They Knew - thoughts after watching Inside Job

They knew - Thoughts after watching ‘Inside Job’:

Just finished watching the ‘Inside Job’ (link to stream - here), which is a documentary about how the 2008 financial crisis unfolded.

My thoughts below on how we’re set up to have another financial crisis in the coming year…

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They knew. They all knew.

The banks knew how much they were lending. How over-leveraged they were. How much free money they got from the US Fed. Everything’s great for the rich and wealthy when interest rates are at zero, stocks just keep going up and the US government is giving you free money.

The problem with this is people get too risky. They start taking greater risks than normal. Leverage starts to get higher. Banks give out more money because they’re getting paid so much money in fees and compensation.

Everything looks great.

What they didn’t account for was the Internet. They didn’t account for Reddit and meme stocks. They didn’t realize that Keith Gill aka DFV was going to become a messiah for how he gamed the system these banks and hedge funds have been playing for decades. He caught them looking. He saw that hedge funds were shorting Gamestop, a video game retailer that many people on the Internet love, more than 140%. All he had to do was get enough people to buy and hold.

Then January happened. Gamestop had a mini short squeeze when the stock jumped close to $500. What most people forget is brokers, particularly those connected to Citadel, like Robinhood, stopped allowing buying. This basically allowed those who were short to cover their positions/start liquidating their long positions to make sure they weren’t going to go bankrupt. Gamestop’s increase was inversely proportional to the market meaning as Gamestop’s stock price increased, the rest of the market fell.

Remember, shorts have unlimited downside so short squeezes can theoretically be infinite.

The crash of 2021 is coming.

At the time, I’m sure hedge funds and these market makers thought it was all over and people would forget about it. Guess what? It only inspired more people to jump on board. Once the world saw what happened and how the banks/hedge funds were allowed to manipulate the market to cover themselves, more people realized how wrong that is.

The Internet never forgets and it will always remain undefeated.

This event could be the biggest f*** you to Wall Street and the hedge funds we’ve ever seen.

There will be a lot of shady things going on behind the scenes over the next several months as hedge funds and banks will do everything in their power to make sure they don’t go bankrupt and become insolvent. However, those who are long the stock have unlimited time to just buy and hold. Remember, if you short a stock, you have to cover your position at some point. If you buy a stock, you can hold it for as long as you want.

The last year has seen asset prices across the board explode. Cryptocurrencies, SPACs, and stocks have all benefited enormously from the Fed’s QE program. People think they’ve been geniuses over the last year because everyone’s making money. What they don’t understand is the system in place that allows them to make all this money.

Never confuse genius for money printing. They’re not the same thing.

My sense is this crisis is going to be worse than 2008 and 2001 because of how much money is in the system today. Trillions of dollars in paper value will disappear because of leverage. Most people don’t understand how leveraged the market is and when that leverage disappears because of short squeezes, it will be unlike anything we’ve ever seen before.

The good thing with this crisis relative to previous ones is there were not many people who made money in the crisis. However this time, there are thousands to potentially millions of people around the world who will have their lives changed by the amount of money they’re going to get.

The ultra-wealthy will not be happy about it, but that doesn’t matter. Money and opportunity needs to get re-distributed to those who need it now more than ever. Covid has shown us that those at the bottom of the socio-economic ladder have lost more than those at the top. In fact for those at the top, Covid has probably been better than any other time as they’ve seen their wealth increase like never before. Meanwhile, millions of people around the world are likely getting pushed back into poverty.

As Naval has said, ‘Equal opportunity, unequal outcome.’

That’s what the world needs to strive for. Give people all the tools and set up the system such that no matter what zip code you’re born into, everyone has a fair shot at life.

The problem today is America today is not set up like that. The rich control everything and until policies are put in place that gives more back to more of the population, we’ll only see this problem worsen.

The next few years are going to be a very interesting social experiment where we won’t see the results for years.

On one side, wealthy people get taxed way more, money gets properly re-distributed to those who need it and the average person has a better opportunity to provide for themselves and their family.

On the other hand, the rich continue to hoard the wealth, use all that money to make sure none of these policies get passed, and we see huge social conflicts as the gap widens even further.

Ray Dalio has talked about this many times about how this time in history is very similar to what happened in the 1930s. We all know how that decade ended.

Let’s hope this decade isn’t the same.