How the Internet took down Wall Street:

The Internet is about to take down Wall Street.

The financial world doesn’t know what’s about to hit them.

In retrospect it was easy to see the signs.

Crypto, SPACs, valuations, money printing, margin debt, stock buybacks, Doge coin hitting a market cap of $80 billion, etc.

We’ll look back at all of these things a few years from now and know we were in a bubble.

What’s going to pop it?

Gamestop, AMC and others. The ‘meme stocks’ as Wall Street likes to say.

What hedge funds, particularly Citadel, have done in trying to short companies into bankruptcy during Covid was terrible. They got caught and the whole world could suffer from their terrible actions.

Citadel is one of the largest market makers on Wall Street. Once they fall, the whole global economy could fall. This is why the SEC put in new rules recently to make sure the whole financial system doesn’t blow up because of Citadel. The market will suffer because of what Citadel has done, but because other people are on the other side of the trade, there will be a lot of money just turning over.

The smartest investors in the world know we’re in a bubble.

The ideas and companies that everyone loves these days will get crushed.

Cryptocurrencies will lose value. The innovation behind blockchain technology and decentralization of assets will be here forever, but the overall crypto market is going to get crushed in the short term. Crypto is prime for speculation and people don’t understand how the monetary environment we’re in now has contributed to the rise of crypto.

ARK Invest is not going to survive this downturn. Their strategy is too risky in a bear market. Looking at their holdings, some of these companies could be great companies 5-10 years from now that shape the world, but they’re too risky right now. They don’t have the revenues and solid business fundamentals to justify their valuations. Seasoned investors know this.

It also came out earlier this week that Bill Hwang, the notorious head of the Archegos disaster that blew up Wall street, seed funded her original funds. It doesn’t really matter how she got her start, but the fact she’s associated with Hwang is not a good look. Saw this recent tweet that does bring to front a lot of questionable activity with regards to Tesla. Does she survive when all the stocks she’s investing in lose 50+% of their value during this crash? I don’t think so.

She’s a symbol of the times. What she’s created with ARK is nothing short of incredible, but she’ll be the face of this bubble. These entire small cap, new innovation stocks have gone up like crazy during the last year because of all the money printing that’s gone into the market. She’s looked like a genius.

But for every up, there is going to be a down.

Newton’s third law of motion: for every action, there is an equal and opposite reaction. Most people don’t understand the environment we’re in right now. What the US fed has done in the last year since Covid is inject trillions of dollars of money that didn’t exist before. It made a lot of people rich on paper.

The problem is this is concentrated at the top. The money has mostly flowed into assets like the stock market. Who owns the stock market? Mostly the rich.

Everyone who’s rich right now probably thinks they’re a genius. They don’t realize how disconnected this world is from reality. At the end of the day, companies are created to provide value to society. They get paid for the products/services they produce for society.

When you have a New Jersey restaurant doing 35k in sales valued at $100M on the stock market, you have to understand how screwed up this environment is.

As Buffet and Munger said in their recent Berkshire AGM, this is the most interesting economics movie they’ve ever seen in their lifetime, and they have no idea how it’ll play out. Neither do I, but by studying history, there are a couple of things we can look to that help us understand where we are.

Right now we’re in a combination of the end of the 1920s but also the 1970s. Let me explain. The roaring 20s had everyone making money and a massive bubble that got crushed by the great market crash in 1929. What followed was the great depression and then World War 2. What most people don’t know about that time was the set up was similar to today in some countries.

Periods of great economic prosperity followed by down cycles. We just finished the longest bull market in history.

Germany went through Weimer hyperinflation where the German government was printing endless supplies of money in order to compensate for the debt they had created from the fall-out of World War 1.

The problem when you print money and get into hyperinflation is the value of the dollar becomes eroded to a point where it means nothing. This has happened several times before in history (Argentina, Venezuela, many countries in Africa, etc.). The problem with these environments is it hurts the people at the bottom the most. Through no fault of their own, their dollar becomes essentially worthless.

Right now America is playing a dangerous game by injecting this much money into the economy, particularly against the backdrop of 0 interest rates.

When you have a zero percent interest rate environment, people borrow like crazy from the bank because the interest on the debt is so low. A lot of people in the last year have borrowed like crazy from the banks, which has only ballooned the debt to even higher than it has been before. The debt to GDP ratio , one of Buffett's favourite indicators of a market bubble, is up like crazy. 

Because the US dollar is still the reserve currency by the world, foreign governments hold a lot of their debt. No one wants the US dollar to fail but at the rate they’re currently producing at, the dollar is getting eroded.

It could get even worse. Why? Because of the upcoming stock market crash.

This market is going to crash because of the Internet.

What Keith Gill did in buying Gamestop shares when he saw hedge funds were shorting the company more shares than existed will go down in history as one of the great checkmates in the world of finance. How does it make sense that market makers can create fake shares of companies that don’t exist? This rule is illegal in many countries because governments know how terrible this rule is.

You have to create systems in which greed is not incentivized.

There’s been significant deregulation that’s happened in the US stock market for the last several decades since Alan Greenspan was in charge of the US Fed in the 80s. The Greenspan put was a monetary policy in response to the 1987 crash where he lowered interest rates, had the federal reserve purchase US treasury bonds and provided banks with new loans - essentially a bailout.

All this did was create bigger asset bubbles and just shoved the problem to the next person in charge. He was celebrated amongst Wall Street because their charade of having the government pay for their failures allowed them to continue to pay themselves while the American people and governments around the world paid for their problems.

It happened in 2001 because of the banks increasing the valuations of tech companies. It happened again in 2007/2008 with mortgage backed securities and synthetic CDOs, which the banks created to add another financial instrument they could trade between each other to make more money off of. 

All these executives of banks are making tons of money while the world suffers.

Thomas Jefferson wrote about this hundreds of years ago:

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.... I believe that banking institutions are more dangerous to our liberties than standing armies.... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

How much longer is the US government going to be able to backstop the stock market? They can’t do it forever. They have to let companies die and let evolution take its place. In the short term, it will be very bad for a lot of people but it’s healthy for an economy to go through down cycles. It gets rid of the bad companies that are not providing necessary value to society.

That’s what’s happened now. Because the government has now been buying corporate bonds, they’re keeping companies alive that aren’t providing the corresponding value.

All of this will come out when the market crashes because of the meme stocks. Most of the world doesn’t understand what’s about to hit them. The amazing thing is there will be millions of people around the world whose lives will forever be changed. They want to change society in better ways and use the money they have to make the world a better place. We need new systems in place to allow resources to be allocated to places where it’s most needed.

This also will be a seminal moment for the switch to ultimate decentralization. Balajis, Naval and others in the crypto world have been talking about this for ages, and this will push that narrative even more. You can’t defraud a system that’s decentralized because everyone can check your work. There’s no central entity that controls everything.

The world will soon realize what the US government, banks, SEC, DTCC and others have done in allowing hedge funds to short companies through naked short selling and payment for order flow. These are illegal in many other countries. 

Why is this allowed in America? Because money talks.

Market crashes are healthy for systems because they allow evolution to take place. The problem arises when you have intervention in evolution because then you’re just passing it along to the next generation. All the people at the top of government right now have existed for a very long time. The world is changing at an exponential pace and young people are the ones who are going to change it for the better.

I’m super bullish on the future of the world because young people now have access to the Internet, something our parents and grandparents never had. We have access to the world’s information at our fingertips. People around the world are finding new ways to solve problems with information they previously never had. That’s super exciting.

With this market crash, I’m hopeful the world will be a better place because young people are hopefully going to use the resources they’ve acquired to make the world a better place for everyone.

The Internet is about to take down Wall Street.

Power to the people.

Are you ready?