# The Great Rug Pull - by Vincent Launay - Vincent’s Corner Source: https://vincentlaunay.substack.com/p/the-great-rug-pull ## Summary Launay argues that the recent GameStop meme-stock rally reflects financial nihilism, a loss of faith in conventional investing among people priced out of housing by money printing. The rally followed a May 13 tweet from Roaring Kitty, whose account posted memes for five days before going quiet again. Launay cites US home prices up 49% from January 2020 to March 2024 and the M2 money supply up 41% from February 2020 to April 2022, and describes a $600,000 house whose monthly mortgage payment rose from $2,023.7 to $4,758.2 as rates went from 3% to 7%. ## Article “You effectively need to earn your money twice with fiat, once when you work for it, and once when you invest it to beat inflation.” Saifedean Ammous in The Fiat Standard A few weeks ago, a corner of the stock market went wild after a meme was posted on X. This meme triggered another meme stock mania, reminiscent of the Covid era, when retail traders drove the valuations of unprofitable companies like GameStop, AMC, or Bed Bath & Beyond to insane levels. The tweet above was seen by close to 28 million people, and GameStop's stock price went bonkers immediately after it was posted. Stock price of GameStop since the beginning of the year In business school, I learned about the efficient market hypothesis and that market participants were supposed to be rational actors. But there doesn’t seem to be much rationality in this market action. So what happened? To understand how it started, we have to rewind the clock to 2020. The world was shut down, central banks around the world printed massive amounts of money, and everyone became a stock market expert overnight. A subreddit (the name of forums on Reddit) called WallStreetBets became extremely popular, with more than 10 million people joining it to exchange investment tips and share their gains but also their, sometimes extreme, losses. There is even a name for this: it’s called Loss Porn. These losses often originate from option trading, a particularly risky way of investing money. Far from being ashamed of losing money, the retail traders on WallStreetBets brag about their losses. They treat the stock market like a video game, and losing (money) is okay. See a recent example below. He has already lost 95% of his money, so he is asking for advice on how to lose the last 5%… One of the members of WallStreetBets, Roaring Kitty, became a hero in 2021 when he turned $10,000 into more than $40 million by buying call options on GameStop. There was a movie made about his story, and he was even auditioned by the House of representatives in the US. The movie made about Roaring Kitty’s story But then, in June 2021, Roaring Kitty disappeared. His Reddit and X accounts went dormant. So when he tweeted again on May 13, millions of retail traders saw it as the return of the Messiah. The 2021 nostalgia kicked in, and traders started buying GameStop stocks just like three years ago. Over five days, Roaring Kitty’s X account continued to post memes but not a single message. Then, the account went quiet again. No one knows if Roaring Kitty was really behind these tweets or if his account got hacked or sold. But the fact that a meme can trigger a $5 billion increase in the market capitalization of a small company like GameStop says a lot about the state of our society. Even presidential candidate Robert F. Kennedy Jr. joined the GameStop train. This is very much real, here is the link to the tweet After my posts on Reflexivity and the debasement of currency observed through the price of gold, there is another piece of the puzzle that is missing if you want to understand what is going on in financial markets and in the economy as a whole: financial nihilism. Let me bring in my loyal assistant to start with a high-level definition. Financial nihilism is the belief that traditional financial systems and investments are meaningless or futile. It often leads to skepticism about the value of money, investments, and financial institutions. This perspective can result in a lack of trust in economic structures and a preference for alternative financial behaviors or complete disengagement from conventional financial activities. ChatGPT Translation: people have lost faith in the system. They believe the odds are stacked against them, that they will never be able to buy a house or retire, so they might as well throw money at things that look more like lottery tickets than buy regular investments like stocks, bonds, or precious metals. The success of forums like WallStreetBets is a direct consequence of the unprecedented scale of money printing that has occurred since 2020. This printing has inflated asset prices and priced many people out of the real estate market. Between January 2020 and March 2024, home prices in the US have gone up by a staggering 49%. Of course, the homes in the US haven’t changed; they didn’t get better or suddenly become more scarce; it’s the money that got worse. The M2 money supply, which measures the quantity of US Dollars in circulation, increased by 41% between February 2020 and April 2022. So it’s no wonder asset prices rose and that we got inflation. Home prices have simply kept up with the money printing. Realizing they overdid it on the money printing, central banks embarked on the fastest interest rate hiking cycle in modern history to try and tame inflation. The cost to borrow money increased for everyone, but real estate prices didn’t adjust. They kept going up. Here is the consequence for homebuyers using a simple example: 2020 Cost of the house: $600,000 Interest rate: 3% 20% down payment needed: $120,000 Monthly 30-year mortgage payment: $2,023.7 2024 Cost of the same house: $894,000 (+49%) Interest rate: 7% (+ 4 percentage points) 20% down payment needed: $178,800 (+49%) Monthly 30-year mortgage payment: $4,758.2 (+135%) You can easily double-check the math. Buying the exact same house just four years apart translates into a monthly payment that is 2.35x what it was four years ago. Unsurprisingly, there is very little activity in the real estate market at the moment, as people do not want to give up the low interest rate they got on their mortgages several years ago. Effectively, the US is running a large-scale experiment where a significant portion of the population benefits from mortgage rates below 3% or 4%, while new entrants face rates of 7%. It’s akin to millions of people living in rent-controlled housing while the rest of the population endures the consequences of uncontrolled money printing. Most existing mortgages have sub 4% interest rates In this context, people who have been priced out of the market have lost hope of ever getting on the property ladder through regular means, i.e., saving and investing in the stock market to get a 7% to 9% long-term rate of return. They want investments that can return 100%, 500%, or 1,000% in very short periods of time. So when the opportunity to make money by buying GameStop stocks arose when Roaring Kitty started tweeting again, retail traders didn’t hesitate. The rug was pulled out from under an entire generation that hadn’t had time to accumulate assets. So, they are fighting back in their own way. You can see financial nihilism in all corners of society. From people buying more lottery tickets than ever… … to the younger generation spending money on luxury goods and vacations, because what is the point in saving anyway? Once you understand financial nihilism and Gen Z's mindset, it starts to make sense. What appears to be irrational behavior from the outside may actually be completely rational in the face of an inextricable combination of unfair circumstances. So don’t be so quick to judge. Gen Z drinking their down payment. The girl isn’t real, by the way. I generated her using Photorealistic GPT. Link to the picture here.