We have entered a post-information era. Most of what you read is propaganda, designed to perpetuate systems that no longer serve the purpose they originally served. 

The result is crises of confidence: in healthcare authorities, in police, in democracy, in free speech—and now in finance. The r/WallStreetBets phenomenon has laid bare the problem: some of our well-meaning abstractions, such as “value” or “free market” or “stocks,” don’t actually mean what we think they mean.

You know the story by now. It started with /u/DeepFuckingValue on Reddit’s r/WallStreetBets forum (WSB) buying GameStop stock (GME), hoping it might get to “at least $10.” Then, after the price skyrocketed, WSB attempted to profit from a potential “short squeeze,” in which hedge funds that shorted the stock by buying it up would be forced to sell if the price stayed high enough for long enough. 

This has escalated into a full-scale financial battle, complete with a “fog of war”: the basic facts of the battlefield themselves are in dispute. For example, on January 30, Yahoo Finance data showed that institutions (as compared with individuals) held 122.04% of all available GameStop stock. How could that be? Was this a bug in Yahoo Finance, or did somebody claim they had more shares than they do? Or take another example: did the investment firm Melvin Capital sell their GameStop stock under pressure from the redditors or not? CNBC seems to say so. r/WallStreetBets doesn’t really believe it, in part because the price of the shorts is apparently still so high. 

Are any of the numbers being tossed around even accurate? Nobody seems to know. Nobody will know, until the battle is finished and the fog of war is lifted. We need to understand this as a crisis of conflicting mentalities, of different working theories about how the market works and assigns value.

Whose Value?

The original theory of the stock market is that the stocks ought to reflect some value of the company—such as the future value of all the dividends. Some people reject this “value hypothesis” all together, claiming that the entire thing is arbitrary and imaginary: stocks, value, the lot of it. This is an understandable position, but it misses the important point that the original rise in GME’s price was the result of people doubling down on the value hypothesis, not rejecting it: it is because higher demand led to higher pricing that the whole thing got started. 

Others predicted that the value hypothesis would prove wholly sound, and thus the stock would go down eventually. That is why they believed that they could make money by buying new short stocks after the original hedge funders back out. This is also wrong.

The truth is, even if the stock is likely to go down in the future, it isn’t guaranteed that anyone can actually profit from knowing this fact.

To explain why, we need to step away from the abstractions of “value” or “efficient markets” and look at the underlying algorithm driving the participants—the rationale according to which WSB as a group is behaving.

Every so often, WSB tries to get a read on how high GME has risen. If it is up to anything like 100% or more, then they spam the message board with “we like the stock” and “apes together strong.” The implied strategy is that regardless of current price, the long holders who “hold the line” and keep their stocks can outlast the shorters who will have to sell, eventually triggering another squeeze. 

This is likely true, as the shorters need to pay interest to maintain their positions, whereas long holders who allowed their stock to be loaned are collecting interest from it. And the collective is far more likely to hold if the price of the stock is very high, because of their shared ethos of camaraderie and vengeance: whether or not any individual loses money, they do not wish to allow any large amount of shorters to make money once they are all bought in.

So we have an amusing situation: the “smooth brain” true believers, who feel confident that the market reflects value in every case, are likely to get pwned by believers in the “apes together strong” thesis. Of course, if the new shorts read this and actually understand it, they would not touch anything related to GME with a 10-foot pole. Alas, they still think the facts are undisputed and everyone’s theory of value is basically the same. They don’t understand that they are proceeding by commitment to abstractions while the redditors are proceeding by understanding underlying algorithms.

The Fallout

The powers that be can react in one of three ways to this situation. 

The first is the cheery outcome expected by some WSBetters: this time, the SEC will step in and help the little guy for a change. People dream of new rules banning short selling of a stock if it’s already 100% or 50% shorted, or even banning short selling altogether. People dream of holding hedge funds accountable for extra risk they undertook. In a perfect world, an investigation into the matter would raise long-overdue questions of whether shorting should be illegal, and under what circumstances.

In my estimation, this has around a 10% chance of happening. 

More likely, the powers that be will react as they usually do to events which threaten their dominance: they will fracture the WSB movement along political lines. Different parties will focus on different sub-problems facing WSB, directing negative energy of each sub-group toward the others instead of Wall Street. This would neuter the movement and its potential to send stonks up. 

Somewhat less plausible, though still likely if the political split strategy fails, is a massive crackdown on retail investors, hard-banning all social media stock chatter either by legal means, or extra-legally through “community standards.” Discord and Facebook have already moved against stock groups. This could involve branding stock buying based on internet trends with the usual marks of shame, such as “hate speech,” and fining or perhaps even arresting key ringleaders and meme makers. 

Yes, it’s likely such people would enjoy some measure of unified internet support. But you can ask Julian Assange or Edward Snowden how useful that ultimately is. Now any “reasonable” person would be horrified to hear about this, or at least calmly urge the regime to not squander legitimacy martyring memelords. But nothing in the post-information era is “reasonable”—least of all the powers that be, who use the full force of their strength and violence in service of outdated abstractions like “normalcy.” The chance of this happening fundamentally depends on how many assets of key players are really backed by short sales of ultimately valuable things.

Of course, Gamers are an interesting demographic with some “spare” political energy. People who can get invested into grinding for what appears to be “meaningless internet points” from the outside can be “politically weaponized” in short order. The “grinding goals” could quickly become “red balance sheets.” If I were to give advice to the current elites, I would highly advise against poking this particular wasp’s nest. But again, just like I don’t expect new shorters to understand the underlying market algorithm, I certainly don’t expect the media state to understand the current legitimacy landscape. 

Could a harsh crackdown on retail stonk buying and discussion be a catalyst of the complete collapse of the regime? It’s unclear. There are only so many times one can turn up the crank of repression before it breaks completely…but who knows when the gasket will blow.