Yes, they've gotten a lot of flak. But could there be something more to the "meme-stock mania" crowd?
In this week's Investor Hour episode, host Dan Ferris welcomes WallStreetBets founder Jaime Rogozinski back to the show.
WallStreetBets is an infamous forum on social media site Reddit. The online community came to public attention in early 2021 when its denizens – often viewed as young, uneducated, and risk-hungry investors – crippled hedge funds by pumping up undeserving "dead stocks" like AMC Entertainment (AMC) and GameStop (GME).
In this week's interview, Jaime gives his eye-opening perspective on the 2021 mania, saying there's more to the story than the negative picture painted by the media...
It's a sophisticated way of doing risk awareness. But it's a conduit for people that start off in a risk-hungry environment and eventually move into a more responsible, traditional approach – but with a tremendous knowledge, I would say, even more so than the average person that starts off with lower-risk approaches.
Jaime also shares what he has learned about investor behavior from watching the action play out across the Reddit board...
When people go into the market and start off with a bunch of wins, it is very dangerous. It's much more dangerous than if they start off by losing money. And the reason why is because it kind of speeds up the learning curve. Somebody that loses money right away is forced to take a step back, slow things down, understand a little bit better, and not be so impulsive. Somebody that makes money without knowing what they're doing goes through these, kind of like, Dunning-Kruger effects... which basically is a way of saying people don't have the ability to measure their own abilities.
He assuages Dan's curiosity on whether anyone from WallStreetBets has ever blamed him for their losses. And he shares stories of even meeting some of the members. Plus, Jaime's simple but sage answer to Dan's Investor Hour-standard "Final Question" will resound in your investing... and in your life.
Founder, WallStreet Bets
Jaime Rogozinski founded WallStreetBets in 2012--a large online community that yields a commanding presence in the world of finance. It has been featured in Wall Street Journal's MarketWatch as well as Bloomberg, CNBC, Money Magazine, Forbes, Vice, Business Insider, and Fortune.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm your host Dan Ferris. I'm also the editor of Extreme Value, published by Stansberry Research. Today we'll talk with Jaime Rogozinski of WallStreetBets. Nobody sees the markets quite like Jaime. You're going to enjoy this. In the mailbag today: inflation, inflation, and inflation. And remember, you can call our listener feedback line: 800-381-2357. Tell us what's on your mind and hear your voice on the show. For my opening rant this week, let's talk about high-yield debt a little bit. Let's do that and more right now on the Stansberry Investor Hour.
Why are we talking about high-yield debt? Well, because it is the next thing, I think, that's kind of blowing up. I caught a chart this morning that was published in the Financial Times and it showed something really interesting. OK, for a while the garbage – the CCC, stuff that's rated CCC and CC and C that's like the bottom tier of the junkiest debt – was doing better. The price was higher. The performance was outdoing the highest tier, supposedly the safest, more desirable tier of junk debt, which is rated BB, right? Everything rated BBB and higher is investment grade. That's non-junk. We're just talking about junk here, and junk starts at BB and goes down, right? It goes BB, B, CCC, CC, C. Those are all the junk-debt tiers.
And so people were chasing yield, as they do in every speculative bubble. So they pushed the price of the garbage, which generally has a higher yield, up higher than the price of the better high-yield debt. High yield or junk – they're just interchangeable names. So – and that was true – like, the trend line remains above – the trend line for the junkier stuff remains above the better high-yield debt until, like, a few weeks ago, until late May. And then the junk, the CCC just kind of collapsed below the BB.
It's almost like – it's almost like equities of various stripes started collapsing early in 2020. They peaked early in 2020. The ARK fund with all the garbage equity in there, way overvalued – we're talking about the ARK Innovation ETF. It's pretty famous. I've written about it several times in the Stansberry Digest and it's been all over the financial media. It's like one of the poster children for the current speculative mania that we are still living in, in my opinion.
So that peaked last year early and, you know, cannabis peaked last year early, clean energy, SPACs, all kinds of stuff. You know, but those are some of the big ones that peaked. And, you know, debt is generally supposed to be safer than equity, right? So it took until now for the junkiest junk debt to kind of respond the way equities were responding, to start acting badly, for people to say, "You know what? This is junk and I need to get rid of it."
So you see things like, you know, just really junk-rated companies. I guess they mentioned, what – you know, Diebold, the company that makes ATMs was mentioned in this one Financial Times article. And if you look at the chart for Diebold, it's like – it goes along and it trades at par, a hundred. Trades at par, trades at par, and then all of a sudden, wham, it collapses, like 80, 60, 40, boom, like huge, huge collapse. And really, you know, anything below 90 is like, "eh," right? And then anything below, you know, 90 and below 80, below 70 – anything – 40? Forty is like saying, "We think this thing is going to go bankrupt. We're out of here. It's garbage. It's not even worth anything. We can't wait to get the hell out." Right? It's people heading for the exits. It's the same thing as when stocks were down 50%, 60%, 70%, because people are heading for the exits because they're convinced it's junk and it's never going to be worth anything.
So that is happening in the junkier junk debt now. And you can say, "Well, all this stuff is healthy because it never should've been priced higher than the better stuff to begin with," but I don't know. I think that we're seeing smaller bubbles within the larger bubble burst. And overall, you know, equities were – like I said, in November of last year in the Nasdaq and in January in the S&P 500, equities were more expensive than they've ever been in all recorded history, more expensive than the 2000 peak, the dot-com peak, which was previously the most expensive they'd ever been in history, and more expensive than the 1929 peak, which for a long time after that was the most expensive they'd ever been in history.
So, you know, we reached a new level of absurdity and overvalued-ness, and I don't think that's solved with a few months of adjustment that we've had since November and January. I think bear markets tend to be roughly proportional to the bull markets that preceded them, so I think we do a lot worse than what we've done so far. Even – you know, there are bear market rallies. We're probably in one right now, and there will be more of them. You know, there were five or six apiece in the dot-com bust and the financial crisis from, you know, 2008, 2009.
So I think that's where we are. I think we're still in a bear market rally. I think that the junk debt cracking is – you know, it's not a sign – I don't think it's a sign of the bottom or anything. I think it's just part of various speculative pockets exploding and falling apart. I don't know what the next one's going to be or if there's anything left, you know? But I think that from here you'd better be careful. You'd better be careful what you buy. You'd better be buying the highest-quality equities. We had Keith Kaplan on the program a couple weeks ago. What did he say? Buy companies with lots of free cash flow and fantastic businesses, right? Sell all your garbage. And I've said both of those things several times. Hold plenty of cash. Hold some gold and silver. Don't worry about the short-term action in gold and silver. And sit tight, man. Bear markets are tough. Your job is to survive and minimize losses in a bear market. It's not to think that you can outsmart it and make a ton of money.
So with that, I'm going to leave you there and let's talk with a guy who knows all about the speculative corners of the market, Jaime Rogozinski. Let's do it right now.
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Today's guest is Jaime Rogozinski. Jaime is an entrepreneur, public speaker, and author. Over the past 20 years, he has started multiple successful companies in tech and finance fields that he has helped build from the ground up. He has a cutting-edge blend of technology and business with a passion for business. He's actively involved with tech and startup communities in both the U.S. and Mexico, focusing on fostering innovation and entrepreneurship. Jaime is best known for having started WallStreetBets, which yields a commanding presence in the world of finance and has been featured in prominent news outlets like the Wall Street Journal, Bloomberg, CNBC, CNN, Forbes, Fox Business, GQ, and more. In February 2020, Jaime published a book he wrote titled WallStreetBets: How Boomers Made the World's Biggest Casino for Millennials. Jaime, welcome back to the show.
Jaime Rogozinski: Thank you very much. Looking forward to this.
Dan Ferris: Yeah. So last time we talked, we were in Vegas sitting in front of each other, which we hardly to get to with anybody these days, and you sort of told the tale of WallStreetBets. You've since come out with a book – I think the book came out shortly thereafter. So what's that been like? What's the response to the book, is what I'm first curious about today?
Jaime Rogozinski: Actually – so I had written the book before then. It's entirely possible that around that time, due to the people looking at WallStreetBets, the number of sales went up, so I think visibility went up and I think more people were able to find out about it. But the book – it's actually really interesting because I wrote it in 2019 and I published it beginning of 2020, right before the pandemic started. And I laid out this – how would I say this – this framework that was starting to be developed as far as the integration of retail/amateur market participants. And I don't call them investors because [laughter] it's arguable that what they're doing isn't quite that. But they're participating in the market and they're having an effect in some form or another, and because of that, the market structure was changing as far as how the brokers are working, with the ease of access and the cost of doing things and the types of tools available to the retail participants.
And I started seeing this pattern, and I laid out basically where we started, where we're at, and where it appears to be going next, all right? And it's fun because there's time and time again when I end up [laughter] kind of tooting my own horn because things will happen for which I will have dedicated a portion of a chapter or whatever, saying this is the tip of the iceberg... most likely that's going to happen. For example, there was a point when I said that even though banks after the 2008 financial crisis, they have to go through these things they call stress tests. They simulate these liquidity crunches to see how they can handle it and avoid another situation like that. And I said, "I don't believe that brokers have to undergo the same types of stress tests that allow them to withstand the hordes, the stampedes of these thumb traders, these amateurs, that are not afraid of margin calls." In other words, you know, the banks are fine, but the brokers, when it comes to stocks, they're not ready for these risk-hungry people coming all at once trying to break it. And effectively they've broken the broker system multiple times. The most famous one was during GameStop when not only Robinhood but pretty much every major broker had to limit or stop trading these certain types of stocks during the midst of a frenzy.
So it's been a lot of fun watching these things play out. Not everything has played out exactly the way that I anticipated, but a lot of it has.
Dan Ferris: Yeah, yeah, it sure has. And last time we talked, you know, it was before all the events of COVID, and then the just screaming speculative hot market that came after it, and all of this stuff that's happened. And now, of course, it looks like we've seen the top, and you know, I wonder – we talked about this before. I wonder, like – I wonder how Jaime feels about, like, all these people getting crushed because, you know, they were – like you said, they're the risk-on crowd. They're the full-on, risk-on, YOLO, push-it, pedal-to-the-metal, bet-it-all-kind of crowd. And now, like – I just saw this morning Goldman Sachs says, "Well, you know, all the money people made for the last two years is gone now. You know, they've round-tripped." And I saw a similar statistic – I think it was JPMorgan said, you know, that they've lost all their gains at this point. I don't know how they track this. But it makes me wonder, like – I do perceive you as a – you know, as more of an observer than a participant, but you know, WallStreetBets was your thing. You created it. How do you feel about what's happened since, especially the past several months?
Jaime Rogozinski: Yeah, so I agree with you. It's difficult to see how exactly they're tracking because there's no point at which I can see – if we're just using like the S&P 500 as a benchmark where people are – any time between the year 2020, before the pandemic, after the – like, during the pandemic and after the pandemic, like, we're still at least 1,000 points higher than we were at that point, right? Even if you were to have bought at the highest point during those years and sold. But then again, it's not necessarily accurate because there's not just the stocks, right? People's entire investment portfolios rely on all sorts of different things. We know that things are happening in the money markets with interest rates, blah, blah, blah.
But that's investing. That's people that buy and hold and they're hoping that the prices increase. If you were to add – we are definitely at a state where we're lower than we were a couple of weeks ago. So there's no arguing about that. But you could say, hey, if you have a hedge fund that dedicates itself to short selling, they're having a good day or a good month or whatever it is, because that's their "investing approach" and they are relying on these moments of volatility in order to profit.
So when it comes down to these retail investors, they don't really care. They're not investing. They're not waiting for dividends. They're not, like, diversifying their portfolio. A lot of them are for their retirement accounts because they're very sophisticated and they said, "My responsible money, sure, it's taking a hit, but that's in my 401(k). I can't touch that Roth IRA. But with my gambling money I'm still having a great time, in fact probably even more, because when there's volatility, there's play action. There's lots of excitement." Typically also during those periods of volatility, however, people do get crushed, right? They get crushed because these moves are very violent or pronounced. They're faster than they usually are when the markets are steady, and so people can really kind of get zapped.
But there's at the same time a lot of people that are ending up making money as well. I have no access to the statistics. I believe the brokers would be the ones that have the keys to that particular treasure trove of data, but what the market's doing now doesn't really concern them. You know, these stocks' options they're buying expire on Friday at 4 p.m., right? Like, they don't care. They don't have time to figure out whether some big macro event is going to really affect their out-of-the-money puts.
Dan Ferris: Right. So, Jaime, am I right? I sense a hesitancy in you to want to criticize, you know, the Reddit WallStreetBets crowd. Do I have that right?
Jaime Rogozinski: You know, like, depends on your vantage point. If we're going to criticize them from a perspective of how responsible are they, sure, I agree with you. I don't pretend to defend them. But what sometimes I struggle with when people postulate or try to categorize what this group of WallStreetBets people do, they tend to say, "Well, this is the way that the market works. You buy, you invest, and it goes up. You fight inflation with it, etc. And therefore, now you have these amateurs that are trying to pick stocks, and they're not going to do it well because they don't know anything." Well, sure, that's correct, and that criticism I will go ahead and take.
But what I try to impose on people is, like, these market participants, they're not playing it like – you know, whey you say, "That's really risky... you can potentially lose all of your money by buying these out-of-the-money put options," the typical WallStreetBets person says to you, "What do you mean, risky? Like, I don't get it. This is the price. This is the cost of my lottery ticket. This is the expense that I have to make in order to enjoy myself with the market and to have the opportunity to make money." That's – a 100% loss to an average investor is the same thing as saying to my wife after she buys a purse to say, "Hey, that's a really risky investment because that's $500 in your purse, you're about to lose all of them in your wallet. You're going to have something else in place, but all of that money you had is no longer there." And she's like, "Yeah, that's the expense that I have to make in order to purchase this particular item." So it's just a different mindset really.
Dan Ferris: Yeah. Well, the way you indicate there, like, the assumption – and I'm guilty here – is well, oh, those WallStreetBets Reddit people, they're retail. They're small. They don't know what they're doing. They're not risk-savvy. They think the mother of all short squeezes is coming again to save them now. You know, but what you represent is actually a – it's more nuanced. It's like what you just represented to me – it's like risk awareness, right? It's like, well, I'm risking it all... I know I'm risking it all. That's not stupid to me. That's risk awareness.
Jaime Rogozinski: Correct, yeah. It's very much "risk aware," because risking it all, risking 100% on a trade does not equate to risking 100% of my retirement account. It's literally like 200 bucks... I buy five cheap call options. And so yes, you will lose that money, and that 100% sounds really bad to a lot of people, but 200 bucks doesn't, right? You know, it's a dinner for two people at a fancy restaurant. So there is that risk awareness.
But the other thing is that there is this connection, right? Like, you have the demographic component that needs to be addressed, which is you tend to have these younger individuals that have a higher risk tolerance and they can afford it. When I started WallStreetBets, I was single. I didn't have any dependents, no kids, whatever. It doesn't matter. If I had a few thousand dollars left over every month that I could lose, like, there would be zero immediate consequences, negative consequences to me, other than having lost that money. But I could afford that risk, and guess what? That led me down to this wonderful world of exploration.
Like I'll share a story that I – I recently got a chance to meet the guy that invented pretty much all the volatility ETF products, which I'm fascinated with, so I was really, really excited about that. But in part of that conversation I revealed to him that when I was first investing in the market, like, I didn't even know about stock options. I was just purchasing stocks and I would use these scanners to see which things had gone down a lot, and silly logic that anything that's gone down a whole lot really fast is probably going to go back up without any more sophistication than that. And I found these things called VXX, which is an ETF for I believe mid-term VIX futures. It's a mouthful for somebody that doesn't understand any of those things. I don't know what an ETF is. I don't know what a future is. I don't know what the VIX is, right? And I don't understand, like, what these mid-term whatever means. But I see that they've been going down a lot, and surely they can't go to zero, right? Or it's less likely because, yeah, Lehmann Brothers went down, but that was a black swan. This thing right here is probably not a bad stock to purchase. This company probably has some pretty good EBITDA and the CEO's probably going to turn the VXX company around. And I purchase a bunch of them, and I just see this thing kind of go down and down and down and down, and I never make money, and I lost some money.
And then I was like, OK, well, what happened? And then I started looking into, well, what exactly is this VIX company and why do they suck, right? And then it turns out there's nobody behind this thing and it's just a math formula. What do you mean, it's just a math formula? You can buy stocks in a math formula? Well, it's not only a math formula. It's a math formula based off a derivative off another derivative. And wait, hold on a second. This thing says it's 3X inverse leveraged – what in the world does that mean? Because my broker won't let me short sell stocks, but you're letting me purchase these short – what – I – unlimited risk is the reason why my broker won't let me, but these people will take on three times the risk on my behalf? This is wonderful, right?
And then I learn a bunch of stuff. Next thing you know, I understand monetary policy and I'm listening to these, like, macro-level events, and guess what? I have a nice, comfortable, boring, safe, diversified, dividend-collecting retirement portfolio. I continue to gamble and continue to have fun. I continue to take risks, but with sums of money which I'm perfectly ready to lose. In fact, I don't think of it as losing it... I think of it as spending.
Just a last example with this: I didn't understand ETFs a couple – sorry, NFTs a couple years ago. I keep seeing all over the years, like, go in for this money. And I'm like, "All right, I could assume that they're dumb because it's a picture, it's a jpeg, and they're going for millions, or maybe I need to learn." So I told my wife, because now I do have a wife and dependent kids – I said, "Guess what? I'm going to go lose some money, just so that you know." She goes, "What do you mean?" I'm like, "Yeah, I'm going to go out and buy these jpegs for a lot of money and see what they're about." That was my mindset going into it. This is the cost of my tuition, and it turns out that I made a ton of money with the NFTs anyways, so that was an added bonus, but I wasn't expecting that. I was expecting to lose whatever I had allocated for them.
So it is a sophisticated way of doing risk awareness, but it's a conduit for people that start off in a risk-hungry environment and eventually move into a more responsible, traditional approach, but with a tremendous knowledge, I would say even more so than the average person that starts off with the lower risk approaches.
Dan Ferris: OK, so that's one end of the spectrum. Let's not understand, however, at the other end of the spectrum the level of naivete that many of these market participants on WallStreetBets possess, and you chronicle it quite well in the book. In fact, it opens up with the story of – what was his name? World Chaos was the guy's name, and he posted I think five of six posts of how he took – I think it was $900 to $55,000 with a streak of amazing wins in the market, and I just thought, wow, that's like whenever I talk with people who entered investing as a career during the dot-com boom and bust, they say, "Well, I lost it all, but I learned a lot, etc., etc." I wonder where World Chaos is today, you know, because he – [laughter]
Jaime Rogozinski: It's actually interesting. I wondered the same thing, and I don't remember if I put this in the book or not. But at the time – if I didn't put it in the book, it was because he asked me not to. But at the time, he was in high school and he was using his parents' brokerage account, so he wasn't even legally allowed to do that. He – you know, this was at least four or five priors to when I wrote the book, so I tracked him down and I spoke to him. And he'd gone to college and he studied finance. It starts his entire career toward a responsible approach. Like, he did use that money responsibly to help pay for the college, and then he continued to invest but from a much lower risk perspective. And then I think he was buying a house and I think wanted to start his own fund. So he did very well, but that's – you know, I don't want to paint this picture which is this is how most stories end, because it's not. Most stories end with people losing money, and for every happy ending story, there's nine other stories of people who end up losing more money.
And one of the things that I like to tell people when being asked for advice for someone that's about to get into the market, it's I hope – I don't know if it's in the form of advice. But when people go into the market and they start off with a bunch of wins, it is very dangerous. It's much more dangerous than if they start off by losing money. And the reason why is it kind of speeds up the learning curve. Somebody that loses money right away is forced to take a step back, slow things down, understand a little bit better, and not be so impulsive. Somebody that makes money without knowing what they're doing goes through these kind of like Dunning-Kruger effects, which basically is a way of saying people don't have the ability to measure their own abilities. And they're like, "Well, wow, I was a genius. I bought Tesla because I heard that they're going to do this thing with a component," whatever, and it turns out that the stocks went up. And then they pat themselves on the back for intelligence and try to replicate that.
The stocks very well may have gone down because Elon Musk sent out a tweet. Nothing to do with the research that you did into the company. And then people use that euphoria and they have these endorphins and then they decide to up their risk tolerance because they're like, "If I took 100 bucks and I turned it into 200 bucks, imagine what would've happened if I did it with a thousand bucks?" And so that continues, and then eventually they do lose it, and then that's more costly to those individuals.
But yeah, there's a lot of great stories, and there's even more stories where people lose money. I always respect when I see people that make a lot of money early on, realize it, that it's not normal, take that money out – leave some in to keep playing – and then go about their lives the right way, because it takes a tremendous amount of discipline to do that.
Dan Ferris: So people who don't know what they're doing, lose a lot of money real fast, frequently want to blame others. And I can't remember if you and I discussed this the first time we spoke on the show a few years ago, but does anybody blame you for their losses? "If that guy had never created that darn thing, I never would've lost all that money, blah, blah, blah, etc., etc."
Jaime Rogozinski: That's an interesting question that's never been posed to me in that exact context. But no, I've never gotten somebody that says, "I wish I never would've discovered it." Some people say that right after a particular loss, but people on WallStreetBets, because of their honesty and because they also like to talk about their losses and not just their wins, people that go into that, they're fully aware that what they're about to do is risky, right? And then they'll use these self-deprecating terms to kind of do this locker-room banter and kind of teasing each other, but they're fully aware of the situation.
And so therefore I've never personally felt guilty about that, but nor have I seen anyone say that WallStreetBets or any type of activity like this has ruined my life. There are stories which you – I see stories in crypto that I have nothing to do with where people make a ton of money, and then they start relying on this money, and then they lose it, and then their life gets ruined. But I don't think they trace it back to that one person that told them that crypto existed, right?
Dan Ferris: Right.
Jaime Rogozinski: However, there is this sense that when somebody has a big win in a very public manner, it worries me because then all of a sudden people get inspired without knowing what's going on. And then they'll try to coattail, and then that'll cause more people to potentially lose more than they were aware of – or, sorry, that they were willing to had they not been excited about that. When somebody loses big publicly, I feel bad for the individual but I feel good for the collective because people can vicariously feel that pain. They can feel that pinch and say, "Wow, I don't want to end up like that." And then it'll cause them to be more cautious. So what's good or bad for an individual usually is the opposite for the collective.
And then lastly, as far as very directly to your question, I've actually met during the past year, year and a half a ton of people in real life from WallStreetBets because I've been traveling a lot to various parts of the U.S. And I cannot tell you – I did not expect this ever, but I can't tell you the number of times the people that have come up to me and said, "Jaime, thanks to you my life has changed for the better, right? Like bought the house, the pandemic almost screwed me up – whatever, I've made this thing." And time after – the first time I was like, "Wow, that kind of feels nice. I got a thank you for something I don't deserve." But then it happened again and again and again, and so that was actually really cool. And, you know, maybe that's a sample bias because the people that lost money don't have the incentive to come up and say, "Hey, Jaime, my life is the same thanks to you," right? But to the same extent, assuming that people that lose money are in the relatively same position as they were before WallStreetBets, and then you're adding on top of that a lot of individuals whose lives changed because they ended up with more money, that's actually an unexpected, I guess, side effect of this entire situation.
And then with a lot of the people that have lost money, from comments online and from other interactions, they walk away with so much more knowledge that they're like, "OK, now I'm going to actually direct all my interest toward just silver, right? Just this metal because I've explored all these things and that's the one that I like." And that's kind of cool, too, because now you have somebody that's participating, hands-on, educated approach, and who knows if they'll do well or not?
Dan Ferris: Yeah. I mean, it's like we're saying people – they take that loss and they take it – you know, they either leave the market forever or maybe they take it as a learning experience. And I was just talking about all the folks I've interviewed on here who took the dot-com crash as their learning experience and went on to fabulous careers. I mean, I can't tell you the number of people I've interviewed on this show.
So, you know, it's funny. I get this weird feeling talking with you, Jaime. It's like I want to criticize the WallStreetBets crowd so bad. "Oh, they're retail. They don't know what they're doing. They're taking risks they don't understand, etc., etc. And, you know, gosh, Jaime's probably getting death threats or something." But none of it – I mean, well, you admit – of course, we all know most people are, like, losing money because of that kind of activity. That's just what happens. But you're at least making it harder for me to be, you know, a get-off-my-lawn, angry old man about it.
Jaime Rogozinski: Yeah, and it's not even fair, right? Because I'm changing the rules on you, right? Because you're actually correct if we're using the framework that's traditionally applied to the market. Here you have people – it's like if you buy a medicine that has an off-label purpose, whatever – these side effects. Sometimes the doctor – like if you have a medicine that's meant to restimulate nerve damage on – like physical nerve damage, and then it turns out that it also has, I don't know, a sedative effect or a blood pressure effect. It's very freak and the doctors say, "Hey, I'm going to give you this medicine that's for something else, but I'm going to give it to you because it also helps you with your thing without that thing," right? They've found a different creative use for it. It's difficult for a medical association board or whatever, like the FDA, to come in and say, "Wait a second. I'm going to say that your medicine is not repairing that person's nerve damage," right, like, because his nerves are fine. "Therefore, your medicine is bad and I'm going to criticize it and the company should stop making that." It's like no, no, no. They've created a subcategory for the way that they're actually using something that exists and there's no precedent for that to compare it to. And if you were to try and criticize this medicine for, hey, it didn't fix the guy – the guy with the blood pressure, didn't fix his nerve ending, that would be a proper criticism. It didn't need fixing. His nerves were fine. There wasn't any noticeable change. But to the same extent, his taking of this medicine had a net positive effect on his life, so that's maybe a good analogy that I just came up with on the spot, which I'm going to refine a little bit for next time.
Dan Ferris: Right. I think I see where you're headed there, and sure. Have you seen – or rather, let me just ask do you kind of keep current with what's going on on WallStreetBets or what's going on with meme stocks? I'm not on WallStreetBets but I am on Twitter, for example, and I have to tell you there are a lot of folks on there who post about GameStop and AMC, those two in particular, the two big meme-stock names that kind of put WallStreetBets on the map, from my perspective. And they're still tweeting like crazy, and every tick up they're cheering, and every tick down they're claiming market manipulation. Do you keep current with the WallStreetBets crowd online?
Jaime Rogozinski: I do. I'm not nearly as actively involved as I had been, say, five years ago, but I do keep my finger on the pulse as far as what's going on there. But I've also broadened the scope of what I keep track of, right? I've introduced crypto into my scope of things that I follow, and so now – so now I follow more things with slightly less attention to that detail. And they're constantly picking up – look, these meme stocks come and go for various reasons. Obviously like Twitter the stock, the company was obviously, like, its own focus of attention a couple weeks ago with Elon Musk doing his shenanigans, [laughter] and that'll continue to happen with different things. AMC was also making noise because they were starting to release products and they were accepting cryptocurrency and, you know, they're trying to poke the meme-stock crowd into kind of giving it a bump again.
I wouldn't say I'm personally interested in either of those or any of the original – when I say original meme stocks, I mean like the ones that were part of this big short squeeze. You know, I've kind of moved past that. I'm looking out for more interesting things. And I would say that people who are still obsessing over that is because that's the one they decided to stick with, right? That's the one that they've emotionally connected with and, you know, that's the topic that they care most about, maybe because it's the one they lost the most money with or made the most money with or invested the most money into, and now the stock or whatever – it's just their new hobby. Like, since there's investing, trading, gambling, whatever – it's just as much of a hobby as it is an effort to try and make money. And so if you're making it a hobby, make it about something that you like.
Dan Ferris: [Laughter]
Jaime Rogozinski: The interesting thing about WallStreetBets is it has a ton of offshoots, right? Like, there's literally – I brought up silver earlier for a reason because there's a thing, like a subreddit called SilverStreetBets, and all they talk about there is that one precious metal. That's it, right? And they say – make predictions and they decide to knock on gold or whatever the other ones are, and they talk about inflation, the Fed – everything revolves around that topic. And there's a SatoshiStreetBets, and then there's a KoreaStreetBets for stocks that are in Korea, and then there's like – StreetBets is now just kind of this philosophy, and you have these more focused subgroups that actually like to zero in on one particular instrument or entity, right? So by instrument I mean maybe people like the stock options instead of stocks or futures instead of whatever, and entity meaning, like, a company, like GameStop or silver, although that's not an entity, but – asset class.
Dan Ferris: So it's funny you mention silver. I promise you I did not know about SilverStreetBets a month or so ago when we talked with Patrick Yip from APMEX, and I called it the "meme stock of precious metals" because obviously, like, if you look at a silver chart, it's this very spiky thing. It's different than gold. You know, you get these just massive spikes straight up, and then much of the rest of the time it kind of underperforms. And then – you know, then you get usually this usually huge retail interesting. And personally, I have to say I do have some, like – I think I still have them, maybe I don't. But I had some sort of out-of-the-money calls on the big publicly traded silver trust, the iShares Silver Trust, SLV, because I thought, "You know, the meme stockers are going to find silver, but" – and they seem to have found it, but it's not doing me any good so far. [Laughter] So it's funny that they found silver.
Jaime Rogozinski: To be fair, you know, what they're trying to do – I looked into that because it also caught my attention because it was a strange thing to focus on. And it turns out that at least when I started looking into this they were on to something that was pretty clever, right? Like, they were trying to figure out this arbitrage based off of, yes, power of numbers, and just do another type of short-squeeze type thing, but they're going for the discrepancy as far as how much physical silver there is in production versus how much silver there is on paper, right? Derivatives or whatever. And so that in itself could've caused the – you know, part of what caused GameStop to go up so much is that it was over 100% shortage, meaning more shares were shorted than existed. Here they're going – it's not the same mechanism, but it's a similar weakness in that there's not enough of that stuff as there is of the things that I can buy on Robinhood... therefore, you can actually try and make these moves. So that was actually clever. I enjoyed that, but you can't go after something that is so – you know, you can't, like, manipulate the USD/EURO forex market, right? Like, just the volume is just much too high. It doesn't matter how many people subscribe to WallStreetBets. And so –
Dan Ferris: Right, or probably like Apple or something, right? I mean, you know –
Jaime Rogozinski: [Laughter] Exactly.
Dan Ferris: Yeah, OK. So they have an eye for the right assets to focus on. Interesting. You know, it's funny because this is a microcosm of a large financial bubble, right? The large financial bubble always has its roots in the truth, you know? The dot-com bubble is rooted in the fact that the Internet really is this amazing thing that's going to change all our lives over the next couple decades, but you know, most of the companies were garbage, and even Amazon fell 90% or whatever, right? But it turned out to be true, and as I recall – correct me if I'm wrong here, Jaime, if you know – the original – wasn't there an original post about either GameStop or – I think it was about GameStop – that was actually quite a sophisticated analysis of an over-shorted stock that was due for a big run-up. I don't think they ever imagined the run that occurred, but do you remember if that was on WallStreetBets? Is that familiar to you?
Jaime Rogozinski: It is, yeah. You're probably referring to Keith Gill, who became kind of like the poster boy for the GameStop movement. And he was a guy who was charismatic and quirky and funny and would stream his opinions on YouTube and had a lot of meme-worthy components to it. But his analysis was not that of your typical WallStreetBets guy or girl that says, "Hey, just tell me what the strike price and expiration." This guy would go in there and actually put a lot of thought behind there, but he was also very hungry for risk. And he turned $50,000 into – I don't know what he walked away with, but at his highest point it was well over $30 million. He was cashing in some profits, and then rolling his options into straight-up shares at some point, so who knows what happened? But he walked away with a ton of money, right?
And during this entire thing, then people were looking to him to see what he's talking about. His original analysis, although it was well thought out, I don't believe it actually included the short squeeze. That came in shortly after he was getting attention. So people like him because he's likable and they agree with his philosophy and they like GameStop because maybe they can relate to it and they like video games or whatever. And so they're like, "Sure, I'll hop on. I think that I understand what he's saying and it makes sense." And then all of a sudden you have a lot of eyeballs on this thing and these eyeballs start looking around for different things to validate their investment that this thing is going to go up, looking for that self-fulfilling prophecy or confirmation bias.
And it turns out they actually found some real ones, such as a catalyst like when Ryan Cohen decided to join the board of directors. Everyone was like, "Oh, wow, this is wonderful. This is going to be so bullish because look at his track record." Michael Burry, same thing, and then all of a sudden somebody realized, "Wait, guys, this is 100% – like, over 100% short flow. Do you know what that means? We can also do this, right?" And then somebody else walked in and says, "Hey, you know what else would actually exacerbate this whole effect?" in addition to Ryan Cohen and the original philosophy, which was a fundamental analysis basis and – you know, so you have fundamental analysis. You have news-related stuff as far as who's investing into this thing. You have technical components such as the short screen. And then all of a sudden you have this mechanism by which to do it, which was using these out-of-the-money call options to do these things called gamma delta squeezes, which is very sophisticated, but it basically just leveraged their ability. And instead of buying shares, they would buy these stock options, made somebody else buy shares for them with much less capital. And so, like, they figured out the perfect storm. But it was on WallStreetBets and there was the original face of this who became quite well-known.
Dan Ferris: So does this all go into reverse at some point? Has it gone into reverse? Like, are they having an effect on stocks because they're scared as hell now that the Nasdaq was down, like, almost 30% recently, etc.? Is there a reverse effect as well?
Jaime Rogozinski: Whereas their lack of participation would have changes into how the market's behaving?
Dan Ferris: Right. [Crosstalk] Yeah, so is GameStop destined to return to a dollar a share or something, you know what I'm saying?
Jaime Rogozinski: Yeah, yeah. It's entirely possible. It's really hard to tell and I wouldn't dare to predict it, just like I wouldn't even predict the market has already topped. Over the past 14 years it's topped so many times I can't count, and just buying and holding was definitely the right strategy. So will it top at some point? Yeah, and I'm not saying it won't happen. I just no longer care if it's now or if it's later or if it was during the pandemic and then recovered twicefold.
But the effect of them withdrawing from their participation because of market volatility is also making the assumption that this market going down is actually scaring them away, which isn't the case, right? They wake up on Tuesday morning. They go to work. They're sitting there in between meetings or whatever and they're at a red light in their car and they open up their Robinhood. Like, well, do I think this thing is going to go up or down today? And literally, Robinhood actually asks you with color-coded arrows which way you'd like to place your wager, right?
Dan Ferris: [Laughter] That's funny.
Jaime Rogozinski: And so, like, sure, I'll flip a coin and I'll pick the color-coded arrow answer, and then it went down so they can just make bets in that direction. During the pandemic when the markets went down in 2020, like in March-ish, markets went down so fast and people were all shorting the market and they were all just doing their typical locker room banter where they're like, "Yeah, let this virus kill the world and blah, blah, blah," and making these offensive jokes but inside feeling somewhat guilty. They made so much money and then made so much fun of this terrible situation that they – a lot of them turned around and felt the need to donate money and pay it forward because it was just this cognitive dissonance. And so I personally participated in the drive that raised, like, $50,000 toward some costs because I made so much money when the market went down so fast.
Dan Ferris: Yeah.
Jaime Rogozinski: And then the market turned around, and so obviously a lot of people lose money during these transitional points because the bears are thinking, "It's not done until it's at zero," right? Like – and so they're holding onto for dear life. And the bulls come in and say, "No, guys, I think this is it. We're going back up, so just switch to the up arrow." And then they make money, and then there's some money that's lost. But of course the market went back up, and then eventually everyone was like, "All right, cool, so we're definitely back in green up arrow button mode. Cool." And then it's gone up again. So market down, market up – it doesn't matter because their time horizon isn't retirement. Their time horizon is Friday at 4 p.m., right?
Dan Ferris: Yeah, right. OK, fair enough. One of the things that fascinates me about this is the degree to which, you know, on the back of all these moves made by WallStreetBettors and Robinhood clients, the degree to which the actual fundamentals of the businesses – and we'll just stick with – you know, we can stick with AMC and – really and GameStop. AMC's actually worse off fundamentally because of all the debt they have. But the degree to which the fundamentals actually changed and they were able to raise lots of equity at enormously inflated prices. And the stocks are down whatever it is now – I haven't even kept track of them in the past couple weeks. It must be like 60%, 70% at this point. And they're still in my humble opinion for dying businesses in dying, secularly declining industries – they're still sporting very large market caps versus their fundamentals. The WallStreetBettors, man, they are a force. They're a real force. They really changed some stuff, man. It's incredible!
Jaime Rogozinski: It is, and it's very interesting to see because there's this dynamic where, yeah, the stocks are still not justified, right? But now there's a component that fundamental investors have never had to consider before. Maybe they have actually, right? So you have activist investors, right? Like individuals – like Bill Ackman or whatever. You have this collective which is kind of unintentionally becoming its own activist investor, right? But they're not interested in joining the board. They're interested in literally making funny pictures and posting them. But that side effect is a capital infusion into these companies which justifiably shouldn't be doing well. These brick-and-mortar video game – like, the original bear thesis for GameStop wasn't a bad one, same goes for AMC. But all of a sudden they have more money because, well, AMC did this. GameStop – regulatorily there was a lot of questions as to what's allowed and what's not, right? So we have AMC that decides to actually raise money and sell some shares from these elevated prices, and they can reinvest into R&D and growth and more goods and services – like, using the capital markets for raising capital, right? Who would've thought? And it is thanks to these investors that have actually in its own way crowdsourced, crowdfunded a second opportunity.
And so now we go back to the point. So why are the stocks still high? On one side, maybe because of the enthusiasm, these Twitter followers that you say are still obsessed with it, it's their hobby. They're not going to sell it ever, etc. You have these diehard fans that could care less. But there's also a fundamental component that because of this meme effect, they've actually improved – well, they have at least the opportunity to improve their fundamentals. They can now, you know, get themselves out of a jam, right? Maybe it's just a financial maneuver where they restructure their debts and their payments into more favorable terms because they have the capital and liquidity and/or be able to cater and modify their business toward the future. So now there's this forward-looking component thanks to this capital infusion, and it is justified as to why the prices are so high, right? Markets are supposed to be forward looking, after all.
Dan Ferris: Yeah, I mean, [laughter] I still don't think either one of them is really going to make it, but you're right. I mean, you know, until the – you know, the market caps go down to something that reflects the more traditional fundamentals, I'm probably going to keep thinking that and it's going to keep being true, what you said, you know? This effect has lasted two – or, well, almost two years, let's just say. Or I guess no, maybe a year really – just call it one year. You know, it's, like, real. Like you say, it's real. So I can't – you know, don't listen to me, everybody. You know, I'm fighting with the market. The market says, you know, these things are worth billions of dollars.
But we've actually been talking for quite a while, Jaime, and I've enjoyed it a great deal. And I want to throw my final question at you, which is the same for all of our guests no matter what the topic. And you can answer in – you know, in terms of our discussion today or just, you know, any old way that you want. And the final question is very simple: If you could leave our listeners with a single thought today, what would it be?
Jaime Rogozinski: The thought would be to keep an open mind because the world is always changing. There's nothing new about this particular point in time. I'd say the speed at which it changes is something that's more specific to this. We're having a lot of changes as far as what the traditional wisdom is and what the future wisdom will be, not to say that the future wisdom will replace current wisdom because some of the facts will remain forever. But some things will be different, and so keep an open mind when it comes to learning new things, and don't be afraid of exploring, even risking with some hands-on approach, always making sure that you do it responsibly, right? Be willing to lose your few hundred dollars for the sake of learning something and enjoy the process and make it something that you or the listeners can actually enjoy and can actually look forward to as a hobby, which can actually end up being much more beneficial in the end.
Dan Ferris: All right, well said. Thanks for that and thanks for being here. And, you know, I hope to – I just hope to check in with you again, you know, in another – I don't know – year or so, however long.
Jaime Rogozinski: Likewise, yeah. I really enjoy these conversations as well and I'd be really happy to.
Dan Ferris: All right, thanks, Jaime. We'll talk to you again sometime.
Jaime Rogozinski: Take care.
Dan Ferris: All right, bye-bye.
Well, I enjoyed talking with Jaime. He brings a perspective that is rather unique among all our guests. You know, there's no large group of guests who created extremely popular online communities which then moved the market and changed the fundamentals of multibillion-dollar market cap companies. So he definitely brings a very unique voice and a very unique perspective to things.
And you hear me, like, I really – if you'd read by Stansberry Digest material if you're a Stansberry subscriber, I want to criticize these retail investors on Robinhood and WallStreetBets so bad, but – and Jaime admits, you know, most of them are losing money. But I find his defense – and admittedly he said he doesn't mean to defend... he just wants to be clear about it. I found his – what I'll call his defense of them really credible and right on. Most of them are losing money, but the mindset is maybe not necessarily as simple-minded and kind of stupid, like I said – not in all cases. I'm sure in many it is. But it sounds like there's a lot of people who kind of understand that they're gambling. Whether or not they should be doing it in financial markets is – you know, that's a whole other discussion. And whether or not it harms the structure of financial markets is another discussion entirely as well. We didn't get into that. I almost did but I chose not to.
Yeah, great talk. I hope you enjoyed it. Let's take a look at the mailbag. Let's do it right now.
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In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Send questions, comments, and politely worded criticisms to [email protected] I read as many e-mails as time allows and respond to as many as possible. You can also call the listener feedback line: 800-381-2357. Tell us what's on your mind and hear your voice on the show.
I only have two questions this month but they're both kind of in the same realm. So let me just read both of the questions... then I'll give you a few thoughts. The first one is from Steven H. and he says, "Hi, Dan. So if inflation is running over 5% and GDP is growing at about 3%, does that mean real GDP growth is shrinking at 2% a year?" Short answer, yes, but let me read the next question to give you a longer answer.
Next question is from Wade S. and he says, "Dan, wondering your thoughts on whether the Fed rate rises could maintain inflation rather than suppress, as conventional wisdom would suggest. I believe Dr. Lacy Hunt suggested that low rates in the past were causing deflation due to the financing of excess production. What if the Fed raising rates causes a contraction in production and supply? I guess there is a degree of reduced consumption with a recession. Any thoughts on this? Wade S."
So, Wade and Steven – sorry about that. So, Wade and Steven, you are both in the same ballpark, asking about inflation. First of all, Steven, yeah, that's the way that calculation goes. I have to wonder what it means, but yes, basically that's the way the calculation goes. If GDP is 3%, inflation is 5%, it's a real contraction of minus 2%.
And, Wade, I have trouble believing – in direct answer to your first thought there, I have trouble believing that the Fed's going to make interest rates go up and that that's going to stoke the fires of inflation. In fact, I think it's already started tamping things down because housing affordability has fallen off a cliff as interest rates have, you know, gone up really fast frankly. I mean, I got a mortgage on my house a year ago, almost exactly a year ago, and we had locked in below 3%. And, you know, now you're up around like five-ish lately?
So yeah, it's gotten a lot more expensive, you know, and especially like those first-time kind of homebuyers. They're on the fence. They can barely put it together and low interest rates really help them out because it keeps the monthly payment down and having a paycheck is their number one asset – their job is their big asset for buying a house. It's not like they have the cash to pay for it outright and they choose to borrow, right? That would be a really safe borrower, wouldn't it? That's like you and me. But, you know, the lower tier of buyers, they largely – a lot of them have been priced out, and you've seen – well, you've seen housing prices remain high and interest rates are quite a bit higher than a year ago. You have also seen housing sales slow way down and housing construction slowing way down.
So, you know, when you think about it, like, that's got to have an effect on price at some point, doesn't it? And that effect also gets into, like, a household wealth effect. The two big pillars of wealth effect are your value of your home because you can borrow against it, and the value of your equities, and they've both take a big hit. So, you know, the wealth effect has started to go into reverse here, I think.
At any rate, this is all complicated. I find it too simplistic and really wrongheaded to measure economic activity in terms of GDP, which is basically just spending. To measure the health of an economy in how much spending goes up, it doesn't seem quite right because you can borrow and borrow and borrow to spend, can't you? And at some point – at some point there's so much debt that you would never call that person healthy, right? You'd never say that person had a healthy financial profile and you'd never lend them a penny. And yet as we measure GDP, we'd wait till GDP collapses to say that that – if it were a person and not a country, we'd wait until the GDP collapsed to say, "Oh, OK, well, they're not doing so well." But we already knew they were doing so well because they'd borrowed too much, right? That's just one simple way of showing that GDP doesn't really cover it.
So my final thought on this is no, Wade, I don't believe that raising interest rates is going to work in reverse and stoke the fires of inflation. I think that inflation itself makes people feel like they're in a recession, you know what I'm saying? If the wages don't keep up, and the wage growth is starting to slow down, and yet if stuff is still expensive, like, oh, I don't know, you know, $8 gas and $6 gas and stuff all over the country – all over the country it's like $4 and something and in places in California it's like $6 and I've seen $8 and $9 here and there.
So, you know, expensive stuff makes people feel like they're in a recession, right? So I don't know. It depends on who you ask. If you ask people who work for a living and live paycheck to paycheck, I'm sure they're already feeling kind of recessed [laughter] and depressed. And if you ask people who are, you know, really, really rich, maybe they feel a little recessed and depressed, too, because they have a lot of equities and maybe a lot of debt, too. I don't know.
But my final thought is that I don't have any solid answers for you besides the ones I've already given, except to say that I still believe we're in a bear market. I think when equities become as extraordinarily overvalued as they were in November for the Nasdaq and in January for the S&P 500, they have nowhere to go but down, you know, eventually, right? I didn't say this was the top at either of those times, but I've been warning of a top for well over a year, right? I was bearish until April 2020, and then I was bullish for several months, and then, you know, the valuations went way off the charts again and I was bearish again, and I'm still that way. I still think there's more downside. I focus on that, Wade. I don't – you know, whether or not it's inflation or a recession or anything, I try to, you know, prepare instead of predicting.
Well, I hope that satisfies you. That's all I got, guys. Good questions. It's stuff to think about. That's the important thing. You must think about these things. Most of the time you don't care about them, but yes, this is a time when you must think about them.
Well, that's another mailbag and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. We provide a transcribe for every episode. Just go to InvestorHour.com, click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy. If you liked this episode and know anybody else who might like it, tell them to check it out on their podcast app or at InvestorHour.com. Do me a favor too. Subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts, and while you're there, help us grow with a rate and review. Follow us on Facebook and Instagram. Our handle is @InvestorHour. On Twitter our handle is @Investor_Hour. Have a guest you want me to interview? Drop me a note at [email protected] or call the listener feedback line: 800-381-2357. Tell us what's on your mind and hear your voice on the show. Until next week, I'm Dan Ferris. Thanks for listening.
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