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The GameStop Frenzy

Episode #21  |  February 3rd, 2021
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In This Episode:

America can’t get enough of the GameStop story that shook up Wall Street. But what are the real implications of the merry band of Redditors that duped the hedge fund billionaires? And most crucially, what does it mean for everyday American investors? Michael A. Gayed (Chief Investment Strategist at Pension Partners) illuminates how the real villain in this story is the FED and the ever-widening wealth gap in our country. The original Wolf of Wall Street, Jordan Belfort, shares the dark secrets of short-selling and the crisis of conscience America is undergoing.

Guests:

Michael Gayed

Portfolio Manager at Toroso Asset Management
Michael Gayed is a manager of the ATAC Funds and a respected award-winning, results-oriented Investment Manager showcasing 15 years of success executing initiatives that result in significant revenue growth.

Jordan Belfort

Author and former stockbroker
As the owner of Stratton Oakmont, Belfort employed over 1,000 stockbrokers and raised over $1.5 billion and started more than 30 million-dollar-companies from scratch.

Episode Extras:

  • The GameStop fiasco has united some unlikely political voices regarding calls for regulating Wall Street: AOC and Ted Cruz.
  • While it can get morally questionable, most short-selling of stocks provides a healthy market equalizer. 
  • Does the average American stand a chance playing the stock market? In the words of the original Wolf of Wall Street: “No.”
  • We’re taught chemistry in high school but nothing of investing in markets. Periodic tables don’t come up a lot for middle-aged people — money management does.
  • The FED has enabled market manipulation by creating an avalanche of debt — and this speculative behavior will only worsen the already deepening wealth gap in this country. 

Transcript:

Trish Regan:               We’ve seen so much volatility in markets this week. GameStop. Silver. A biotech firm. Everybody going onto the online platform Reddit to WallStreetBets, and they’re exchanging tips. And you know, some people are going to get really hurt here. Some people are really angry because they feel like the system again is really stacked against them. What’s really going on? I wanted to dig into it, and so I brought two people on the show today. I’m looking forward to having you hear these interviews because one is making the point that the system is all messed up because of the Fed – just like Ron Paul says. The Fed is actually the real root of the problem, and it has created so much inequity, and this is playing out in different ways right now.

 

                                    The other guest is Jordan Belfort. You may remember him from The Wolf of Wall Street. The real-life “Wolf of Wall Street.” Anyway, he walks us through how these pump-and-dump schemes can work, what really in his view might have been going on in some of these online chatrooms, and the reasons for it right now.

 

                                    He agrees that there’s a total lack of trust in the system right now, and that is manifesting itself in different ways – whether it be through online trading platforms or in politics. So lots going on. Lots to get to.

 

                                    My good friend Michael Gayed from the ATAC U.S. Rotation ETF. He’s a portfolio manager at Toroso Asset Management. Again the ATAC U.S. Rotation ETF.

 

                                    Michael, good to have you here. I know that you’ve had a pretty good year thus far.

 

Michael Gayed:          Yeah, so far. Yeah, I’m thankful and humbled by the way things have played out in joining the Toroso team with the mutual fund as well with ETF RORO.

 

Trish Regan:               So let’s dig into you know – we’ll get into the macro environment, etc., but first, I just want your thoughts on what’s really going on right here, and sort of the push-pull between these folks online in the Reddit trading rooms, and the narrative that now is being captured by not just Alexandria Ocasio-Cortez and Elizabeth Warren types, but by Ted Cruz. I mean, I don’t know. I look at it pretty simply… when you have Ted Cruz and AOC on the same side of something, something must be a little bit messed up. There must be more to this story. What is your take?

 

Michael Gayed:          You know, for me, I would like to think of things in terms of not mile markers, but conditions under which accidents tend to happen. And the conditions have been there for things like this to occur because of the sheer amount of debt in the system, the sheer amount of leverage, speculative nature of what’s happening coming out of the COVID crash, so on and so forth. So I don’t think it’s a surprise that when you have so much money sloshing around in the system these types of dislocations occur.

 

                                    Now where it gets to be I think potentially very dangerous and in my opinion disturbing is in the narrative that’s being formed around, you know, WallStreetBets and Reddit and what’s going on with GameStop. That narrative primarily being that it’s the little guy against the hedge fund.

 

                                    And I take issue with that from a few perspectives. First of all, hedge funds have been underperformers for a long time. If you just compare any hedge fund largely against a simple path of buy-and-hold of the S&P 500 or any number of paths of ETFs, those paths of ETFs which “the little guy” can take advantage of have destroyed the performance of any short seller you can possibly imagine.

 

                                    So the notion that this is us against them and that it’s them holding down the little guy makes no sense to me because all you have to do is peel the onion a little bit and realize that there’s really nothing to that narrative.

 

                                    The other thing, which I think is amazing to me, is this discussion to your point on the political side that this is about market manipulation and that this is the way of these Reddit investors kind of making a stand and making statements. Meanwhile, all of these politicians who were arguing about manipulation are allowing the Federal Reserve to exist, and the whole reason for the Federal Reserve’s existence is to manipulate markets to their whim in terms of trying to create growth and inflation even if it’s at a distorted level.

 

Trish Regan:               Can I stop you there? Because that’s a really interesting point, and one that we’ve dug into before. Actually, Ron Paul was just on the show the other day, and he was talking about this. He was making, of course, Congressman Paul, the point that by having the Fed as active as it is, leaving interest rates consistently low by also, you know, having the U.S. as the reserve currency of the world, you’re basically feeding into this. Right? You’re enabling the system to print money, and you’re enabling this sort of injection of liquidity which creates a whole false set of things.

 

Michael Gayed:          That’s right. And taking it even a step further, I mean, the end result of everything that we’ve seen, you know, this incredible ongoing widening of the wealth gap, which is really at the core of where some of this populism and sort of frustration has come about… but, you know, hedge funds are not even a symptom. Because again, they’ve been underperformers for so long. The real driver of this is this wealth gap, and nobody seems to want to address the elephant in the room which is that the wealth gap is being created by manipulation of interest rates, which creates more and more debt which only the very wealthy can take advantage of while everybody else who would benefit from higher rates can’t sink. I mean that’s the real elephant in the room, and seemingly nobody wants to address that. We get sucked into these individual stories about GameStop, but there’s a bigger discussion around why things like GameStop and why these narratives form when the reality is very different than the way most people tend to think about the headlines.

 

Trish Regan:               You know, look, I think it’s an interesting narrative. I wish it were that simple, right? Because those of us in the media, we crave these simple headlines that can be, you know, the David-and-Goliath-type thing, but it’s not that simple. And it’s naïve to sort of present it as that given that, you know, you have hedge funds that do actually play a role in these overall markets. I mean hedging is an important part of overall liquidity, is it not, Michael?

 

Michael Gayed:          You know, I think that’s right, and I’ll take it even a step further. So I’m not a fan of shorting because I think it’s fraught with dangers as we’ve seen now with some of these funds that have blown up or had severe losses.

 

                                    Now having said that, I can equivocally make an argument that shorting is a necessary part of the system functioning, especially now. And this is sort of an interesting nuance about the environment that we’re in. With the proliferation of ETFs, what has happened is more and more money has gone into these passive investment vehicles, which means more and more stock price movement is not driven by fundamentals, but simply because of money flowing into ETFs that they are constituents of.

 

                                    Well, now that creates a misallocation. That creates a valuation issue because then you will have a stock that’s going up just because the ETF that it’s a part of is getting closed. Shorting may be the only real way to try to bring some degree of true fundamental analysis and equilibrium when you have this kind of big macro movement into ETFs that benefit these individual stock things. So, you know, yeah, there are egregious examples of where shorting is more than 100% of the shares I’m standing in that unequivocally need to be more correctly regulated and addressed, but the idea of banning shorting to me seems like it’s a recipe for disaster because then you’re basically saying it’s only about exuberance and misallocation through fund flows which have nothing to do with what the company’s worth actually is.

 

Trish Regan:               Yeah. No, I think it’s important for people to remember, too, that they serve a function. Not just in terms of liquidity, but also in terms of keeping the management teams on their toes, etc.

 

                                    The one thing that I did kind of get, though, was this idea that somehow people are like OK, it must be market manipulation. I wonder if – you know, this to me is a very interesting question. I don’t have a perfect answer for this, but I do wonder how it is that say Bill Ackman can get on television and talk about why he thinks Herbalife is a pyramid scheme, and why you know, Carl Icahn who’s on the other side of the trade who, by the way, came on many times with me, can say you know, Bill Ackman is full of you-know-what, and I think this is the greatest thing since sliced bread. And they can have that debate in a very public way where one is short and one is long, but it’s somehow not OK to do this on a Reddit chatroom?

 

Michael Gayed:          No, no. And I think that’s about – it’s not a critique on Reddit and WallStreetBets. Although, I do think that there is – and even in just kind of scrolling through the types of posts – one, I am certain the hedge funds are themselves now engaged in WallStreetBets. I mean anybody who thinks that now this is just a retail game, that if there is sort of this pump-and-dump that’s occurring on the individual level, which may have been true and thoughtful discussions and posts around, you know, stocks and dislocations… now I’m certain that hedge funds are coming in there and doing VPNs and spoofing accounts and seeing this as another way of manipulating, you know, the markets.

 

                                    It’s good to have that public debate, but I can tell you, I think what’s happening here is actually very, very dangerous. I made this point on my Twitter account at Lead-Lag Report that listen, the hedge-fund guys and their high-net-worth investors, they’re going to be fine. They might be going through these severe short squeezes and collapses in performance, but they’re already wealthy. The mom-and-pop investor that’s going on Reddit and is putting, you know, all of their shares, all of their money, all of their savings into GameStop or some of these stocks because YOLO, you only live once, and you know, take the gamble, there’s going to be very severe consequences where they’ll lose money they can’t really afford to lose. And I feel for that.

 

                                    And I think there’s even a bigger discussion around, you know, why is it that, you know, we’re taught chemistry in middle school and high school and nothing about investing in the financial markets? You know, most people don’t know anything about a periodic table in their 30s and 40s, but they have to deal with money management themselves.

 

                                    So you know, part of this, I think also with Reddit conversations, is education is a big part of this.

 

Trish Regan:               Yeah. It’s a big part of it. By the way, we’re talking with Michael Gayed right now. You can follow him on Twitter. I encourage you to do that. The Lead-Lag Report. LeadLagReport.com as well.

 

                                    And Michael, you’re right. There needs to be better education around the financial markets in general, but you know, one of the things that should be pretty evident, right, is that this is sort of a casino. Right? And if you’re not going to bet on fundamentals, which I still – I’m old fashioned in that sense. I really like companies with strong fundamentals. Imagine that. But if you’re not going to bet on fundamentals, then you’re taking on all of that risk. And you’ve got to know, right, that you’re going to run the risk of losing it. That’s a market.

 

Michael Gayed:          Yes. And what has created again the conditions for that casino, it’s one institution and one institution only. It’s not hedge funds. It’s the Fed.

 

Trish Regan:               But in this case, I would just argue, Michael, that the Fed – and I hear you, and I agree with you on that – but the Fed has made it so that you’re never really going to lose. I mean, the Fed has made it so that you just keep pouring money in. I just actually published a piece on this today on Trishintel.com where I’m talking about, you know, like it’s sort of – it’s a little bit crazy because this market is so priced for perfection and nothing’s perfect, but maybe it doesn’t matter because the Fed is there to try and make it perfect.

 

Michael Gayed:          Right. And there’s even a bigger part of that discussion, right? Because if the Fed makes everything perfect, and they’re creating the debt monster that only gets bigger and bigger, well then basically the Federal Reserve is telling all of our politicians that everything’s going to be fine. Who cares about misallocation of capital because they’ll just keep printing more of it? Debt keeps ballooning, which then brings with it a whole different set of questions, which is that if debt doesn’t matter, why are we paying taxes or why even collect taxes to begin with? If it’s a casino, and everyone is gambling because at the end of the day there are no losses, I think there’s much bigger implications on the system.

 

                                    And by the way, I think there’s a nonpartisan issue, right, both Republicans and the Democrats I think are at fault for arguably destroying the finances of the country, and the Fed is enabling that just like they’re enabling some of this speculative behavior which is only going to widen the wealth gap. All of these people were gambling on GameStop to lose while everybody else just keeps on ,you know, going about their day-to-day in their own worlds.

 

Trish Regan:               And it’s an important point, and I do think it does a lot to exaggerate that wealth gap. And you know, I don’t love the term income inequality. Right? Because you know, hey, Bangladesh has little income inequality. We don’t want to be Bangladesh, but nonetheless, you do see this widening of that gap. I’ve referred to it as an hourglass economy. Long on top, long on bottom, and then that middle class keeps on getting squeezed. And that’s in part – I think you’re right – to what the Fed has done.

 

                                    And, you know, if you’re a normal saver, Michael, what do you do? Like you can’t go put your money in a CD. You can’t put your money in treasuries. You’re not going to make anything. So what are you left doing? You’re trying to pursue risk if you can afford to. Right? I mean, that’s another important component of this. Because a lot of people, they don’t have the extra capital to put into the markets in the first place so they’re trying to, you know, just save a little. Scrimp to get by. And, you know, they’re going to wake up in 10 or 20 years, and all the money they saved for retirement is not going to be worth what it once was.

 

Michael Gayed:          Yeah. You know, there are kind of two takes to that. One is what I think is the most appropriate answer, which is sometimes the best investment with your capital is not in the stock market. It’s in your own education, which means try to learn your skills and try to put that extra effort, as hard as that is, and bet on yourself when no one else will because the payout is higher that way.

 

                                    From an investment standpoint though, look, the range of outcomes, sort of the unknowable future, I think has never been wider. You can make a case that it’s going to be hyperinflation, you can make a case it’s going to be deflation. You can make a case that bitcoin is going to take over the dollar. You can make a case that bitcoin will just, you know, be gone in five years.

 

                                    There’s no way to know. So the best thing anybody can do from an investment allocation perspective is have as many different investments that play off as many different future paths as possible because you don’t know which one ultimately will hit. That means you don’t take concentration risks in individual stocks. You don’t take concentration in stocks to begin with. You properly diversify, whether it’s across stocks, bonds, strategies like the APEC U.S. Rotation ETF or anything like that, or commodities. The future is always unknowable. I’d argue it’s even more unknowable than ever before. So the best thing one can do to protect one’s self is not have the conviction of belief that a certain thing will happen, and have as much exposure to as many things that can happen as possible.

 

Trish Regan:               What’s your strategy in your fund?

 

Michael Gayed:          So I have a bit of a bias. Right? I always like to talk about risk-on and risk-off because everything that I do, all of the award-winning whitepapers I’ve put out there, the mutual fund that I run, which was up 72% last year, everything that I do is around risk-on and risk-off conditions. So the idea is that if you want to kill it in the stock market, you have to not get killed.

 

                                    So the nature of everything I do is to try to identify where the weather is suggesting it’s raining to slow down entering the storm. I do think that we are going to see many, many more storms as a cycle because with the sheer amount of leverage and debt there is in the system, it doesn’t take that many butterflies flapping their wings to create a hurricane. You can have these continuous butterfly flecks like GameStop repeat in the future that can be quite destabilizing. And all that means from an investment standpoint is you’ve got to stick to a strategy that you know can manage through those high-risk periods, and you’ve got to mentally prepare yourself for the idea that it’s not going to be a smooth ride the way it used to be. I don’t care how much the Fed tries to manipulate the markets, at some point, the market will be bigger than the Fed, and that’s when it becomes I think a big problem.

 

Trish Regan:               Yeah. No, I hear you. I mean these are important things to consider. Is there a way to insulate? You’re trying to insulate investors a bit, but like what are sort of the things that you would encourage them to look at? Gold? I mean, silver is crazy right now. Right? Because it seems the Reddit community got into silver. But what are the sort of safe bets?

 

Michael Gayed:          Yeah. I mean safe is a relative term. Right? So in my world, risk-off tends to be Treasuries, longer duration, which benefit from higher stock-market volatility. But when I say risk-off, it doesn’t imply no risk. Unfortunately, we’re in a world where the riskiest thing to do is just sit around and wait in many ways. Right? Which is cash. I mean, that’s kind of the real risk.

 

                                    So you know, I think traditionally gold, you know, Treasuries. You know, it remains to be seen if bitcoin and cryptos become a type of safe haven asset, or there’s no evidence that suggests that yet. Maybe as it becomes more institutional, that’s possible. But you know, I think everyone probably would agree that the risk is that the Fed gets its wish, which is that they jam so much inflation into the system that we may be in a scenario where savings almost have to turn into investments just to keep up. Just to kind of keep the standard way of life.

 

                                    So the risky thing is to do nothing, but don’t always consider individual stocks like GameStop and fall for the narrative, which you know, I promise you, everybody will forget about in a couple of weeks. You know, I don’t know if you saw this, Trish, that Netflix is thinking about doing a movie or contract to do a movie on Reddit and GameStop. I mean, this is to me just complete insanity. I mean, by the time that comes out, you know, there’ll be another GameStop or something else that’s different. There’ll probably be a market that’s in a totally different place. What a world we’re in when these types of things become the stylized drama that really don’t play out the way it looks like on TV in reality.

 

Trish Regan:               Yeah. No, very good point, and tremendous risk involved. I mean, Michael Gayed, it is so great to talk to you. Thank you, my friend. It’s been a while. Good catching up. You, as always, are consistent in your criticism of the Fed, which I very much appreciate, and I think people really need to pay attention to right now.

 

                                    You can go to the LeadLagReport.com and get more from Michael, and fund membership there as well.

 

Michael Gayed:          Thank you. My pleasure. Thank you, Trish. Appreciate it.

 

Trish Regan:               We’ve been watching the GameStop frenzy, which has turned into silver, which has turned into a biotech company. I mean, investors kind of going crazy with these online Reddit forums. We thought it might be interesting to talk to a guy who knows a little bit about, you know, how these stocks get run up, and then people sell them, and a lot of small investors are left with not a whole lot after the fact.

 

                                    Jordan Belfort. You know him, of course, from the movie The Wolf of Wall Street. Somebody who’s very well acquainted with sort of these – well, I guess we could say for lack of a better word, these pump-and-dump-type schemes, and he tries to warn investors about all of this now.

 

                                    Jordan, welcome. It’s good to talk to you.

 

Jordan Belfort:           Thank you. Thank you. I mean, I hate to say it. I was warning people a few days ago about this. Trying to be positive. I really respect them for what they did, you know, and I think it’s great. You know, the little guy fighting back. He’s awesome. And I wish I would have thought of doing this. But I mean, I also said, you know, please be really careful because I think this is not going to end well. I think we’re starting to see some troubling signs. But you know, you never know. It could come back again. It probably will once or twice. But yeah, that’s what’s going on right now.

 

Trish Regan:               So when you say it’s not going to end well, walk us through. And of course, if anybody’s seen the movie, they’re very aware of some of the schemes that can go on, but walk us through what that sort of pump-and-dump idea is and why it makes you nervous in this environment.

 

Jordan Belfort:           This is a really interesting situation. It’s not a pure pump-and-dump. I think what you have here is different players with different motivations. You have some people, I am sure, who are on these Reddit boards who are simply in it to pump and dump, to make money. They got in early. They’re spreading the word. They’re talking up stocks. They’re chatting them up. Looking to pump up the price. And I wouldn’t say they’re looking to so-called dump it at the top to screw people. I don’t think we really understand the full ramifications of what’s going on. Probably a few do, but most probably don’t. It’s not as bit nefarious.

 

                                    I’ll flat out admit that what I did was nefarious. It was a pump-and-dump. I knew what I was doing. Things start off that way, but very quickly, I knew what I was doing. And we don’t want the stocks to go back down because why would you? I would rather them always stay up. I hoped those companies would be great, but you knew. You knew the outcome that eventually water seeks to level.

 

                                    Some of these people I don’t think really know that because you go onto the boards, the message boards, they’re vehemently like behind the long-term holding of these stocks. They call it HODL – the term they use. It’s a bitcoin. There’s a crossover here of some bitcoin terminology and bitcoin mentality into these stocks, and the danger with that is that this is not bitcoin. Bitcoin has a finite amount of coins that can be created, and although it’s still you know, can be manipulated as well as it was in the past, here you have companies that theoretically can issue unlimited amounts of stock, and they’re stars that can blow out at the top. If the stocks stay up for too long at these high prices… if I was GameStop, I would be issuing shares and raising money at these ludicrous high prices and repurpose that back into something else. There’s so much that can go wrong with a public company because it’s not a finite thing. I can keep printing and printing and so forth.

 

                                    So I think that you have these different people there with different motivations. The pure pump-and-dumpers – I hope the FTC tracks them down and something happens. Most of them I believe are not doing that. They want to get back at Wall Street.

 

Trish Regan:               In some ways, it felt like almost a cause. Right? And by the way, as people got wrapped up in this so-called cause, you know, they really bought into it in a way that you know, it was like OK, let’s fight back against the man so to speak. Right? Let’s stick it to them. What do you think of hedge funds and shorting? We were talking to the previous guest who was making the point that you know, you kind of need them in the marketplace. You know, he doesn’t love them, and he doesn’t short, but he was making the point that they actually do play a function, and they have a role. But nonetheless, you see this sort of online army of Reddit folks who are like we have no use for these guys because they can really take a company out. What do you think?

 

Jordan Belfort:           Well, it’s all about two very different things, and I think there’s some really important distinctions. And the great thing about a podcast is you actually have some time to talk about this. I mean, I’ve been on every news station for seven minutes. You know? You can’t get the full story.

 

Trish Regan:               Yes.

 

Jordan Belfort:           Here’s the story. A couple of things. No. 1, you have different types of short sellers, and they’re not the same thing. So the short sellers that you talk about is the regular, healthy short selling that goes on in the market. Yes. Of course. That needs to be there. It’s a healthy part of the market. It checks upward momentum in stocks so they don’t get ahead of themselves. Also, it creates liquidity. It’s a normal, smooth functioning of the market. And I couldn’t see you having a market that was functional without them.

 

                                    However, that is an entirely different breed of animal in the type of short sellers who got behind GameStop to short it. That’s when colluding short sellers get into a company and they get so – and usually they’ve done their deep research. You do deep research. They’re not stupid people. They’re smart people. They’ve done very deep research. They believe the company is either going to go out of business or is widely overvalued, and they will short that company as much as possible legally, and then they’ll break the law all day long illegally shorting by you know – there was the New York Stock Exchange and the uptick rule. They will not borrow the stock. They’ll use market major accounts, they’ll use prime brokerage accounts.

 

                                    And then even worse, they will start creating problems for the company. They will call the FEC or the FBI and try to start trigger investigations because an investigation will cause the stock to fall. They will call suppliers. They will pollute to bring the stocks down or create tension on the board.

 

                                    The reason they do that is because the short sellers really get bad. This is what happens to the stock. The short seller that’s doing this type of extreme shorting, it’s very expensive for them to stay short. So while they might be right, they might have done the research, and they say yep, this company is wildly overvalued, it’s a matter of when do I short the stock? Because timing on Wall Street is everything.

 

                                    You know, in real estate, location, location, location. On Wall Street, it’s timing, timing, timing. And if you short a stock, you might be right, but if it takes six months to be right, do you know how much you paid in interest on the stock you had to borrow and margin? It’s massive. So they must do something to make sure the short stock is going down immediately. That’s why they start manipulating the stock. That’s why they try to create investigations. That’s why they have journalists on the panel to release bad news about the company. This is the sort of shortage that Reddit was fighting back with, and for them, that needs to stop.

 

Trish Regan:               That’s where it gets extremely seedy and really lacking in any kind of morality. When you’re just deliberately trying to push this on. I don’t like that aspect of it. So that gets us back to the fact that these online traders didn’t like that aspect of it. You’re pretty angry, I understand, with Robinhood right now. Robinhood, which by the way has gotten like more than $3 billion in capitalization because they’re trying to meet their margin calls so that they can deal with their clearing house, but it made it pretty challenging for your average investor who thought that they could trade transparently and easily on Robinhood. Right?

 

Jordan Belfort:           So the day that Robinhood did that, I came out and supported Robinhood. When it first happened, my instant knee-jerk reaction was, you know, I knew exactly what was going on, partially because I understand that when something like this happens, there are two issues that Robinhood is facing.

 

                                    No. 1, when you have concentrated trading like this, the way your net capital requirements work for the FEC is that you have certain requirements based on normal trading and concentrated positions. When you have concentrated positions overly volatile, there are massive amounts of margin that are required to be kept at your account department, your query brokers, and in your own net capital calculations.

 

                                    So what happened was they were probably getting close to the line of capital. They needed to do something, or they would have blown through their own capital violations. That’s one thing. In addition, the even more troubling thing problematically for Robinhood is that when this does unwind – and it will at some point, it’s got to. OK? Here’s what’s going to happen. The stock will drop so fast, and you won’t be able to use stop losses because stop losses only work in an orderly decline. If a stock is $300 and you put a stop loss at $200, what happens is the stock goes from $300 to $130 in one trade. That means you get stopped out, but you don’t get – it blows through your stock, and you get sold out at $130. Let’s say based on your margin that you had up, you might actually not have only lost all your money. There might be a loss of $100,000 in your account. Well, when most people get in that situation, they don’t actually send the money in. They close their account, and then the clearing broker has to keep that money, AKA Robinhood. So they stand to lose billions.

 

                                    It happened to me. When I was on Wall Street, I got in a short squeeze with someone else, another firm, but it was the same clearing broker as me, Adler Coleman. They put Adler Coleman out of business. A New York Stock Exchange clearing just like this… it’s what happened.

 

                                    So that’s why I came out in support of Robinhood. However, as I looked more deeply into what was going on, I saw a couple of things that were red flags to me. Like No. 1, the relationship with certain hedge funds. Citadel. OK? That was the big thing. And also, they could have just as easily instead of closing down the ability to buy, they could have increased the margin. That would have been a far more intelligent thing for Robinhood to do. If they would have said listen, you need to bring the margin up to 80% –

 

Trish Regan:               Let me just jump in. They could have increased the margin, but could they have really? I mean, if the clearing house is saying hey, you know, we need you to cough up a certain amount in liquidity, then do they not have a choice but to go back to their customers and say you guys have to do this? Or maybe they can’t even do it. Like maybe they didn’t even have the liquidity to do it.

 

Jordan Belfort:           Great question. The way net capital climates work, I’m sure they didn’t get that close to the edge like that. It was a buffer. But when you accomplish that, when buys increase – when you increase margin, you reduce 99% of your risk. All the risks here is the second part I said – that when the stock drops precipitously, if you blow through the equity in the account, that’s the only risk. That’s all that Robinhood and everybody else on Wall Street is worried about in this situation. Forget the fact that we all lose money – the separate issue, the moral side of it. But in terms of the pure financial side, there’s only one risk, Trish, and that is when a stock drops precipitously, it’ll end up being lost in the customer accounts because they’re trading on margin. Think. If they weren’t on margin, well, all you can lose is your own money. But when you’re on a five-to-one ratio or when you’re trading up margin on a short, that’s when you could have massive liability. So all they had to do was they could have made calls – everyone’s got to cover a margin. They could have done that. They would have accomplished identically the same thing. So I don’t know why they didn’t do that.

 

                                    So the fact that they did that and the short – instead of looking at the short interest, they were still short, well they certainly in that moment created, you know, a downward move in the stocks. So I’m not saying – listen, I guess we’ll know when the truth comes out when they do the investigation. Right? If you found e-mails from people that were on the other side – the hedge funds to Robinhood – if anywhere in their accounts there are e-mails saying this is crazy, these people are manipulating stocks. If you find in an e-mail that they were under pressure, goodbye Robinhood.

 

Trish Regan:               Yeah. No, I mean that’s a really good point. They’re going to have to be squeaky clean on this because if there’s any kind of sense that there was a collusion of some sort, then that’s really, really problematic. Listen, a lot of people, Jordan, they feel like you know, how can I get a fair shake in this market? I talked to an investor the other day who said to me that she’s worried to be in the market. That she has memories of the flash crash. Now she sees this. So she’s saying wait a second, does the average investor really stand a shot? What would you say to someone like that?

 

Jordan Belfort:           I would say that you know, she’s right, and Wall Street is a really, really dirty place, Trish. I mean listen, I was there. OK? And I was saying that when I wrote my book. I was like oh, I’m not the worst guy out there. You know, you could do something wrong and commit a crime and say, well, everyone else doing it, but it doesn’t make what you do right. Of course. Right?

 

                                    But it’s pretty bad, and here’s the thing. You have a situation right now where Wall Street has been sticking it to the masses for so long that even when I came out in favor of supporting the Redditors and saying hey guys, good luck. I created a funny video for them. Like someone asked me to do that. I could not leave and just, you know, motivate them that you know, this is a feel-good video where I made a parody of the movie Leo. It was pretty funny. Everyone liked it. Right? And even somebody said like he was a crook! They had such a contempt for Wall Street, even if you’re supporting them, and even the slightest attachment to the establishment really upsets these people. And I think we see that playing out. You saw that in a lot of different ways.

 

                                    This is not just about the stock market. It’s a distrust of the mainstream media. It’s a distrust of politicians. It’s a distrust of the incestuous relationship between politicians and Wall Street lobbyists. There’s a lot more going on here. It’s a distrust of Big Tech. And one thing… the reason why you suddenly saw this play out – suddenly with AOC and Ted Cruz agree? What does that tell you? [Laughter] Yeah. I mean, causes are one thing. Money like this is a pure thing. It sort of transcends actual politics. And what you’re seeing is contempt for institutions. That’s what I really believe here.

 

Trish Regan:               That’s really interesting, Jordan, because you know, it’s a very interesting combination of sort of this “occupy Wall Street” plus a lot of maybe, you know, MAGA supporters all kind of rolled up into one. I had the same reaction. I’m like wait a minute, AOC and Ted Cruz? Like this is kind of scary territory when they’re on the same page of things.

 

                                    But I think you’re right in that it’s sort of people do not trust institutions right now. I know you’ve got to go, but I just want to get your thoughts on why that is. One of our guests was, you know, pointing to the Fed which I think does have something to do with this because money has been made so plentiful and we have all this liquidity in the system that really seems to exaggerate this class warfare thing because, you know, only those that can invest in these asset equity classes are really benefiting from this environment, and that’s the way it’s been for the last 10, 15 years.

 

                                    But why do you think there’s such a lack of trust right now in the system and in institutions? Has it always been there, and it’s just exposed now more? What’s it really rooted in?

 

Jordan Belfort:           Well, I think that, you know, certainly it’s always been there, and you’re right. It’s being exposed more, and social media allows people to exchange ideas. Also, you know, you see things happening and, you know, no matter which side of the aisle you’re on, you might cheer when it benefits you for the moment, but in the pit of your stomach, you know it’s wrong.

 

                                    Like when you see Gavin Newsom say restaurants have to close, and then he eats out at a restaurant. And we all say oh, whatever. And the people say oh, it’s not so bad. But meanwhile, they know it’s not right.

 

                                    When you see someone like, you know, Google erase bad reviews on Robinhood, you say why would they do that? When you see people get thrown off a deep platform, you’re like, even if you hated that person, you know in your heart it’s not right. You sense there’s something wrong here.

 

                                    Now go back to, you know, things like the Federal Reserve. What you have is a lot of also misinformation and half-truths out there and here’s where places like Facebook are just so damaging for society. Because what they do is they put in an echo chamber the way the algorithms are written. They’re written in a way that the more that you like something, the more you see it. And the less you see the opposing view.

 

                                    So it’s not like you get Walter Cronkite giving you that sort of somewhat, you know, semi down-the-middle version of what events are. So everyone’s seeing the same news. Everyone’s getting the same set of facts. But now, you have one side of the equation getting one set of facts. The other side gets another set of facts. So they’re operating from completely different worlds because they’re getting different facts. They believe different things because they hear different things. So how could you possibly reconcile?

 

                                    As long as Facebook and companies like that are allowed to exist in their present form, you’re going to have a society that remains incredibly divided, hating each other because their algorithms are different. They’re causing you to live in an echo chamber where all you see or predominantly hear are people who think just like you, so it ends up becoming an exaggeration which always goes towards the extreme because those voices are the loudest.

 

                                    You see it on Twitter. You see it everywhere. So I think that it’s a huge issue. And that’s I think the fuel on the fires have been raging for a while of class warfare. We see, you know, globalism has created concentrated wealth in the hands of a few people, while other people have been destroyed by the eroding of the manufacturing base. So it’s all this stuff happening, right, that puts fuel on the fire with social media and the echo chamber. So it stops people across the country. Yeah, that’s my opinion. Just my opinion.

 

Trish Regan:               And what’s so frustrating, you know, I like to look at all sides of things. You know, it’s my nature. I have a viewpoint, but I kind of want to take it all in. Right? And see many different views. I think that we are better informed as individuals if we welcome all viewpoints. But that’s not accepted anymore, and you’re totally right. It’s an echo chamber. Doesn’t matter what side you’re on. You want to keep hearing, you know, sort of your point of view. And right now, it’s getting alarming because there’s one group in charge, and that group in charge wants to make sure that the other side is not heard in any way, shape, or form. And that I think has dangerous implications for our society going forward.

 

Jordan Belfort:           It will backfire because what’s going to happen, you know – what’s happening right now I believe – is that the people right now who are being disenfranchised are people on the Right at this point, this moment in time. They’re being de-platformed and not being allowed to be heard.

 

                                    But the issue is the people on the Right are typically those that are a bit more I would say financially successful for the most part. They’re a bit more empowered. So things are not like – you know, when do people really act and do something? When they feel like, you know, this has gotten so bad that I can’t feed my family. Well, I don’t think we’re there at that point. Everyone’s like taking it on the chin and just accepting this because things aren’t so bad.

 

                                    You know, when you saw things like Black Lives Matter, you know, when they were not being heard, what do they do? Well, they’ll go in. I don’t want to use “burn down the streets,” but to them, shaking up the system is a good thing because they perceive themselves as on the bottom, and true, there’s a lot of righteous wrath there, and they are on top of a lot of things from the bad time currently. But to them, tearing down the establishment serves them. On the Right, tearing down the establishment does not serve them. So I believe it’s going to take a lot more people on the Right to really do something, you know, at the level that you saw. Come on. The thing that happened in one day in D.C. – that was a blip of 15 minutes versus what we saw for weeks of rioting, and burning, and looting, and stuff like that. Because one side says I want to take the establishment down because I’m on the wrong side. I get it. It makes sense. If I was on their side, I’d probably feel the same.

 

Trish Regan:               Yeah, I know. Then there’s the hypocrisy. The media that somehow, you know, is very concerned about any protests on the Right versus the protests on the Left, you know. But anyway, we will save that for another day.

 

                                    Jordan, it’s so good to talk to you. I want to encourage everybody to go to your website. Straightlinesales.com. You can read more about Jordan and his sales training, and his books, and we’ve got to continue the conversation again.

 

Jordan Belfort:           Thanks, Trish.

 

[End of Audio]

 

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