UGH – Robinhood is Not Your Friend

I didn’t want to do this. Talk about GameStop, Reddit, Stonks, short-squeezes, hedge funds and roaring kitties.

And yet, here we are.

GameStop Strip Mall Location

I didn’t want to do this because part of what I hate about traditional financial journalism is that it focuses on the sensational and statistically improbable, such that the average reader may come away with a twisted sense of what is normal and probable. And therefore the average reader might set a course that is unwise, or cement beliefs that are untrue.

I didn’t want to do this, but then I kept reading the stories that celebrated all the sensational. I fielded questions like – “are short sellers bad? If not, please explain” and comments like “I bought GME, wish me luck.” So I can’t help myself. 

My apologies for piling on. 

Short-selling is not bad. Short-selling is a necessary market function. Institutional market makers, otherwise commonly known as brokers, go short in the ordinary course of their business to maintain orderly market flow. Other institutional investors have the ability to “go short,” by borrowing securities, selling them at today’s market price, and then hoping to buy them back at a lower price in the future. Sometimes this makes money, when the stock declines. Sometimes this loses money, when the stock price rises. There is no deeper moral meaning to this short selling activity. 

Short-selling is part of the plumbing and wiring of financial markets. Short-selling is no more evil than copper wires are evil for lighting up your house. Should you, the non-licensed electrician, touch those copper wires? Hells NO! Step away from those wires. Do not short stocks yourself unless you want to get fried.

Institutional investors do sometimes short stocks. They also use borrowed money, engage in options strategies, and trade for short-term gains and losses. Retail investors should, probably, never do these things. I’m not saying it should be illegal for individuals to do this – we permit harmful vices all the time in a free society among consenting adults – but there should be warning labels and limits and deep discouragements and heavy taxes and all the speedbumps to prevent people from doing themselves much harm.

Robinhood app – I’m not a fan.

Robinhood is a financial services app providing an easy-to-use onramp to retail investors. A seemingly-friendly accessible Main Street approach to Wall Street. It should be a morally neutral platform. Unfortunately, it appears to encourage all the worst investment behaviors that Main Street retail investors should not do. Behaviors like using leverage, options, trading individual stocks, short-termism. Robinhood is a menace because it’s going to cost people money, people who probably can’t afford to lose it. And lose they will.

Acorns, my favorite “democratizing investing” app

Despite the name, the Robinhood app does not favor the ‘everyman’ over the Wall Street sharps. On the contrary, to the extent it encourages leverage, options trading, individual stock trading and short-term trading, it will, over time, inevitably tend to transfer money away from the everyman toward Wall Street. All under the guise of “democratizing investing.” There are some great “democratizing investing” apps.1 Robinhood just is not one of them.

Reddit is cool. A couple of guys (I think they were mostly guys but on Reddit users can remain anonymous so permit me to just simplify genders here) found value in an unloved stock, GameStop. Many months ago. It was so unloved that many hedge funds had large short positions. In January, a mob of Redditors, and others, engaged in a buying frenzy, a storm-the-capitol type pile-on in that stock. It was as unwise, conspiratorially-fueled, and briefly successful as any shocking market move in recent memory.

To be clear, there is nothing new about a part of this. Attacking short-sellers and making them suffer is a time-honored blood sport among professional hedge fund investors. 

What was new was Robinhood investors and Reddit Bros figured out a way to put on their viking caps, fur-trimmed coats and body armor to overwhelm the financial barricades to participate en masse, with the sheer weight of their bodies, (metaphorically, financially, speaking) causing mass hysteria in the stock.

Would-be populists, ranging from Senator Ted Cruz to Congresswoman Alexandria Ocasio-Cortez questioned attempts by regulators to slow down the GameStop frenzy. Their commentary was neither informed nor helpful. 

The slow downs, we now know, were designed not to quelch the mob nor to defend short-sellers, but to protect market makers – including especially Robinhood, from failing. They were the Capital Cops of this story trying to do their jobs. Nobody wins when they go down. Unless you are in favor of anarchy. Which I am not.

We also now know that much of the frenzy involved large institutional investors as well as the Reddit Robinhood and Reddit Bro crowd. The Wall Street Journal has reported on $700 million, $200 million, and $150 million gains by traditional hedge funds joining the pile-on in January. I just mention this because the simple David and Goliath story is always appealing in markets, but frequently wrong.

A few other thoughts. I recently argued that despite the fact that traditional inflation in the economy seems tame, that the run-up in real estate and stock markets generally should be understood as a specific form of inflation. 

Protect yourself from the viking hats

I cannot prove the following, but I believe it: The frenzy in GameStop, like the parallel ephemeral frenzies in stocks like Tesla and AMC, cryptocurrencies like Bitcoin and Dogecoin, and commodities like silver seem to share a mob-like desperate quality. My thesis – again just my belief – is that the easy monetary policy from the Federal Reserve (low interest rates, huge securities portfolio) has created an ocean of extra cash, sloshing around the capital markets. The excess liquidity sloshing around creates waves and then occasional rogue wave tsunamis. The appearance of these rogue waves in the markets are a kind of inflation. 

They are dangerous and possibly destructive, but only if you put yourself in harm’s way. Stay inland, and defend your castle against the viking hats.

A version of this post ran in the San Antonio Express News.

Public Service Announcement: Please use better investing apps than Robinhood.

Like Acorns (my favorite)

or Like M1 Finance

or Like Qapital

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  1. Specifically, I think Acorns is amazing and everyone should open an Acorns app right now

The Populist Approach to Disaster Relief

rose_cityWhat is the most effective way to deliver resources to a community in need, especially following a natural disaster like Hurricane Harvey?

We’re still far from knowing the best way, and we won’t all agree on the answer. Should relief come from the federal government, primarily through FEMA and the SBA? Should financial relief come from giant international organizations like the Red Cross, even though the Red Cross has come in for attacks in recent years, for its large overhead costs and uneven on-the-ground effectiveness?

Or should we largely look to private citizens to organize themselves to solve local needs using local resources?

One of the challenges of improving disaster relief is that people won’t go on the record criticizing relief organizations. Well, stay tuned.

Rose City, TX, a 500-person bedroom community next to Beaumont, TX and less than a hour from the Louisiana border, got slammed by Hurricane Harvey. Of the estimated 210 houses in town, Mayor Bonnie Stephenson told me, only two houses escaped flooding.

The financial needs of this town are immense, in part because of the preponderance of retired and low-income households. Another factor in Rose City, according to Stephenson’s estimation, is that after Hurricane Ike flooded the town in 2008, 90 percent of residents could not afford, or declined to get, flood insurance. Without insurance, Stephenson claims, FEMA has declined to help the residents of Rose City rebuild. The Mayor herself had flood insurance, which she’s been unable to collect from FEMA, because of what she calls “red tape.”

For Stephenson, the answer to my question above – the best way to deliver resources – is neither FEMA nor the Red Cross.

“FEMA is not helping,”

she told me.

And the Red Cross?

“Red Cross came in and gave $400 gift cards, but everybody didn’t qualify for this. Some of them were turned down. But why were they turned down? And my question with FEMA,” Stephenson continued, “Why do we have to jump through hoops? Why are we having to wait? We’re not trying to cheat anybody.” And for the rest of the town – the majority of people who didn’t have flood insurance – she asks “Why aren’t they [FEMA] going to help the people who need it the most?”

In response to my questions about who actually has been helping, Stephenson named smaller, self-organizing groups of citizens who came to Rose City’s rescue. Volunteers from the Los Angeles Police Department flew in, the week following the Harvey rains, rented cars in Houston and brought barbecue and generators and lights from Home Depot. Church groups, including Baptists and Mormons and other denominations, she said, came to town. She recalled the self-appointed “Cajun Navy” and later the “Cajun Army” arriving from Louisiana, ordinary citizens delivering hot meals and supplies using their own resources.

red_crossPerhaps the most impressive of all, according to Stephenson, was the one-man operation of Eric Klein, and his no-overhead-cost “I don’t know how we would have done it without him. He knew how to get things organized.”

I spoke to Klein on the phone recently. He has no doubt in his mind about the answer to my question above.

And politeness about criticizing others’ efforts? That’s not holding Eric Klein back. In fact, he says he got involved in disaster relief 15 years ago precisely because he is fueled by rage – rage at money that never gets delivered. “I have never seen anything this corrupt in my life. People are in dire need, cut off and denied.”

I mention FEMA and the Red Cross. “Red tape is by design,” Klein claims. “Without any doubt [FEMA and Red Cross] create this red tape, and this all happens.”

Shortly after arriving in Rose City in mid-September, Klein recorded a video on Facebook that went viral – 500,000+ views and 16,000+ shares, about a woman sleeping in a tent holding on to the ashes of her deceased son.

In a Not-Suitable-For-Work stream of consciousness video he channels the helplessness and rage of people who have not seen the financial resources of FEMA and the Red Cross show up in Rose City.

In response to what he sees as the financial opacity of big aid organizations, Klein’s calling card is “100% transparency.” He has taken to posting’s bank statement on line. He’s self-funded, so all money raised is pledged to Rose City’s residents.

Now, if you ask me, a rational finance guy, whether the one-man-savior approach to disaster relief is the right way, I would say: No way.

In my conversation with Klein, I challenged his approach. Isn’t it inefficient, I argued, to have no infrastructure? How can one dude on his own “scale up” to meet the challenges of a big disaster like Harvey, even in a tiny town like Rose City, Texas?

Klein disagreed, arguing that he’s more than just one man with zero budget, relying on his wits.

“I have the best volunteers. These are top notch. You don’t need to have back office. We designed it this way from day one. We’re going to be as accountable as we can.” He went on: “We’ve been vetted by the top people. We roll into a town, me and a couple of my buddies, and by the end of the week we will have 100 strong.”

In the face of my skepticism about the effectiveness of a one-man relief operation, Klein pulled off a neat trick December 6th, appearing on Megyn Kelly’s Today Show with Rose City’s Mayor, Bonnie Stephenson, gathering a giant-sized $10,000 check from Lowe’s on live TV for their trouble.

What is Klein’s ultimate goal? His medium-size ambition is to convince a corporation like Lowe’s or Home Depot to look at the amount he raises, and match it, after which he plans to distribute loaded gift cards to all of the residents of Rose City, for home reconstruction.

His Texas-sized ambition would be to use his publicity campaign to attract a big donor for something like $1 million. “With $1 million, we could rebuild Rose City!” enthuses Klein.


Please see related post:

Use Caution With The Red Cross

GiveDirectly and Hurricane Harvey (upcoming post)


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