an American Prophecy
What Bitcoin Did Podcast: Why Bitcoin Wins with Gary Vee and Robert Breedlove
Book (1980): The Coming Currency Collapse
Niall Ferguson: Bitcoin and China are Winning the Covid-19 Monetary Revolution
Cointelegraph: Miami Mayor says City Employees should be able to Take their Salaries in Bitcoin
Coindesk: Harvard, Yale, Brown Endowments have been buying Bitcoin for at Least a Year
Coinlist: What the GameStop Saga Means for Crypto
Book: When Genius Failed: The Rise and Fall of Long Term Capital Management
This news story came out after we recorded but before the episode was released. Elon Musk is in!
Wall Street Journal: Tesla Buys 1.5 Billion Dollars in Bitcoin
Related Episodes
Episode 153 on the world decentralizing
Episode 112 with Naomi Brockwell
Episode 29 with Clyde Vanel
Transcripts
Max Sklar: You're listening to The Local Maximum Episode 157.
Time to expand your perspective. Welcome to The Local Maximum. Now here's your host, Max Sklar.
Max Sklar: Welcome, everyone. Welcome, you've reached another Local Maximum. How are you doing? Very excited to start off the show today. This is gonna be an exciting show. Hey, Aaron.
Aaron: Hey
Max: How are you doing?
Aaron: I'm doing okay. It's been a weird week. But good to be talking with you again.
Max: Have you ever heard of something called the Strauss-Howe generational theory?
Aaron: I have. I think we may have discussed it in one of our pre-show bits briefly. And I've heard it as kind of the counter to the great man theory of history that there are trends that pay heed to no man and that are out of the control of the individual.
Max: Wait, well, you're confusing me here. No, yeah, I see what you're saying. Right. So this—a lot of these theories of history, I find them absolutely fascinating. But also as an inference guy, as a science—as a scientific-minded person, I always find a little bit of skepticism within me of all these theories. But it is sort of a theory of how historical trends might work. I guess they're not historical trends, just ongoing trends might work over the course of, say, like hundreds of years or generations.
And this one is a very interesting one. Because it predicts that there's—first of all, it predicts like a giant kind of revolutionary period, every 80 years, every lifetime, essentially. And we're in the midst of one, right now. And if you think about it, we had—here in the US, and here in the west, we had 80 years ago, we had the Great Depression and World War II. Remember that? I mean, I know we don't remember that. But we probably know someone who remembers that.
Aaron: I've heard of it. Yes.
Max: Yeah. And then 80 years before that, there was the Civil War. And I believe a bunch of stuff went down in Europe as well. And then 80 years before that, you had the American Revolution, and 80 years before that, it doesn't really fit that well, in 1700. But if you go back to 1690, there were actually revolts all throughout the colonies, and governors were placed—in England, they had their Glorious Revolution or whatever.
So, okay. I mean, I'm sure a lot of people hear that they're like, “Boom, I'm sold. This sounds amazing.” But the problem is there are also a lot of events that could be thought of as big—what they call fourth turning events. In other words, they have like four generations between each one, and each one is called a turning. So it's like, well, where just World War I fit in? Where do other big changes fit in? And so it could just be a coincidence of history.
Aaron: And there's certainly a danger of kind of confirmation bias that, once you're aware of the pattern, you can find things that fit it. And it's very easy to ignore the things that maybe don't so much fit it and emphasize those that do.
Max: Yes, that's the reason why I want to bring it up today is just because—well, first of all, they came out with this in, I think it was at least 15 years ago, it might have been like the early 2000s. So...
Aaron: This was the original, I assume it was Strauss and Howe...
Max: Yeah.
Aaron: ...were the researchers.
Max: So, it is a point for them that the instability we're experiencing now is stuff that they predicted before it happened. But it's—I don't count, I count that as data that supports the theory, but not by no means overwhelming data. But it certainly is interesting because I read about this before then. And so if their timeline is to be believed, if we say 40 years from 1945, then we reach this grand finale in 2025, which is, “Oh, isn't this fun? We're gonna have five more years of this. Whatever this is.”
Aaron: Yeah, well, and it raises the question, so where does something like 9/11 and the Global War on Terror fit into this cycle? Does that fit the sequence of events or do we have to consider that that's not really a turn of event?
Max: No, that's a third turning event. It's like an unraveling. So it's like, well, yeah, but they would have the third turning between, say 1985 and 2005. So I'm not too familiar with exactly what that means. But that's sort of when—the lead up to.
Aaron: But they're saying we're in the midst of a crisis here.
Max: Right. Right. The 20 years before sort of the lead-up to the crisis, and I guess that 9/11 was a part of that. And I guess the argument would be that if 9/11 happens now, it would be like the—it would be the event that sparked everything, versus 9/11, in actuality sparked some things, but it didn't... I would argue—when 9/11 happened, people were like, “Oh, my God, our lives are changed forever. And our government has changed forever." Well, a little bit, but it wasn't like the—it wasn't the spark that brought the whole thing down to its knees by a longshot. If that makes sense.
Aaron: Not in one fell swoop, certainly.
Max: No.
Aaron: If it was then it was the spark that triggered a long, smoldering process of decades.
Max: Yeah, no, I actually don't think that 9/11 is the cause of—well, we're not even, we haven't even gotten into what I'm talking about in terms of instability right now, which is really interesting. People could be thinking about a number of things.
I'm going to talk to—we're going to talk today about our monetary and financial system. That's fun. We're going to talk about Bitcoin, we're going to talk about GameStop, people could be talking about our political system, and all that. And, or academia, or there's so many things that could fit this mold, really, but yeah, I think that—where was I going with this? It was just, yeah, I think a lot of stuff is going on.
Aaron: What is the context for our Strauss-Howe generational theory discussion here?
Max: Right, I think we're gonna have to have a few of them. And so today, I want to talk about monetary theories. Personally, I actually think this theory works that like, Eastern Europe seems to be one generation behind. I'm surprised they don't say this because it feels like they had the Russian Revolution during World War I. And therefore, turning kind of feels like the fall of communism, which is actually a pretty good—I mean, it was chaos over there. But as far as Fourth Turning goes, it's... that's not so bad.
Aaron: Yeah. Well, and I jumped to that conclusion when you mentioned, the civil war being one of our Fourth Turnings here in the West because—was it the 18—was it 1848? Was the big year of revolutions in Europe.
Max: Right.
Aaron: So that's roughly a generation before that.
Max: Yeah.
Aaron: Things get a little fuzzy.
Max: I mean, right, you’re right.
Aaron: And I think it's an interesting discussion to be made about will we see these timelines accelerating, as so many things have accelerated with the increased speed of communication and globalization, or generations or generations, whether they're pre-electricity or post-internet.
Max: Right. Because it's the people.
Aaron: Yeah.
Max: It's the people involved. But I—that kind of makes me skeptical of theory because that if you could, like, if you could shove things around in them, if it's 10 years before, 10 years after who cares, then you're kind of making the theory difficult to falsify.
Aaron: Well, yeah, a generation is a pretty, pretty large window as anyone who's tried to define what a millennial is.
Max: Right. Yeah, exactly.
Aaron: It's very fuzzy.
Max: Yeah, so anyway, I saw—I listened to a podcast recently. It was called Why Bitcoin Wins. Well, the podcast called Why Bitcoin Wins, oh sorry, the podcast is called What Bitcoin Did, the episode was called Why Bitcoin Wins, this is Gary Vee.
Aaron: Who did what?
Max: Yeah, by Gary Vee and Robert Breedlove. But the question that I found interesting is not why Bitcoin wins. But what does it look like if it does win? Because I can imagine, hey, you've got Bitcoin, it's the global standard or some other cryptocurrency or some digital currency or whatever. You always have to caveat that.
But the shocking changes that have to happen in between to get from here to there are hard to cope within my mind, and I was hoping we could discuss that today. And that's sort of where I kind of fit that in with the Fourth Turning. So I just thought that—I thought, “Hey generational theory maybe predicts this”. So that's pretty cool.
Aaron: So are we talking about the question of not just will Bitcoin or digital currency or blockchain, crypto for more general term there, that's what I was looking for. Will that become—not so much will that become a standard, but what kind of event leads to it? Is there going to be some sort of total collapse or will it be a gradual transition or...?
Max: Yeah, exactly. Exactly. And, yeah, the predictions of currency collapse, I should point out are nothing new. There's a book from 1980, I guess I'll link to in the show notes page, The Coming Currency Collapse and what You Can Do about it. That was written 40 years ago. I wasn't even born yet.
Aaron: I assume that was written about the dollar. Because there are definitely currencies that have collapsed, but not the dollar, at least not in, as obvious away as that would imply.
Max: It was written in wake of the inflation of late 70s. So, yeah, I guess they thought that it was coming faster. But if you read the reviews on Amazon, a lot of people are like, there's very few people who are like, “Oh, this is a bunch of crap." There's actually a lot of people who are saying, “Oh, it's actually it's just delayed, it's still gonna happen. It's inevitable,” which is interesting. It's an interesting kind of human psychology thing where they're kind of these permanent, sky is falling type people in terms of the currency. And so I don't want to be one of those. So it is important to point out that, yeah, these predictions are not new. And so I don't know, if the—first of all, does the currency have to collapse? Does the dollar have to collapse for us to have a Bitcoin standard? I mean...
Aaron: It sounds like it could very easily be playing on the same impulses that make us susceptible to things like Doomsday cults.
Max: Right.
Aaron: That there's something very appealing about both the prospect and the explanation for how we're going to get there.
Max: Yeah, yeah. And so it's like, it's the—if the US government decided to go back on the gold standard, which is not easy to do, although I think Alexander Hamilton might have been the last person to do it. It's a big country back in the gold standard. That doesn't mean the currency collapses, right? So if you had a Bitcoin standard or even a hybrid Bitcoin gold standard, it doesn't mean the currency collapses, or so. I don't know.
Aaron: But you would expect there's gonna be some shocks in that transition.
Max: Yeah, yeah. And so, and something's got to shock the system into doing it. Like, they're not going to do this just because someone asks nicely.
Aaron: Right. Yeah.
Max: The politicians don’t want...
Aaron: It seems unlikely that they would put the genie of—what is it? Fractional reserve
banking back into the bottle if they don't absolutely have to if...
Max: Yeah.
Aaron: Only the threatening of everything that they've come to believe in and build their society on, they being the economic infrastructure would put them into that position.
Max: And there ARE really no politicians or very few politicians who want to touch this stuff right now.
Aaron: Yeah, well, and...
Max: ...and for either party.
Aaron: ...economists don't become politicians. And I don't know what that says. But I feel like there's something to be gleaned there.
Max: Well, some of them. Some of them do. But yeah, not so much in the United States. Actually, I think that's more like in other countries, you have economists as politicians.
Aaron: Well, certainly as technocrats, but I feel like as politicians less so.
Max: Yeah, yeah. Why is it? It's blanking on my mind. But I feel like there are certain like African leaders who are economists.
Aaron: That may be the case.
Max: I think I was watching The Crown. I think one of the British prime ministers was
an economist, I think, Howard Wilson. Howard Wilson, I think I'm saying that right, some guy from the 70s.
Aaron: I would believe that because I have a—completely based on anecdotal evidence impression that, like Oxford and Cambridge output, some sort of disproportionate number of economists to what a standard American University might do. That may be completely faulty conclusion to draw there, but it's something that I would rank as believable.
Max: Wait, what was the conclusion?
Aaron: That I feel like Oxford and Cambridge, in the UK, they output a much higher percentage of economists than a American University of equal caliber.
Max: Oh, interesting.
Aaron: So there's probably a lot more of them in Europe than there are in the US and at that kind of upper tier of education, which tends to feed into the people in government at that level.
Max: Right. People in government, right. When I went to Yale, there were a lot of econ majors, but they weren't going into—they weren't the people going into government.
Aaron: Well, and I would say that...
Max: They were—people go into finance.
Aaron: ...if you were from a family that was connected and or wealthy in Africa or certain parts of Asia, that's where you went to school.
Max: Right.
Aaron: So you got pumped into that system.
Max: Yeah.
Aaron: I don't know how true that actually ever was and how true it is today, but it's certainly the impression that I'm carrying around in my head.
Max: Yeah, me too. It's, yeah, it's pretty true. I mean, one of the things you realize, like, because I went to Yale and one of the things he realized is, you can be very successful with that education. But a lot of it is the sum of the people there. I mean, well, okay, I don't want to be like, I don't want to say it.
Aaron: It's not all networking, but it's not all networking.
Max: No, no, I'm not even gonna say that some of it is just the connections—the family connections, and the wealth that people who are there already have. And so if you don't have that you could still make a—get huge benefit from that education though, people are gonna argue with me then, but I know I did. But it was like, okay some of the people there were already set up with, “Hey, if I want to start a business, their family can lend them half a million dollars, and they've got all the connections and...
Aaron: Yeah. Well it’s the expression of starting on 3rd base and picking a bit of a home run.
Max: ...It doesn't mean they can’t be successful otherwise. But a lot of the politicians especially. Well, yeah, and it's not that they’re not aware.
Aaron: Because ladder climbing is an intergenerational endeavor, that rarely do you go from the bottom to the top in a single lifetime.
Max: Yeah. Okay. So anyway, but that's not related.
Aaron: Completely off-topic.
Max: Yeah, that's a little off-topic.
Aaron: So Bitcoin.
Max: Right. So right. Okay. I just want to remind people about how fast these things move. I don't think it's going to take 40 years. If you remember back to 2013, 2014. I mean, some people have asked me more recently, like, “Max, you knew about Bitcoin back then? Why didn't you tell me to invest?” And the answer is, well, “I kind of did tell people too but I didn't push it that hard. Because a lot of my Facebook friends and people in the media were telling me like it's a scam. And it's evil. And this is going to be one of those things that you just you're gonna realize how stupid you are later." And like, it was kind of getting to me a little bit. I didn't believe it. But I was like, “Oh, I'm not gonna be that guy who pushes everyone just to make sure". And in fact, I even apply that to myself, like, I didn't overinvest, so it's like, I probably should have, but whatever.
So, it is kind of—it has come so far, in just a few short years, and it shows no sign of stopping. And so what—at some point, there are going to be political and economic earthquakes. If this thing has—I don't know, what's the market cap now? Let me just check it real quick. Just for comparison's sake. So the market cap right now...
Aaron: So market cap is going to be the dollar equivalent of the current holdings...
Max: Right.
Aaron: Does this account for lost and abandoned Bitcoin?
Max: Yes. Yeah. So it might actually be, well, it's hard to say. So it's a very—it's more of a order of magnitude measure.
Aaron: Got you.
Max: But let's say right now, it's $700 billion. So it’ll clearly be a trillion dollars, what happens if it's 10 trillion? What happens if it's 100 trillion? Then you start getting into, okay, all of the, like, everyone's funds are invested in this thing. And then you start having governments being invested in this thing as holdings just like they hold gold. And, in fact, I believe that we're actually pretty close to having some local governments and municipalities in the United States try this out. I think that there's a good reason for it.
So there's one article I want to call attention to. The Miami Mayor says, that city employees should be able to take their salaries in Bitcoin. That's Miami, that is a big city and is a city that's doing well, right now. And it’s the city that wants to become the next tech hub. Honestly, I think I could live in Miami, what do you think? I don't think that'd be that bad.
Aaron: I can't say that I've spent much time there. So the big question that pops to mind, and maybe the article addresses this, does that mean that they get their salary set in Bitcoin?
Max: No.
Aaron: Or their salary is set in dollars, but at the time of payment it is converted to Bitcoin?
Max: It's the time and payment for sure. I already know that I don't have to look at the article. Because they wouldn't do that with…
Aaron: Well, you can certainly negotiate that. I think a lot of freelancers have experimented with that type of thing.
Max: Yeah.
Aaron: Particularly if you're freelancing, internationally, you can...
Max: Yeah, but government is government, let's not push it that far.
Aaron: And government, well, kind of came up with the original concept of I'm going to give you this piece of paper that I say is worth something but it's only actually worth what I'm willing to redeem it for at a later date, so I can change my mind.
Max: Right. Right. So there have been companies that have invested in Bitcoin, I'm just gonna give—well, the big one right now is MicroStrategy. But there's some rumors, maybe Elon Musk might do it. And so sometimes instead of holding cash, they might hold Bitcoin.
People just a few years ago would have said, “That's insane this company should not be investing in Bitcoin, they should have their cash in dollars because their investors don't want to invest in Bitcoin." But now people are changing their mind. And I even think a city like Miami might try to do it. And I think some states might try to do it.
And what I think might be a catalyst for this is if, during the pandemic, some places locked down really hard, and destroyed all their businesses, with the hopes that, “Hey, we're going to get a federal bailout later." And now it looks like those bailouts might come and I feel like some of the places that stayed open like Miami, like Florida might say, “You know what if you're gonna give all of our dollars to states that didn't let their businesses operate, well, maybe we'll just invest in Bitcoin and let Bitcoin rise in relation to the dollar.” I think there might be appetite for a revolt of that nature on the local level, which, honestly, would be a lot more effective than any...
Aaron: I’m very curious what the mechanism there would be for—because the way you phrase it, it sounds like almost trying to protect themselves from the abuse of the federal government. But what about Bitcoin lets them do that?
Max: So, no, the federal government will still collect income taxes and whatnot from that state, like it's not—they're not protecting their assets, or there are people's assets from the federal government. But what they are doing is they are saying, “Hey, the federal government is doing these bailouts on credit, right? It's gonna be all credit. It's all gonna be—let's print a trillion dollars, let's print another trillion dollars. And we'll, we'll deal with it, our monetary system can handle it, presumably. And we'll just pass these dollars out to the areas that need it." Okay, fine.
Aaron: If state's maintained a large treasury, I could see that being a valid path. But my impression is that most states have a small to medium rainy day fund. And other than that, it's money in money out, that they struggle to keep a balanced budget, nevermind to accumulate a long-term surplus.
Max: Yeah. They might say that...
Aaron: What would be the exception, though, is pensions. And maybe that's not so much the state, but public-sector unions tend to be some of the biggest cut the—groups that still actually have pensions, and that's a lot of money to throw around.
Max: Yeah, that would be the ultimate Hail Mary pass, like our pensions are—a lot of times the pensions are not—you can't—what does it mean? Like we don't have enough to pay for the pension fund that the pension fund’s not solvent. All right, let's put it on Bitcoin and see if we can see… That seems crazy.
Aaron: But the purpose of the pension, right, is to beat inflation.
Max: Right.
Aaron: And if they're concerned about money printer go brrr. That there's going to be huge modern monetary theory and inflationary quantitative easing or whatnot, then that may be an excellent way to hedge that for the pensions.
Max: Right. Right. No, but and...
Aaron: And if they make the move, if the big institutional pensions go into that, then I think it won't be too long after that, then you start seeing maybe not individual retail level, but you may see like a fidelity or I'm blanking on some of the other big 401k managing companies having essentially the equivalent of like a mutual fund or a targeted retirement fund that has a huge chunk of Bitcoin in it.
Max: Oh, yeah. Yeah, for sure. That's probably gonna happen sooner, and I do think...
Aaron: because I don’t know about you, but I've never worked anywhere that's actually had a pension program. So.
Max: Yeah, a 401k.
Aaron: Yeah.
Max: But so I do think, though, you talk about these rainy day funds, and you talk about holdings that these states have, I think some states are gonna decide, “Yeah, let's have some holdings in Bitcoin, or some city funds” because they have something there. And they're like, “Hey, you know what, let's,” the thought of a state or a city betting against the dollar would have been crazy, I think just a few years ago. Now, it seems almost within the Overton window because people are so fed up and just buying Bitcoin doesn't seem that radical, it seems like a rather peaceful way of going about things. So that could be interesting.
And I actually think that if it starts to harm the dollar, that is when maybe politicians on the federal level might step up, and it might force their hands to do something about it. Or they might screw it all up. We don't know.
Aaron: So I was...
Max: This can come to a head at some point.
Aaron: We were talking about institutional investors and...
Max: By the way, before you get into that—the term is called hyperbitcoinization. It's the idea that everything gets turned over to this one asset, which is the hardest asset. Again, I don't want to be—say, it's definitely going to happen. But it's very interesting. Think about the idea of people who support this theory is like, “Yeah, it's gonna happen very fast. And it's gonna happen somewhere around 2025 to 2029”.
Aaron: Yeah, I don't know that we are headed to a future where everything is done in Bitcoin, but I could easily see a future where Bitcoin functionally replaces the dollar as the reserve currency of the world. That not everything is done in Bitcoin, but everything is benchmarked to Bitcoin.
Max: Yeah. So what does that mean for us in the US, like functionally?
Aaron: Well, that is perhaps a better alternative. If you accept the forecast that many people are making, that we're going to lose reserve currency status here in the US that the dollar is on an inevitable downslope and it's just a question of how long, then perhaps Bitcoin stepping into that role, or some other form of crypto is a superior option for us as Americans, than China, or some other nation stepping up taking that role?
Max: Right. Oh, yeah, much better. Like, would you rather be governed by China or Russia? Or by math, essentially. The question is, what does that mean for us, economically? Because I'm not really sure. Like, does that mean that we have—I'm still uncertain, like, whether that means we have unemployment jobs, leaving the country, at least in the short term or not? It's sort of—it's definitely going to be a shock if it happens, an economic shock.
And that always includes some economic pain for a lot of people, it might not be economic pain for me or you. Particularly if I successfully—as I do the research on this program, kind of anticipate where we're going, it could mean very good things for me and for the listeners of this show. But for people in this country in general, it could mean a lot of people are going to get hurt when things aren't done the way they're used to. But not too many have hold all their savings and dollars anymore. So I'm not so sure.
Aaron: Yeah, well, and so we were talking about pensions and big institutional investors, and how maybe some states have these large rainy day funds, but many don't necessarily have those kind of large holdings. But you know who does have large rainy day funds or large endowments? Ivy League universities.
So while we were talking, I went and checked, and there's actually an article from the end of January, indicating that Harvard, Yale, and Brown among other Ivy League universities have been buying up Bitcoin as part of their endowment for over a year at this point, not just getting donated Bitcoin by the occasional alumni but literally buying through public exchanges. So, if they're starting to move in that direction, then that's a huge vote of confidence in this as a reasonable hedge against wherever the economy is going
Max: This is just so amazing.
Aaron: Because they don't screw around with billion-dollar endowments.
Max: I don't want to—I can't emphasize enough, just a few years ago, this was like Mt. Gox exploded, this is it—Bitcoin is made to be stolen and made to be a scam, which of course it isn't. It's just hey, could it have been any other way if Bitcoin was introduced in the market And then the first few things that popped up were scams, like when there hasn't been like market pressure against that.
Aaron: Yeah.If one of the trustees of the Harvard endowment came into a board meeting and suggested we should really put some of our funds into Bitcoin at that point. They would have submitted him for mental review to...
Max: Yes.
Aaron: Send him of to the psych hospital
Max: It was magic internet money. Yeah, yeah, but I remember the people, like, using—the way I think about it, like, imagine if you're living in a world where Bitcoin has already taken over, for lack of a better term. And you read the history of how it started, the history would not say, “Oh, yeah, it was introduced, and it just kept going and going without any problems until it took over." It's like, no, like, there are growing pains.
And so I suspected at the time that Mt. Gox exploded, I was looking at it, and people were like, “Yep, this is the end, this is the end of everything”. And I was like, “Well, wait, let's see if this coin survives,” because then there'll be another crop of Bitcoin companies, and then some of them will go out of business. And there's still scams, and there's still scams around it even today. Sure, well, there always will be.
But as the organizations that do it get bigger and bigger and more reliant on brands, then and more and more, like, dare I say, regulated, I hate this term. Someone being like, “Hey, I am operating under the laws of the United States. And I'm here and there's really the, like, there's really very little I can do to kind of just steal your stuff. I've done X, Y, and Z to basically make it impossible or extremely unlikely”. So it's crazy how fast these things moved. And it's amazing, the number of people just a few years ago, who saw these initial blow-ups and use that as an excuse to say it's all dead. And the fact that it's moving so fast, it's just unbelievable. And it seems to be moving faster and faster in 2021.
Aaron: Yeah, and it's not unusual for the nerdy types to be at the cutting edge of this type of stuff. Most famously, Isaac Newton was master of the mint for the Royal Mint in Great Britain.
Max: Was he?
Aaron: Right before—what was it? It was 1699 and around then. So, I don't know much about what exactly he did in that role. But it's interesting...
Max: He was pocketing some money.
Aaron: Well, he certainly got a nice salary off of that. Yeah. But polymath is all around
Max: A pound for me, a pound of economy. A pound for me, a pound of economy. No, I don't know. Well, it's interesting. Well, I think mathematicians back then even theoretical mathematicians, were probably a lot more likely to get their hands dirty with that kind of thing, just accounting because that would have been probably a much bigger deal back then for someone—could he even be able to do accounting, maybe not by 1699. But certainly in the Middle Ages.
Aaron: Yeah.
Max: My history is a little weird on that.
Aaron: Well, so how do we tie this into the other major story of the last two weeks?
Max: Which is GameStop. Let's, so I don't—so some people are saying it ties in. Let's talk about and see if it does tie in. I'm not so sure. First, I guess I should summarize GameStop either—I feel like I've listened to, like, ten.
Aaron: If you're first hearing about it here, then then I don't know where you've been. But yeah, give the cliff notes version.
Max: Right. Right. Okay. So, well, we don't know—I feel like I've listened to 10 podcasts on GameStop already. And everyone's talking about it, so I feel like everyone knows, but so anyway, a bunch—so GameStop is a video game company.
Aaron: They're the Blockbuster of video games.
Max: Yes, you might find their stores at the mall, although they're not like Blockbuster that they're still around, they kind of feel like they're out of the 90s. Right? It feels like something like that. So they're a publicly-traded company. And they are heavily shorted by hedge funds. Shorting means that they're betting the stock is going to go down. They're borrowing the stock in hopes that the stock goes down so that when they buy it back later to return the stock, they'll buy back at a lower price.
And some people on Reddit wallstreetbets, which has, which is one of the—it's a pretty big subreddits, got a lot of people in there, someone discovered that it is very heavily shorted. In fact, the short positions taken out on GameStop are more than the entire value of the company. Which just means it have very heavily shorted. That actually confused me at first, does that confuse you at first when they said it because I—have you heard that...
Aaron: Yeah, I saw the 138% number thrown around which seems wrong at first. And it is certainly a red flag. I've heard that anything over, like, 20% of the value of the company being shorted is unusually high.
Max: Right.
Aaron: But it's not impossible because when you borrow that share to short it, and you borrow it to sell, and then whoever you sold it to could then lend it out to somebody else. So the same share can be shorted multiple times.
Max: Right. Right. So some people have come out and said, “Oh, if they're shorted 138%, or whatever that is, then they'll never be able to give back the shares.” But that's not entirely true.
Aaron: Right. And not all those shorts come due at the same time.
Max: Right, you could give back one share, and then buy it back later, and then give it back again. But it is still pretty crazy that you could be shorted that much. And so the people on wallstreetbets whether it was to make money or to stick to the hedge funds, I guess, were like, “Let's all invest in this.”
Aaron: It can be two things.
Max: Yeah, yeah, let's all invest in this, let's drive the price up, and let's drive them out of business. And it costs them—I think, on the order of, like $50 billion, or something crazy like that. Because the price of GameStop just had like a short squeeze, where demand for the stock—the supply was so low, and the demand went so high, and there were so many GameStop hagglers being like, “I'm gonna buy a bunch of GameStop. And I won't sell no matter what,” that the price just went from something like 18 at the beginning of the year, and actually, it was only $5 in the middle of 2020. So this kind of was a slow-rolling thing. People were starting to notice it in the summer of last year, but nobody really knew it. So it went 5 to 18 last year, then it went to 18 to like 450 and now it's fluctuating very, very much up and down and up and down.
Aaron: Right, it...
Max: GameStop, the fundamentals are clearly not worth that much. But it's really, really causing some of these hedge funds...
Aaron: Ignoring for a moment the 138% shorting of the stock, or whatever that number turns out to actually be. The fundamentals—it made sense to short that there was a turnaround effort underway, but it seems likely that it was a reasonable bet to be making that that it was overvalued where it was.
Max: Right, although the question is how much…?
Aaron: But fundamentals are a long-term indicator, not a short-term indicator, as we've seen in the last two weeks.
Max: Right. Right. So I think Melvin Capital was the—what was the name of the hedge fund? They're real people, they have names. They are people who work there, I once got a job offer at a hedge fund. I didn't end up taking it. But I guess I wouldn't have been invested in the hedge fund, I would have just been doing statistical models for them, although I'm sure my bonus would have been based on the amount they made.
But actually, so there's this hedge fund Point72, which is invested in Melvin capital. And they probably lost a bunch on this, but I heard they raised more. It's such an enormous hedge fund that it doesn't register for them probably—well, it registers. But doesn't kill them off, for sure.
This whole thing reminds me of—there's a question of what the meaning of this is. I think that there's a lot of people who ascribe meaning to this event. Like, is it revolt of the little guys taking down the big hedge funds once and for all? Well, there are examples of just crazy things that happen in the financial markets from time to time. Nassim Taleb talks about them. They're called Black Swans, I mean, Black Swans more broader than that, but he noticed them, certainly in financial markets. It kind of reminded me of a company called Long-Term Capital Management, if you've ever heard of that one.
Aaron: No, I'm not familiar with them.
Max: Okay. So there's a book on it. It's called When Genius Failed: The Rise and Fall of Long-Term Capital Management. I read that a couple years ago. And yeah, they're one of the funds that really screwed up. I think they had like 4 billion and they were leveraged 125 billion or something like that. And they used all these mathematical models. And I think, to make a long story short, they assumed some things were—some variables were independent when they were not. So they thought that something had a one in quadrillion chance when really it had a much better higher chance of happening.
Aaron: Yeah, well, I mean, fundamentally, the idea of a hedge fund is that they're supposed to be hedged in each direction, but...
Max: Yeah. That's where the name comes from.
Aaron: But the more you chase the big gains, the faster and looser you play with covering yourself with hedges. And clearly, these guys did not cover their full downside at Melvin.
Max: Yeah, Melvin or Long-Term Capital Management in which was 1997. So again, if this could happen in 1997—again, though, what was going on in 1997? We were also in the middle of a little bit of a financial bubble in ‘97. Right, and then, one of the shocks came of the Asian financial crisis, which is what led to… One of my takeaways from the books, I don't remember from the book, I don't remember all the specifics there, but it's not like all of the hedge funds are in it together. And they're like, “Help a buddy out.” No.
Aaron: Certainly not.
Max: If some of the funds sees that one struggling, they will go after, like sharks.
Aaron: Yeah, blood in the water for sure.
Max: They will take it apart. Yeah. So it's not just the little guys that would go after you...
Aaron: Which makes it surprising that Melvin basically got bailed out by a bigger fund, but I'm sure that that bigger fund is extracting their pound of flesh for doing it.
Max: Yeah, that's what they do. Yeah. And I'm surprised that other funds didn't see—the things that people saw in wallstreetbets. I'm surprised that someone at another fund, or a trader, or something, or I guess they are traders, but it's something...
Aaron: Why wasn’t another big fund doing the short squeeze play here?
Max: Yeah, they could have easily done it. I mean, I guess there are lots of quirks and opportunities out there. And the fact that some people in wallstreetbets saw it like, I think, “Well, that's really clever.” So it really takes someone who's looking hard...
Aaron: Yeah, I am hesitant to refer to—so on the one hand, I don't think this is an event that's going to drastically change the financial markets forever. I think we'll see some things shift around, but it's, this isn't—I wouldn't say that this is a major turning point.
Max: No. I did say...
Aaron: And part of that is because unless you work in this specific narrow sector of the market, the media coverage this has gotten is vastly blown out of proportion to how much most Wall Street people care about what happened. That this has happened in a very narrow space of the markets. And it certainly had a big impact on some people, but most funds were pretty much untouched by this in a meaningful way.
Max: Yeah, but it still is big news. And it still is—I think it could be indicative of a little of financial bubble conditions, just like Long-Term Capital Management was in kind of a bubble market. We could be in a little bit of a—again, I'm not like an expert on these things. So I don't want to go too far out of my lane. But could we be in some kind of a monetary bubble? Because we have COVID. And we have all of this stimulus printing, and we have years and years of low-interest rates and the conditions of the market.
Now, again, could this happen in normal conditions in the market? Maybe it could. But I feel like it's more likely, when something's in the big picture out of whack. If that makes sense.
Aaron: Yeah. I don't know enough to make the determination. Is this a sign of there were major flaws in the market? Or is this just the market working as it should? Where this group identified an inefficiency in the market, they exploited it, and now they're returning the market back to its natural equilibrium as a result of having fixed the inaccurate pricing.
Max: Yeah, yeah. Eventually, could it mean, some people have said...
Aaron: I'm pretty confident that the GameStop has not settled back to its true value.
Max: Oh, no, no.
Aaron: But I think it will eventually.
Max: It has to be.
Aaron: It needs a couple of weeks or months to get back to that, but it will, I'm fairly confident.
Max: Here's an easy question, what do you do if you are the leadership of one of these companies like you got an—you're the CEO of GameStop. And you're like, I don't know if the management team at GameStop actually cares about video games, but they might. So they're like their gaming people and they’re business people, but they don't—they're like, “They didn't teach this in business school. What am I gonna do?”
Aaron: Yeah, this is one of the dangers of being a publicly-traded company is that things can happen, that are not directly under your control of it, throwing everything out of whack, out of perspective.
Max: Yeah. So I suggested that—and then I found out that this is like, really hard to do probably almost impossible to do. But I was like, well, why don't they get together and say we're going to issue new shares of GameStop. Apparently, that takes a lot longer. You can't just, like, do it on a whim.
Aaron: Yeah, that would be my assumption. But again, way outside my area of expertise, but...
Max: But if you could, they should just issue shares of GameStop. Raise money for the company, put it in Bitcoin, maybe, I don't know. And then when the share and then when the stock price goes down, buy it back up. And then it ends up higher than it otherwise would have. And then you'd be acting in the interest of the shareholders that whole time. But...
Aaron: Uncharted territory, for sure.
Max: Yeah. Yeah. Some other stocks is happening. I don't know yet. I heard like AMC, the movie theater...
Aaron: There were some bumps there.
Max: There were some bumps there. And that could stop AMC from going out of business. They were close to going out of business from the pandemic, maybe now they'll survive. So that's interesting.
Yeah, so again, this could be a symptom of the easy money economy that we had for a long time. Some people say, like, “Hey, does this mean a radical shift in the market towards decentralization away from big funds?” I think that sounds too good to be true. I think we'll always be big funds. But maybe the little guy will have more—maybe there's more opportunities for a smaller player to get in there and gum up the works, especially with... I mean, the use of an internet worm that doesn't seem very—that technology doesn't seem particularly new. You know what I mean? Like, why didn't they do this 5-10 years ago?
Aaron: But the ability to coordinate the actions of literally millions of people virtually in real-time that...
Max: We had that 5-7 years ago.
Aaron: Even though internet forums were around back in the days of BBS, it couldn't be mobilized in the way that it can now.
Max: Right, right, I guess maybe in the last 10 years...
Aaron: ThenI think the numbers were something like wallstreetbets had 4 million members back before this hit the front page of the newspapers in January.
Max: But let me ask you this, then why not five years ago?
Aaron: Well, there, I think there are two pieces there. One is the Robin Hood app...
Max: Oh, yeah.
Aaron: ...which made for an easy point of entry for a lot of people. And I would say it's not just the 4 million people that were in there at the beginning of January, it's the probably millions more who saw the story, whether they heard about it through the grapevine or through Reddit, or when it—people on NPR and The New York Times started talking about it. But it was easy enough for them to jump on the bandwagon before it was over. And the whole concept of a meme stock is a lot more movable.
Doing a pump and dump through your newsletter is a lot harder to scale to this level than when you can not only use Reddit and Twitter but also they essentially weaponize the media here because that drove the message even further and got more people to jump in on it.
Max: I mean, weaponizing the media and making them a useful idiot to your plans is sort of something that we've seen a lot of in the last few years.
Aaron: I mean, they're gonna be a force for destruction. At least I'd like to be able to point them in a direction I'd like.
Max: Yeah, so speaking of meme stock, there's a meme coin too, Dogecoin.
Aaron: Dogecoin is like one of the OG coins that goes way back.
Max: Yeah, so, it's—I used to mine it and I think I lost the ones that I mined. But, or maybe I didn't. But anyway, I think I only mined a handful. So it's like people like, “It might go to $1” whereas that's not going to be—unfortunately that's not going to pay the bills for me.
Aaron: Especially with the dollar decreasing in value.
Max: Yeah, well, yes. If I—I think I mined three Dogecoin—no, I think I mined a fraction of a Dogecoin. So if Dogecoin goes to $100,000 let me know I'll go to the dump and try to get my—no, well no, I might have—what I would have to do is go through all my hard drives or whatever.
So anyway, but that's been having a little bit—so that was a meme coin back in like 2014 maybe and it was like the number three coin at some point. And it's not really—it's not hard money like Bitcoin because the schedule is they just—they issue a lot of it. So it's like, there's always going to be more made. It's not very—it keeps the supply is not very limited. So that sort of limits how high the price could go. But it's the quintessential meme coin, and it went—it did shoot up through all this, like collective action on Reddit and stuff recently. And then Elon Musk tweeted about it because he likes to make these things happen. And, he got a big Dogecoin bump. So, these things are happening all over the place.
Aaron: It's interesting times.
Max: Yeah, yeah. I think that's the theme of the episode. Interesting times. I don't know what to call this episode. I'm still kind of up in the air about it. But I guess we'll figure it out offline. Any ideas? What's the over overriding theme of this episode?
Aaron: Oh, overriding theme.
Max: Yeah.
Aaron: Where are we going? Nobody knows.
Max: Yeah, yeah. That's—I almost, well— I'm trying to think of something a little bit more certain than that. Nothing certain but uncertainty, no, we'll figure it out. All right. Yeah. So bottom line is if I had to summarize—yeah. The changes to our financial and economic system are—there is a tsunami on the horizon. And we see it coming closer and closer to our shore. And we have some—we're experiencing some big waves first, and we're like, was that the tsunami? And no, it's like the small tsunami and the bigger one is still out there. So that's gonna crash in a few years. And we will be along for the ride if I could use that, if that metaphor has landed properly.
Aaron: Well, now I'm well and truly terrified. So thank you for that.
Max: All right, next week, on the Local Maximum. We're going to talk about a big change in my life. So get ready for that. All right, any last thoughts Aaron?
Aaron: No, I'm just worried about this Bitcoin tsunami that's coming.
Max: Oh, yeah. Oh, yeah. Get your—I don't know how you prepare for it. But...
Aaron: Bitcoin umbrella.
Max: Bitcoin umbrella with all your funds. Alright. We'll call it a day and have a great week everyone.
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