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What happens after the GameStop bubble bursts?

A conversation with Henry Blodget, who knows what it’s like when stock market booms go bust.

Charlie Sheen and Michael Douglas on the set of 1987’s Wall Street.
Sunset Boulevard/Corbis via Getty Images
Peter Kafka covers media and technology, and their intersection, at Vox. Many of his stories can be found in his Kafka on Media newsletter, and he also hosts the Recode Media podcast.

We don’t know where and when the GameStop story will end (though it may be ending fairly soon). But it’s easy to see the overall mania for day trading — propelled by a combination of social media, easy-to-use apps like Robinhood, Covid-19 stimulus checks, and Covid-induced boredom — and think of parallels to the dot-com boom a couple decades ago.

Which makes it a good time to check in with Henry Blodget.

Blodget is currently the CEO of Insider, the digital publishing company he sold to Axel Springer in 2015. (Disclosure: I worked for Blodget when he started the company and made money on that sale.) But prior to that he was best known as a very high-profile Wall Street analyst who promoted internet companies during the late 1990s; after the web 1.0 bubble burst, regulators charged Blodget with fraud, arguing that he championed stocks he didn’t believe in. Blodget eventually settled the charges without admitting guilt and was banned from Wall Street.

Blodget has still kept his eye on the stock market, though, and in a reversal from his former role, he has spent many years warning investors — particularly retail investors — about the dangers of speculating. Since Blodget launched his career during a stock bubble, I wanted to know what he thought of this one. This is a transcript of an email conversation we started Monday (when GameStop shares started at $316) and finished Tuesday morning (when Gamestop had dropped below $100).

Peter Kafka

Hi Henry. Thanks for agreeing to chat (actually agreeing to write) with me.

Let’s start with historical context: You were front and center to the dot-com boom and bust, and you also had a very good view of the housing/banking collapse. How does the Reddit/Robinhood/GameStop frenzy compare to those events?

Henry Blodget

Aspects of it are frighteningly similar! Three things in particular.

First, the story that we’re suddenly in an amazing new paradigm where small investors are smarter than Wall Street. The day-trading craze at the end of the 1990s was the same. The story then was, “Professional investors are clueless and incompetent. Most underperform the market. You can do better!” What that story missed is that professional investors don’t underperform the market because they’re stupid. They underperform it because it is really hard for anyone to consistently beat the market, no matter how smart you are. Also, risk usually correlates to reward — or punishment. So if you’re crushing the market for a while, you’re probably also taking an extraordinary amount of risk.

Second, there’s this idea that it’s new for small investors to use technology — in this case, Reddit — to tout stocks. Please. The Reddit of the 1990s was chat boards. They were just as powerful. You recently highlighted a great article Michael Lewis wrote about a 14-year-old in New Jersey who got so good at chat-board stock-touting in the 1990s that he made $800,000 doing it.

Third, the phenomenon in which boring, lifeless stocks suddenly go bonkers. I remember sitting in my office in 1998 when the stock of an old music-packaging company called K-tel suddenly blasted off. It was a huge short squeeze, just like GameStop. The stock went from pennies to the $30s. Everyone was gawping at it. Then speculators ran off to play with the next shiny object, and it went back to pennies.

Anyone who still thinks there’s something new happening here should read Reminiscences of a Stock Operator, which was published in 1923. It opens with a famous quote that I think of every time something like this happens: “There’s nothing new in Wall Street. There can’t be, because speculation is as old as the hills.”

Peter Kafka

There is an argument, as you know, that what happened with GameStop and what is happening with GameStop isn’t merely about speculation — that this represents a social movement, organized on social media, against Wall Street and financial elites. You have been publicly skeptical of that theory. What would it take for you to reconsider that skepticism?

Henry Blodget

I can’t speak to what people are thinking when they press the “buy” button, but I would respectfully suggest that, if they think they’re “sticking it to Wall Street and the financial elites,” they’re not really thinking.

Wall Street likes a good short squeeze, too, of course. Professional traders are almost certainly on both sides of these trades. Meanwhile, the big shareholders of these companies are almost exclusively institutions. So if it’s really just little guys driving the price spikes, which I don’t believe, the ones who are really cashing in are the financial elites.

What is indisputably true is that Americans are angry — and they have a right to be. Inequality is a huge and growing problem. But the way to address it is to demand that rich, successful companies pay their employees better. Not for every dude with a smartphone to try to beat “Wall Street” at a difficult, dangerous game.

Peter Kafka

Speaking of day trading, here’s the ad E-Trade ran during the 2000 Super Bowl. Very Reddit-y. Speaking of history lessons — when the dot-com bubble burst it helped tip over the rest of the economy. When the real estate bubble burst we got the Great Recession. Are you worried that the current day-trading boom could have effects beyond boosting random stocks or other bets (see: silver)?

Henry Blodget

I see today’s bananas speculation as a sign that we’re near the end of this bull market rather than a risk to the economy. Yes, a lot of speculators will likely lose their shirts, but that will be more painful for them than the economy.

The big risk to the economy, I think, is still the pandemic, and how the government responds to it. My hope is that we’ll get another big emergency package and, finally, a competent vaccine rollout, and that we’ll be mostly back to normal by the summer. But we have a long way to go.

The big risk for the stock market, meanwhile, could actually be a positive for the economy and society at large.

The biggest economic problem in this country is that the share of income that is going to “capital” (investors) is clobbering the share going to “labor” (people who work).

That’s why so many people are so angry. And it’s why everyone is cheering on the idea that Redditors are socking it to Wall Street.

Societal or government pressure will keep pushing companies to pay people better. That would be great for Americans and great for the US economy. But temporarily, at least, it might be bad for the stock market, because it would reduce corporate profit margins. (Tiny violin ...)

If companies still refuse to pay Americans a living wage, meanwhile, Congress will probably hit the investor class with higher taxes, including, perhaps, a wealth tax. That will force investors to sell stocks to pay their tax bills, and would therefore also be bad for the stock market.

So, I’m hoping that, when this bull market finally ends, it ends for a healthy reason: Companies finally deciding to share more of the value they create with the people who create it — their employees. If companies don’t do that, the government will do it for them. Neither would be good for the stock market.

Peter Kafka

You’d like companies to pay their workers a living wage. Is that a federally mandated $15 an hour? Something else?

Henry Blodget

Ideally, good companies — and their shareholders — will decide that it is not okay for people to work for them full-time and still be poor. There’s no law of capitalism that says you have to pay people as little as possible. It’s a choice. Big, rich companies can afford to share more of the value they create with the people who create it. If they do, they will help not only their employees and their families but society and the economy.

When you only make $10 to $15 an hour, you spend every dollar you make. So higher wages mean higher spending, which means faster economic growth. Earning a living wage and not being desperate and exhausted all the time from working multiple jobs also makes people happier and healthier. So paying a living wage is not just the right thing to do — it’s a great thing to do.

Many big companies are now doing this voluntarily, and that’s encouraging. If others refuse to, then, yes, a $15 an hour minimum wage would help.

Peter Kafka

I’m curious what role you think the media should play in this. Obviously GameStop is an irresistible story and will be covered as such. But there’s also an obvious cycle here where the more coverage GameStop, and day trading in general receive, then the more it encourages people to day trade in search of the next GameStop. It’s also obvious that the sober financial advice most outlets periodically offer — invest in diversified index funds and then move on with your life — won’t generate the kind of audience that “Top 10 Next GameStops” will generate. Do you think the press should go out of its way to restrain the coverage it does here? And does that even matter, given that so much of the GameStop story has been happening on Reddit, Discord, TikTok, and other editor-less media?

Henry Blodget

Yes, it’s newsworthy, and it’s a topic of intense interest, so of course the media should cover it.

And, yes, the coverage will help spread the word about the excitement and fortunes being made, the same way coverage of bitcoin, bull markets, the lottery, and other money-making opportunities does. But media exists because people want to be informed about news and topics they care about. So by covering it, I would respectfully suggest, we are doing the job our readers, viewers, and listeners want us to do.

(And, yes, given the array of information and communication options these days, if the media didn’t cover GameStop, et al., everyone would just ignore us and get all their info elsewhere.)

Two things we know from history: 1) When speculative frenzies are inflating, people mostly want to hear about how to play, and 2) the moment the music stops, people start looking for others to blame. “The media” is usually a prime target. So no matter how restrained we are, I expect we’ll get some pies in the face.

Speaking as a member of the media who has had prior experience with speculative frenzies, let me say this clearly:

Speculative frenzies can be thrilling. They can make some people a lot of money fast, at least temporarily. But, at some point, they usually end. And when they do, they wipe out most of the late players and many of the early ones, too.

So if you decide to play, don’t delude yourself about the risks you are taking. Don’t mistake luck for skill. Don’t imagine it will be easy to “spot the top” and get out before the collapse. And don’t bet more than you are willing to lose.

Peter Kafka

You mentioned looking for someone to blame. After the dot-com bubble, you faced fraud charges and were banned from Wall Street (you settled with regulators without admitting guilt). I’ve known you for a while so I know better than to ask you to talk about that chapter of your life, but I know you have defenders who argue that you were singled out for practices that were widespread at the time. If you had to predict, who do you think will receive the brunt of investors’ and politicians’ wrath when and if this ends badly?

Henry Blodget

Yes, I am unfortunately also familiar with the “blame phase” of speculative frenzies. It was a searing experience, and I have spent a lot of time in the past 20 years thinking about what I could have done differently. I wrote a book about some of what I learned, including the difference between speculating and investing. (Speculating is exciting, fast, action-packed, high risk/reward, and more difficult than it seems. Investing is slow, boring, and relatively easy — the art of doing less and avoiding mistakes. The vast majority of us should invest, not speculate.) It’s called The Wall Street Self-Defense Manual: A Consumer’s Guide to Intelligent Investing.

It’s hard to say what and who will be blamed this time around. If I had to guess, I’d say regulators will look closely at things like “payment for order flow.” This is the practice that encourages Robinhood and other speculation apps to make rapid trading not only free but as fun, exciting, and friction-free as possible. Some traders don’t realize that the apps aren’t doing this to help you grow your savings. They’re doing it to generate lots of volume for their actual customers — big institutions that pay for an early look at what other traders are doing.

In Robinhood’s defense, lots of companies take “payment for order flow.” And lots of people want to be able to speculate as freely and easily as possible. (One of the big scandals last week, in fact, was that Robinhood temporarily restricted people’s ability to speculate!) But a frequent feature of the “blame phase” is that common practices get reevaluated. “Payment for order flow” seems a prime candidate for that.