Guest Post by "Louisiana" on Meme Stonks

[This guest post is by our correspondent from Louisiana, who previously wrote "Modern Art is a Giant Tax Scam", and "Time to Assess Practical Risk" about coronavirus. He was the winner of the 2018 CBS Prediction Contest.]

In my ongoing conversations with CBS, I've floated a thesis that explains the "value" behind meme stonks from Gamestop to Tesla. I live near Houston but visit family in Louisiana often. The small city of Lake Charles, just across the border, has two major industries: petrochemicals and casinos. The Texas Republican Party is too strait-laced to allow gambling in the state, so more morally flexible Louisiana gladly fleeces Texans on the weekends at remarkably nice casino resorts just two and a half hours from Houston.

From an Austrian subjective value perspective, obviously the casinos must provide some value to their patrons. The value is the manipulation of endogenous neurotransmitters through engagement in artificial addictive behavior, akin to junk food, pornography, or even our beloved nicotine. My thesis is that advances in gamification through mobile-friendly brokerage services like RobinHood, in addition to the obscuring of commissions and the ability to buy partial shares, have made certain parts of the stock market function exactly like a casino. Cryptocurrency is even better for this purpose.

From the gambler's perspective, the ideal stonk or crypto would have certain qualities:

1. High volatility. Gamblers get excited by low-probability but high return outcomes. The perception is even better than this, however. The historical growth of these issues makes the risk seem minimal compared to blackjack. One way to conceptualize these stocks is like the Powerball lottery. The more tickets that are sold, and the longer the jackpot goes unclaimed, the larger the prize becomes. Imagine the appeal of Powerball if tickets never expired until the prize was awarded. Either way, earning an inflation-proof 7% in Altria or oil royalties for 20 years is not on the menu.

2. Like smokers, alcoholics, and other addicts, gamblers demand cues associated with their vice. A casino does more than simply provide a volatile negative expectation redistribution of funds. It also must provide what the industry calls "gingerbread." Resorts are themed in various ways (Caesar's Palace, the Bellagio), and aspects of community are provided with nice restaurants, shopping, and social events: in other words, all of the things brain-damaged extroverts need to distract themselves from even a moment of introspection. Even at the micro level, slot machines obscure their brutal, mathematically ordained outcomes with game themes. Some gamblers prefer a Wheel of Fortune themed game. Others may prefer one themed from a recent action movie. Similarly, a feature of meme stonks and crypto is some sort of plausible story to provide gingerbread for the gambler. Just as some people believe there is a strategy to win at lotto or slots, the stonk gambler needs a rationalization for destructive, addictive behavior. The best stonks have some compelling story: Elon Musk is Tony Stark, the idealized version of themselves every nerd can idealize, and will eventually own the entire transportation market worldwide and the entire planet of Mars. Crypto is the new gold, or the new currency, and if you don't want to be stuck holding wheelbarrows of worthless dollars, left behind by our new crypto kings, you'd better get in early. The key quality of a stonk or crypto is that it must have no objective value, and with no objective value, its value could be anything. Communities form around these memes that are emotionally meaningful to the participants, including a penchant to engage in infantile bonding behavior (literal baby talk with words like "tendies").

3. It is impossible to analyze the casino business from an objective perspective. Objectively, they provide no real economic value (or at most very expensive entertainment value), which is one of the reasons most jurisdictions severely restrict or ban their operation. Nevertheless, where they are allowed to operate, they are consistently profitable. Perhaps the best explanation for the emergence of meme stocks and the crypto bubble is in-person gambling being shut down during Covid, along with the more recent crackdown on online poker. Those animal spirits demanding their dopamine hits (and frankly, a salve for the profound loneliness in the culture) had to find an outlet somewhere.

I think some value investors are operating under an old paradigm where a stock's value is equal to the net present value of cash flows delivered to the investor. But stonks and crypto can pay a different type of dividend in the form of neurotransmitters to gamblers. Once a stock or crypto becomes a meme, it is as useless to attempt to short it or otherwise predict its crash as it is to predict when the lotto will pay out. With the recent short squeeze of Gamestop, short sellers have to be extra cautious that they will be targeted with a campaign of forced bankruptcy and margin calls before their bets can achieve their "rational" value. On the flip side, no one can "call" my oil royalties or tobacco dividends, no matter how low innumerate or irrational ESG managers sell the stock. If well managed, these shares are being bought back in an accretive way anyway, limiting the mark-to-market downside.

It is possible, maybe likely, Tesla and Bitcoin will continue to trade at high levels simply out of their entertainment and gambling values. If recent years have taught us anything, never short the stupidity of the Kwa's population.

Once the Covid crisis is over, it will be interesting to track publicly traded casino earnings. Does legal gambling in stonks increase or decrease their foot traffic?