GameStop: Sandworms Into the Future (Venture Capital on Arrakis, Part 2)

“I need time now to consider the future that is a past within my mind.”

So, to GameStop, the only thing worth talking about now, and probably for years to come. By pure luck, GameStop arrives in time to save me from having to write the planned second installment of the Arrakis series, which was going to have me jumping through all sorts of hoops about precognition and building the future and the inevitable (but productive) failure of financialized foresight. Instead we have this, not just an object lesson or an illustration but a moment that heralds the fundamental transformation of that relationship between money and the future. (Don’t worry though, we’ll get back to Paul Atreides, and soon).

First, a refresher for those still getting caught up on the biggest financial markets story since the 2008 financial crisis (or at least since WeWork). In very broad strokes: GameStop, as a primarily physical retail outlet in an industry that has largely transitioned to digital direct sales, is not expected to do well in the future. So a lot of professional Wall Street types have bet heavily that its stock price will drop. But a group of very smart independent traders, organized through the Reddit forum WallStreetBets, thought that maybe GameStop had a future the real Wall Street didn’t see, and began buying the depressed stock way back in 2019. The stock did indeed go up, and they made a solid amount of money.

But then – and here is where things get both incredibly complex and incredibly important – the same group figured out that the number of people and institutions betting against GameStop made those “shorts” vulnerable. The technicals here are fascinating but irrelevant. What matters is that the Redditors eventually attracted enough small traders to adopt their strategy, and they were able to defeat the shorts through sheer brute force, turning several large hedge funds into smoking craters the size of small moons.

(A note before we continue: The title of this email is a pun on something noone has ever heard of, the obscure tape-ambient band Dolphins Into the Future. Their album On Sea-Faring Isolation is a very solid soundtrack for reading this newsletter.)

There is a great deal of discussion of the class conflict angle to the GameStop story. First, it should be said, these are all people with at least a little disposable income to throw at a meme stock, so we’re not talking about most of the 17% of Americans whose household income is below $25,000 a year. WallStreetBets is by no means the voice of the lumpenproletariat.

But WallStreetBets is made up of workers, if mostly of the semiprofessional middle classes. These are above-average Joes sharpening their plowshares into swords for the hedge fund guys. It’s a satisfying story that holds together fairly well under scrutiny. If there’s anything wrong with enjoying it when a well-organized mob mug a couple of billionaires using the billionaires’ own tools, then I don’t want to be right.

So why exactly is there so much rage against the financier class?

The most succinct and consistent explanation I’ve heard is a simple argument for an even playing field: “They manipulate the market all the time, so why can’t we?” This does refer to some cases of straightforward market manipulation in big-time finance, or just the clubby elite atmosphere that creates a strong appearance of conspiracy, like the hedge fund “idea dinners” mentioned by Levine.

But a deeper, even more galling version of this in the modern era comes via hedge funds’ participation in the ultimate legal confidence game – venture capital. Broadly, hedge funds are among those with access to early-round startup equity sales, and these sales are often followed by what can look like an effort to use privilege, leverage, and cash to make sure the bet pays out.

The ultimate example of this conspiratorial (yet completely transparent) element of venture capital is Masayoshi Son’s SoftBank Vision Fund. The fund’s premise, once you scrape off the gold leaf, is that enough money can make any company successful, simply because a big enough pile of cash will allow a firm to effectively buy customers until it runs its competition out of business. This playbook was exemplified by Son plowing billions of dollars into WeWork and Uber, two equally terrible businesses that were supposed to win by sheer scale (one of those businesses is still burning Son’s cash).

Ironically, SoftBank has come to exemplify this strategy exactly because it has failed so spectacularly at executing it – but others have succeeded, again and again. A more banal but much more common example is the frequency with which VCs (and hedge funds through them) invest in multiple ‘rounds’ of a startup, helping ensure that its paper valuation keeps rising, which creates a narrative of success around the company that makes an eventual payday more likely.

In effect, this is a way of summoning alpha by using money itself to signal that, “Hey, this is what we’re doing now, jump on board.” It is completely unremarkable on Wall Street, but it looks an awful lot like cynical market manipulation to the layperson on Main Street, who it turns out is a bit smarter than has been credited.

This makes the class-conflict angle all the richer, since the GameStop rally is to a degree about small traders banding together in an effort to mimic the same future-engineering that has become standard in VC. In this case the target was a decades-old mall retailer instead of a tech startup, but the basic dynamics rhyme.

It all started with Roaring Kitty, a.k.a. Keith Gill, a man with a fact-based thesis: that a mall retailer in 2020 could maybe turn things around. Just like many institutional investors or venture capitalists, he publicized his thesis. But from there, bit by bit and then all at once, the pile-in to GME became a decentralized but totally open attempt at market manipulation.

I hate to be so crude, but Keith Gill is Paul Atreides.

Like Paul, Gill’s vision has made him powerful. But, again like Paul, the vision was substantially self-fulfilling: war, like finance, is a confidence game. Mass mobilizations require mass delusions, and in both cases those delusions create the conditions by which impossible dreams become accomplished fact.

So, when we look at Keith Gill’s great and terrible jihad, where is the line between the intention of the seer, and the reactions of the many to his foresight? This question is at the core of the regulatory fog encircling the GameStop story. Matt Levine, discussing the definition of “market manipulation,” also finely traces the infinitesmal gap between believing in a likely outcome and actively working to create it. (Some important context here on “jihad,” in Dune and in Islam: not merely a crusade, but a great struggle).

“If you buy stock with the purpose of pushing the price up so that other people will buy it, that’s market manipulation,” Levine writes. “If you buy stock hoping that the price will go up because other people buy it, that’s not market manipulation; that’s just normal. Those things are not so different.”

(Levine’s piece goes on to elegantly break down the real-world, everyday legal logic by which financial fraud allegations are evaluated.)

But manipulated or not, a stock price must eventually cross the horizon between future and present. Expectations must become reality – or not. I have already referred a few times in these notes to the “collapsing wave function” of finance, and here I go again. In physics, an object remains in a quantum state of indeterminacy until it is observed. In finance, a growth or turnaround stock remains in a state of speculation until it becomes a dividend-generating company that justifies its valuation, or collapses in a selloff.

Market fluctuations around a single stock are like the coexistent eigenstates of an unresolved wave function (at least under EMT, but don’t string me up on my contradictions). They ebb and flow at an unpredictable pace depending on the sentiments of others, with various parties getting on and off the train as it moves towards its destination – the point where price equals value.

(Of course, that destination is only ever reached in one case: When both price and value become zero. Any other present moment inevitably creates its own desire for a future – either of growth or of death, but never of stasis.)

The most important big financial context for all of this is that we now live in a zero interest rate world (credit to the inimitable Felix Salmon for reminding me of this point). When interest rates for average conservative savers reach zero, the delta between investment and speculation goes to infinity, creating the condition for a confusion of futures (times) that invade the present through futures (financial instruments). These future (times) have names we all know now – not just GameStop and AMC and Nokia but Tesla and Rivian.

In the broadest possible terms, a fairly consistent systemwide interest rate for savers represents a social expectation of steady, safe growth. At bottom, it represents a generalized belief that you can use capital today to build something – in fact, to build nearly anything – and expect at least a modest future return. When savings and government bond rates go to zero, they reflect a lack of the same faith. Growth investments are scarce.

But at the same time, the growth that does happen tends to be highly concentrated and exponential. This is basically because we are still in the hangover of a monopoly-friendly political regime that lasted for decades, and at the same time in the midst of a technological transformation where global scale, software produced at zero marginal unit cost, and automation of routine tasks are being used to build giant conveyor belts that deliver money to, like, ten guys.

As long as interest rates are zero, the potential future return on any investment is more than zero, while the opportunity cost of choosing stocks over something safer, like government bonds, is also zero - as long as you ride into your future with your fellow tribesmen.

And so, never the twain shall meet: as long as the Great Dream looms, and there is no Modest Dream being offered as an alternative, the Great Dream will grow infinitely, like a fairytale castle whose vines fatten and harden, its walls swollen with lurid pregnancy, until it is a cancerous abomination overflowing its hilltop, thrusting its hungry veins into the peasants at will.

Or, more frequently, until it explodes, and we awake into a vast nothingness where the dream once was.

People are talking a lot about a financial transaction tax, and that would certainly have some impact on volatility on a day to day basis. But the underlying force driving inflated asset prices would be unchanged: we would still live in a world where the slim possibility of a magically transformed future has far more appeal for the vast majority of average people, than an investment in the individual or community that would directly build a maybe slightly better future that they create themselves.

And this change is not a failure of drive or morality or vision – the rules now dictate that anyone not swinging for the fences is a goddamn idiotic sucker. The rules, not the Kitties, have called down the whirlwind.