February 9, 2021 | Pump & Dump

Reddit’s five-second, what-the-hell-was-that? Superbowl ad was judged as a brilliant marketing move the next day. If you missed it, that was almost the point. First a logo, then a bunch of words which flashed by too fast to read them. A Millennial, GenZ thing. Most Boomers were in the can at the time.

Of course the Redditers were capitalizing on the explosion of interest – by media and newbie day traders – of its r/wallstreetbets chat room. Not only was the site responsible for a massive crowdfunding manipulation of several stocks (most notably GME, GameStop), it also just raised $250 million in private equity to help expansion. By the way, Robinhood, the free-trading app most favoured by the Reddit mob, also ran a spot on the football extravaganza. But this is what people strained to see…

While speaking about market manipulation, media exploitation and investor frenzy, we can’t ignore Elon Musk. The gazillionaire EV-space travel-tunnel digging-digital visionary and idol of the moment invested $1.5 billion in crypto while making it know he’d sell Teslas for Bitcoins. This helped propel BTC to new all-time highs, as it steamed towards the $50,000 US mark in an eruption of orgiastic rocket–thrusting enthusiasm.

Some people think crypto will replace fiat currency, now forever corrupted by bad government decisions, central bank bungling and unrepayable sovereign debt. Of course, they’re wrong. But that’s a topic for another day.

What’s notable about Musk is that he’s a promoter. A great one. Not only has he juiced BTC, but he purposefully did the same for GME, and even a puppy-crypto that was started as a joke (dogecoin). His theatrics meanwhile have made Tesla the most-capitalized car company on the planet when it’s not even in the top ten vehicle producers. It’s stunning what some well-placed hype will do when wooing investors. Especially the moist ones.

So, Reddit. The Hoodies. GME, AMC, silver, BTC and Elon tweets. It’s an old lesson that keeps being relearned. If getting rich without working for it (because you’re smarter than everybody else) was actually a strategy then this blog would be all over it. But, alas, in the real world we call it ‘pump & dump.’ It’s why there are regulators. And why they’re a bit pissed.

The latest news comes out of BC, where there’s been a long, long history of selling crap assets to gullible rubes. For 92 years the province was home to the Wild West of Canadian equity markets, the VSE, where any of the dodgiest mining deals in the country were struck. For most of those decades being a ‘promoter’ was almost respectable, and there sure were a lot of them. Think silk vests, string ties, handlebar staches, shiny horses, babes and moneyclips. Oh, and bags of gold nuggets, rushed in by mule from the latest big hole.

So the BC Securities Commission is now all over Reddit. “The pump and dump game has changed,” says the regulator, “in a world dominated by social media.” And this sums it up nicely: “The simple idea is this: somebody shouldn’t be able to lie on social media about a stock.”

A big problem with GME on Reddit, for example, was that people with positions in the stock – even corporate insiders with a significant holding – were able to say whatever they wanted, without consequences, making broad claims and exhorting the aroused masses to load up. (On Tuesday a remorseful woman admitted to me that she bought 25 shares at $447 a pop. That’s about $400 a piece more than they’re now worth – for a one-week loss of $10,000.)

So the regulator is mulling a requirement which would force anyone who is pumping or dumping a stock to publicly disclose if they have a long or short position in that company. In the interests of transparency the commish points out it doesn’t have to actually prove any statement moved the price of an equity, only that a reasonable investor might find that information important in making a buy/sell decision. That’s a big hammer. And the odds are this would be adopted Canada-wide by the Canadian Securities Administrators and IIROC (the very scary dudes with quasi-judicial powers who regulate quivering financial advisors like moi).

Last week, in the wake of the Reddit mash-up, they said this: “We will take appropriate regulatory action to protect investors if we identify that abusive or manipulative trading activity may be taking place.” Yup, and there’s zero reason not to believe what happened with GME or AMC (or other target assets) was pure manipulation. The last total I saw for cumulative GameStop losses was $18 billion. Most of it out of the pockets, rent money and credit cards of people who mistook gambling for investing, and trusted some sleaze on a chat board. Like always (now with Bitcoin), a few will pig out enormously. The many will be Hoovered.

By the way, don’t bother slamming the comments section to say I’m a paleo who doesn’t understand fintech, blockchain technology, web3, the inevitability of cyrpto or the evil of naked shorts. I do. But that’s not the issue. It’s about cheating people, especially those who can least afford it.

Smirk away. You’ll still burn.

Garth Turner February 9th, 2021

Posted In: The Greater Fool

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