The Morning Dispatch: What’s the Deal With GameStop?

Happy Thursday! Today’s Morning Dispatch turned out totally differently than the way we drew it up yesterday morning. You’ll see.

Quick Hits: Today’s Top Stories

• President Joe Biden signed a sweeping executive order on Wednesday geared toward addressing what he called a “profound climate crisis.” The order defines climate considerations as an “essential element of United States foreign policy and national security,” suspends oil and natural gas leasing on federal lands, and creates a new presidentially appointed position, the special presidential envoy for climate.

• Federal Reserve Chairman Jerome Powell said Wednesday that interest rates will remain near zero. The Fed will also continue its bond-purchase programs until unemployment decreases and the United States reaches its goal of 2 percent inflation.

• Fulfilling a campaign promise, the Biden administration has reportedly begun staffing a bipartisan commission intended to study possible reforms to the Supreme Court and the federal judiciary. Jack Goldsmith, a Harvard Law School professor and former assistant attorney general in the Bush Department of Justice, is among those selected to serve on the commission thus far.

• The World Health Organization issued interim guidance this week recommending pregnant women avoid the Moderna or Pfizer-BioNTech COVID-19 vaccines unless they are at a high risk of exposure. “WHO recommends not to use mRNA-1273 in pregnancy, unless the benefit of vaccinating a pregnant woman outweighs the potential vaccine risks, such as in health workers at high risk of exposure and pregnant women with co-morbidities placing them in a high-risk group for severe Covid-19,” the report said.

• Acting D.C. Police Chief Robert Contee III said this week that another police officer who was on duty during the January 6 Capitol attack, Jeffery Smith, died by suicide on January 15. Capitol Police Officer Howard Liebengood also died by suicide on January 9, three days after the riot, and Officer Brian Sicknick died after sustaining injuries during the insurrection. “Between USCP and our colleagues at the Metropolitan Police Department, we have almost 140 officers injured,” Gus Papathanasiou, the chair of the Capitol Police Labor Committee said in a statement. “I have officers who were not issued helmets prior to the attack who have sustained brain injuries. One officer has two cracked ribs and two smashed spinal discs. One officer is going to lose his eye, and another was stabbed with a metal fence stake.”

• The Biden administration is reportedly temporarily freezing arms sales to Saudi Arabia and the United Arab Emirates and launching a review of the Trump administration’s transactions with both countries.

• Chicago Public Schools once again delayed a return to in-person learning on Wednesday as the Chicago Teachers Union moves closer to a strike over coronavirus concerns despite evidence that schools do not significantly contribute to transmission of COVID-19. “Frankly, there is no good reason why we shouldn’t have an agreement at this time,” CPS CEO Dr. Janice Jackson said.

• The United States confirmed 151,194 new cases of COVID-19 yesterday per the Johns Hopkins University COVID-19 Dashboard, with 9.4 percent of the 1,601,364 tests reported coming back positive. An additional 3,800 deaths were attributed to the virus on Wednesday, bringing the pandemic’s American death toll to 428,862. According to the COVID Tracking Project, 107,444 Americans are currently hospitalized with COVID-19. According to the Centers for Disease Control, 47,230,950 COVID-19 vaccine doses have been distributed nationwide, and 24,652,634 have been administered.

GameStop Goes Gangbusters

Readers of a certain age may remember GameStop as the place they used to swap used PS3 games in the mid-2000s; older readers may have hardly heard of it at all. But this week, the brick-and-mortar video game retailer has been at the center of one of the strangest stock market stories in years—one that’s pitted Wall Street hedge funds against a spontaneous mob of online iconoclasts who have a bone to pick with the financial system.

Many consumers have shifted to primarily purchasing digital copies rather than physical copies of games in recent years. This has been brutal for GameStop, which watched its share price sag lower and lower from 2015 until last year. For most of 2019 and 2020, the company’s stock could be had for less than $10 a share. But the company has recently seen a modest resurgence in its fortunes after e-commerce whiz Ryan Cohen acquired a large stake and announced plans to pivot toward online retail. The stock hit $20 on January 12, $30 a day later, and $40 a day after that.

But all that was pennies compared to what came next. Over the last few days, the stock simply exploded. $76 on Monday. $148 on Tuesday. Yesterday, shares closed the day at $347, and it’s unclear whether that will be the ceiling.

What fueled this insane spike? A gaggle of largely small-dollar traders in the Reddit community r/WallStreetBets, an online forum for hobbyists and professionals to discuss market speculation and day-trading. Bear with us here; this gets a little technical.

Earlier this month, members of the community had realized something: Despite GameStop’s improving fortunes, several large hedge funds and money managers were still heavily invested in shorts against the retailer. Put simply, this meant they’d put significant money on the proposition that the stock would soon drop back to more GameStop-standard levels.

Such short bets carry one large risk. In ordinary stock investments, the worst possible scenario is that your shares become valueless and you lose your investment. An investor holding shorts, meanwhile, has essentially pledged to buy shares at market value at a specific future date and then sell them for the pre-agreed amount. If share prices spike unexpectedly upward, the short-seller actually stands to lose more than he invested in the shorts in the first place. In extreme cases, a catastrophically poor short can bankrupt a firm.

This fact gives rise to a phenomenon known as a short squeeze: When a heavily shorted company bucks expectations and its stocks rise, short-sellers are sometimes compelled to cut their losses by buying out their own shorts. But this increased demand drives stock prices even higher in the short term, making such events a potential bonanza for people who didn’t buy the market pessimism early on. This is exactly what traders on r/WallStreetBets did: Carry out a deliberate short-squeeze on the hedge funds short-selling GameStop. They drove the price up—and then the squeeze carried it even higher.

But the existence of a squeeze alone doesn’t explain how GameStop stock went this bananas this week. The answer lies in the unique character of r/WallStreetBets. The forum isn’t just a group of traders; it’s also a particular sort of online community where users share a specific sense of humor, a strong sense of in-group loyalty, and a fierce us-vs.-them mentality. In the minds of the Reddit traders, the squeeze represented a golden opportunity to beat hedge funds and money managers at their own game: Exploiting a market vulnerability for an easy profit.

So when the squeeze happened and prices shot up, the community mood didn’t change to “let’s get out while the getting’s good.” Rather, Reddit’s investors quickly settled into a different line of thinking: If we hold the line and don’t sell, we can run those short-sellers right into the ground.

After that, another trait of the internet community came into play: It caught on. Suddenly, this week, GameStop was everywhere. That $347 spike can be partially attributed to entrepreneur Elon Musk tweeting about the cause on Tuesday. The allure of easy money, the anarchic glee of sticking it to the financial industry, and the simple joy of throwing oneself into the latest internet trend did the rest.

All of this, of course, continued to juice the stock beyond all believable bounds—to the further dismay of those short-sellers who had not already bitten the bullet and taken a multibillion dollar hit.

When asked about it yesterday, the White House felt compelled to say its economic team—including Treasury Secretary Janet Yellen—is “monitoring the situation.”  

The Securities and Exchange Commission also put out a statement, saying, “we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants.”

Some brokerages have restricted trading of the affected stocks, and the instant messaging service Discord last night banned the r/WallStreetBets server because it continued to allow “hateful and discriminatory content after repeated warnings.”

What happens next is anyone’s guess. We’re far past the point where we’d have likely seen investors cash out under ordinary circumstances; there’s zero question that GameStop’s stock is ludicrously overinflated compared to the company’s real-world value. A similar phenomenon is happening, to a lesser degree, with Nokia, Blockbuster, Blackberry, and AMC.

Now it’s just a question of how long buyers of GameStop stock can keep telling each other they’re all in this together, when the simple market math makes it clear that some of them are going to make off like bandits and others will be left holding the bag.

What morals you draw from this will likely depend on your priors. There’s no question that small-ball investors have already managed to bleed billions away from the short-selling hedge funds—an unqualified win in the Redditors’s books. Still, it’s important to note that we don’t know who all of the people most involved in this actually are, or what their backgrounds are, yet. 

The more short-sellers who bow out of the game, the more the rest just starts to look like what some have argued it’s been all along: A bubble that’s preparing to pop. r/WallStreetBets is full of testimony from young and low-income people who say they’ve staked their whole bank account on this single, insanely volatile stock: When the market falls apart, it isn’t just rich people who’ll feel the financial sting.

“There’s a strong likelihood of many investors that end up with significant losses, near or full wipe-outs on their investment,” the Heritage Foundation’s Joel Griffith told The Dispatch. “So that’s a danger, whatever people’s motivation is on these investments. There are real economic consequences—sometimes a gain, sometimes a loss—but without a doubt, this volatility should be flashing warning signals for those that are concerned with taking on enormous amounts of risk for their personal financial futures.” 

Dual Attacks on Riyadh

Saudi Arabia’s capital of Riyadh was the target of two attempted drone and missile strikes over the past several days, but onlookers are having a tough time pointing to the intercepted objects’ origins. Charlotte turned to the experts for a piece on the site to uncover why two different insurgent groups may have been behind the thwarted attacks. One state actor—Iran—almost certainly played a hand.

What were the interceptions like from the ground? 
Astute observers anticipated the collisions before they happened, having tracked flight diversions from the capital city and speculated about their purpose. Others—even those who heard the blasts first-hand—didn’t discover their source until much later. Although the U.S. Embassy released a statement informing Americans of the first thwarted strike and warning that they “stay alert in case of additional future attacks,” Saudi officials refrained from actively publicizing the attacks.

“I was home when the drone was intercepted Saturday morning. I heard a very loud double ‘Boom!’, one almost on top of the other. It was so loud I had one of those, ‘What the heck?’ moments,” Robert Godley, an American expat living in Riyadh, told The Dispatch. “I really had no idea what it was, but I am near a major city artery, so I thought it might be a car crash, though it didn’t really sound like one. I didn’t know it was a drone strike when a good friend and colleague showed me the video his brother had taken of the intercept.”

Why may Yemen’s Houthis have carried out the attacks?
Saudi Arabia entered the Yemeni civil war in 2015 amid concerns about the rebel group’s apparent ties to Iran and fear of insurrectionists on its southern border. In the years since, the conflict has escalated into one of the most devastating humanitarian crises worldwide. Iran and Saudi Arabia have been battling it out indirectly in Yemen, using the country as a testing ground for emerging weaponry.

“It’s been the single greatest number of missile defense engagements, as well as an extremely significant number of air and missile attacks, UAVs, cruise missiles, and other various kinds,” Tom Karako, director of the Missile Defense Project at the Center for Strategic and International Studies, told The Dispatch. “The Iranians have been using the Yemen conflict as a place to try out a lot of weapons over the past several years. In that respect, the two drone or missile attacks are part of a much larger phenomenon.”

Given the geographical distance between Yemen’s border and Riyadh—more than 400 miles—the Houthis have taken to attacking Saudi infrastructure elsewhere in the country. But striking the heart of the kingdom is not impossible, particularly given the influx of Iranian ballistic missiles to Yemen. In June 2020, the rebel group deployed eight armed drones and several ballistic missiles to Riyadh, Najran, and Jazan. Earlier that year, the Royal Saudi Air Defense Forces intercepted two ballistic missiles over the capital city. During 2017, four different ballistic missile attacks out of Yemen shook Riyadh.

Why may an Iraq-based militia supported by Iran be responsible? 
Another group—a newly formed Iran-backed militia in Iraq called Alwiya Alwaad Alhaq—released a statement claiming that they, in fact, had carried out Saturday’s attack in retaliation for ISIS’s attack on Baghdad that killed 34. 

Although it’s unclear where the new militia is situated within Iraq, the distance from the southern border of Iraq to Riyadh is only about 300 miles. And Al-Qabas, Kuwait’s newspaper, released a report last month confirming the deployment of precision-guided missiles and drones to south Iraq along with two units of officers. 

“I think that this follows an emerging pattern of Iraq-based militias targeting Saudi Arabia. We saw this most clearly in May 2019 when there was an attack on a Saudi oil pipeline. Initially, everyone thought it was the Houthis, but the U.S. later concluded that it came from Iraq,” Jason Brodsky, policy director at United Against Nuclear Iran, told The Dispatch. “You see Iraq becoming a very important theater for Iran to use to project its power and carry out its malign interference around the region.”

Worth Your Time

• Before the Capitol insurrection, the right’s economic populist politicians—namely Josh Hawley and Ted Cruz—thought they were in a good place. They’d spent weeks drumming up support among their colleagues to vote against certifying the Electoral College vote, and they were thought of by most bystanders as the natural successors to Trump’s nationalist populist GOP. Enter the January 6 Capitol siege—and weeks of “Stop the Steal” nonsense that preceded that fateful day—and now right-wing populism has become synonymous with insurrection and unthinking loyalty to Donald Trump. Looking toward the future of the movement, Ross Douthat now thinks that “any attempt to build a conservative populism after Trump is likely to be sucked into the vortex of crazy around the former president.” 

• As the coronavirus has eaten away at our social lives, most people have tried their best to stay in contact with their closest friends and family members. But what about those individuals who linger on the outskirts of our lives? “They’re the people on the periphery of your life—the guy who’s always at the gym at the same time as you, the barista who starts making your usual order while you’re still at the back of the line, the co-worker from another department with whom you make small talk on the elevator,” writes Amanda Mull in The Atlantic this week. Maybe you’ve never spoken to the guy at the gym. Maybe you don’t know your barista. But to some degree, all of these people used to be a part of your daily routine. Perhaps the pandemic will help us appreciate the different categories of friendship that make life fulfilling. “My hope is that people will realize that there’s more people in their social networks that matter and provide some kind of value than just those few people that you spend time with, and have probably managed to keep up with during the break,” said one of the researchers Mull interviewed.

• This piece, from National Review’s Dan McLaughlin, is among the most thorough and well-reasoned cases for impeaching and convicting Donald Trump that we’ve seen. The essay is framed as a response to two writers who disagree, and McLaughlin calmly and politely dissects their arguments one by one. “One might say that Democrats mishandled the impeachment, but that assumes that they ever had any interest in conviction. They do not. It is Republicans who would benefit from Trump being formally sanctioned,” he writes. “The argument for acquittal is, in essence, the argument of nihilism and despair: that so long as a president has some popular base within his own party, it does not matter what he does, it does not matter what the standard for impeachment is, it does not even matter if his conduct in office is a direct, existential threat to the continuation of the American system bequeathed to us by the Founders.”

• A few days before Trump left office, then-Secretary of State Mike Pompeo concluded that “[Chinese] authorities have conducted forced sterilizations and abortions on Uyghur women, coerced them to marry non-Uyghurs, and separated Uyghur children from their families.” As Eugene Kontorovich, director of the Center for the Middle East and International Law at George Mason University’s Scalia Law School, writes in the Wall Street Journalthis week, “it is now America’s official, bipartisan position that China is engaged in ‘ongoing’ genocide—the gravest of all international crimes.” How will private companies react? They “may carry on any lawful business they choose, and the genocide determination carries no concrete legal consequences,” Kontorovich writes. “But for companies that profess a commitment to some higher good, or to a doctrine of corporate social responsibility, this will be revelatory. Are their policies truly motivated by a concern for justice and minority rights, or by some combination of expiatory ritual and a narrow partisan agenda?”

• Today is the 35th anniversary of the tragic space shuttle Challenger explosion. Seven heroes died that day, when, just over a minute after launch, the spacecraft broke apart and disintegrated over the Atlantic Ocean. Millions of Americans witnessed the disaster in real time on their television screens. Today, it’s worth taking a few minutes to watch President Reagan’s address to the nation following the explosion, as a reminder of the power a leader’s words can have in times of crisis or anguish. Then, read Tevi Troy’s reflection on the speech. “One of Reagan’s many gifts was his strong sense of optimism, which informed his positive view of America,” he writes. “To Reagan, there was no obstacle that America could not overcome. In this speech, given in the midst of tragedy, it was essential to convey that tragedy would not get in the way of the essential American characteristics of innovation and exploration. While Reagan recognized the tragedy that had just taken place, and was careful to read the names of each of the seven fallen, he also did not express regret about the endeavor. In his praise of innovation was a recognition that there is inherent risk – and at times mortal danger – in order to attain technological and civilizational advancement.”

Presented Without Comment

Also Presented Without Comment

Also Also Presented Without Comment

Toeing the Company Line

• In his latest French Press (🔒), David gets at the heart of one of America’s biggest political fault lines: “The most important battle in American politics isn’t between right and left, but between truth and lies.” From QAnon to “Stop the Steal,” conspiracy theories are on the rise everywhere. Can defamation lawsuits break this misinformation fever? David argues we should use the “instruments of law to impose legal consequences for unlawful action while also engaging in good faith and open hearts with the vast bulk of the population that isn’t fully committed to its false narrative.”

• In the “deindustrialization myth busters” edition of his Capitolism newsletter (🔒), Scott Lincicome explains why we shouldn’t rely on protectionist trade wars and industrial policies to prop up the American manufacturing sector, given recent data on output, investment, and financial performance show “a large and dynamic industrial base that remains a global powerhouse.” 

• On Wednesday’s episode of the Dispatch Podcast, Sarah and the guys discuss vaccine distribution logistics, Trump’s upcoming impeachment trial, certain media outlets’ rewriting of history, and the latest drama with former DOJ officials in the Trump administration. 

Let Us Know

As we were putting this newsletter together last night, we got sidetracked for longer than we should have challenging one another to come up with a top-five favorite songs of all time list.

What’s yours?

Reporting by Declan Garvey (@declanpgarvey), Andrew Egger (@EggerDC), Haley Byrd Wilt (@byrdinator), Audrey Fahlberg (@FahlOutBerg), Charlotte Lawson (@charlotteUVA), and Steve Hayes (@stephenfhayes).