How A Profane Subreddit Moved The Market

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

Tracy, it really feels like, from a markets perspective, this is the closest we've been lately to sort of 2008 financial crisis vibes, well, since the financial crisis, wouldn't you say?

Tracy Alloway (0:34)

I would say so, and I would certainly say the statistics back you up. Biggest weekly sell-off since the financial crisis we've just seen, right?

Joe Weisenthal (0:43)

Right, massive sell-off in risk assets, an extraordinary amount of repricing of expectations for central banks all around the world to come in and intervene. And we've had other periods of sort of semi-crisis since the great financial crisis during periods to say the Eurozone, but it's just never felt as extremely uncertain as it does right now.

Tracy Alloway (1:11)

I don't know. I sort of remember late 2015 Yeah, I mean, late 2015, you had all the issues going on with credit and you had one big fund blow up. So I'm still waiting for the second order effects of the market sell-off that we've seen to emerge.

Joe Weisenthal (1:30)

That's true. Like we haven't actually seen any sort of major liquidations or institutions of various size, like truly go bust yet amid the volatility.

Obviously nobody, you know, we're not hoping that that happens. For now, it's mostly been like a sort of a markets reaction. But as you say, there hasn't really been a second order effect just yet.

Tracy Alloway (1:52)

Yep, very true.

Joe Weisenthal (1:56)

So obviously, the coronavirus is the clear contributing factor. People are gripped by panic all around the world. It started in China late last year. Now it seems to be spreading to countries basically everywhere. But I also think that there is another contributor to the top.

It's not just the virus that caused the top.

Tracy Alloway (2:21)

Well, I mean, the virus didn't cause the top. The virus was the catalyst for the top to no longer be the top and for markets to sell off. But what are you thinking about, Joe?

Joe Weisenthal (2:35)

Well, I mean, obviously, it's our recent Business Week cover story that our colleague Luke Kawa wrote about when the bull market got weird and about all these traders and online forums making crazy big bets. And I think in retrospect, many people will see the recent cover as what really did the bull market in.

Tracy Alloway (2:56)

Yeah, it was good timing. But in the history of market crashes, people always go back and sort of look for retail investors who start to become really overconfident. Some people actually look at retail investor participation in the market as evidence of the top coming.

And so, some of the behavior that we have seen embodied in places like what Luke was talking about, you could maybe see that as an indication that markets were a little frothy.

Joe Weisenthal (3:29)

Yeah. So, for those who actually haven't been paying attention to this particular subplot, which is probably most people because there's bigger things going on in the world, over the last several weeks, prior to this extreme bout of selling and volatility that we saw, there was a lot of attention paid to the behavior of people on a certain internet web page or chat room or message board, whatever you want to call it, in which there was an extreme subreddit, it was on Reddit, an extreme level of speculative activity, particularly in the options market, the likes of which we haven't really seen arguably since the glory days of the Yahoo message boards back during the.com bubble.

And it's a really fascinating story. It's a really interesting look at how the markets work and how retail players can really make a dent in publicly listed equities.

Tracy Alloway (4:22)

Yeah. So this is the thing that I find the most fascinating about this subreddit. It's called WallStreetBets.

And in recent months or over the past year or so, a lot of the people on it don't just think that they found good ways to make money through investing in the market. They think that they found a good way to sort of force the market to do what they want it to do. So they actually think that they're impacting how WallStreet functions and pushing up the stock price. And that's where it gets really, really interesting. Are they in fact having this impact on the market?

Joe Weisenthal (5:01)

Right. And I remember the message boards, the Raging Bull message boards, Silicon Investor, Yahoo message boards from 1999 and 2000 And I think they were far less ambitious than what people are doing these days. So for more on this, let's start by bringing in Bloomberg's own Luke Kawa, who did have the cover story that cursed the market overall.