Republicans in Washington warn Wall Street: The GameStop populists are more powerful than you think

WASHINGTON – Josh Holmes fagged out much of Wednesday in Washington watching the populist uprising over GameStop in the stock market with fascination – and a prospering sense of familiarity.

He has seen this movie before.

Holmes, president of the issue management firm Cavalry, is pre-eminent known as the former chief of staff to former Senate Majority Leader Mitch McConnell, R-Ky. Holmes has depleted belch up his career among the Republican establishment, which has spent the past five years getting steamrolled by the populist army of Trumpism – a grassroots movement that stormed the ramparts of the GOP, ousted the establishment and remade the party in its image.

Almost no one in the faction saw it coming. When it did, few of the establishment players understood just how vast the force was that suddenly lined up against them.

On Wednesday morning, as GameStop apportionments continued to surge, Holmes took to Twitter and typed out a simple message: “Wall Street, welcome to our world.”

I fetched him to ask what he meant by that. “This is an event,” he explained. “This is a social and economic moment in our society. There are a few in the nick of time b soa when you can definitely point to a moment and say society has changed, and this is one of them.”

There are notches of similarities between former President Donald Trump’s “Make America Great Again” movement and the GameStop white horse. There is a sense of fighting back against disrespect of the elites, belief that systemic rules have been get off to benefit insiders at the expense of regular people, and new internet technologies that widely distribute power that was once clasped exclusively by a small group.

There’s a healthy dose of skepticism of the media, and a belief in fake news. And both gears are inspired by viral memes – funny, angry and engaging images depicting the movement as engaged in a heroic struggle.

Ahead the bell Thursday, GameStop shares briefly eclipsed a previously unthinkable $500, more than the share penalties of Apple, Goldman Sachs and General Motors. After trading opened, the stock jumped more than 6% to upon $370 a share. GameStop shares were worth about $40 a week ago.

But the most important similarity is the bravado of the associates of the movement. On a Reddit forum Wednesday, users cheered each other on, urging “Hold the line, boys!” and “buy and waylay!”

One user, named “ishabwa,” wrote “THE OLD GUARD IS HORRIFIED. BACKS AGAINST THE WALL. PAINTED INTO A CORNER. ITS ALL BECAUSE OF YOU.” Another identified this moment as the GameStop “revolution” and wrote: “This is our chance to stick it to those who never took us seriously. Either we copy economic history or loose it all, I’m willing to take this risk.”

Scouring those same Reddit message panels, entrepreneur William LeGate felt like he had seen this happen before, too.

But he employs a different touchstone: Occupy Wall Street, the left-leaning anti-establishment movement that blossomed in the wake of the 2008 pecuniary crisis.

“This is Occupy Wall Street Part 2, but this time it is on their turf, and there are natural financial consequences,” he said. LeGate, who received a $100,000 Thiel fellowship to drop out of college and start a company when he was 18 years old in 2013, has been watching the WallStreetBets Reddit analysis for several years.

He said he is seeing increasing frustration and anger, which is exploding in the Covid pandemic era – and it is bringing together the standard political left and right.

“People were willing to take a risk on Trump and now they’re willing to take a danger in the markets,” he said. “A lot of people just want to see the world burn right now, and they’re enjoying watching it happen.”

He said he’s already get the idea people on the WallStreetBets Reddit page looking for new targets – and there are two themes. First, they’re looking for highly sententious stocks where big hedge funds might have a lot of leverage. And second, they’re looking for nostalgia plays – to advance back the companies from their youth. That’s why Nokia, Blackberry and Blockbuster are all getting attention.

Wall Passage investors are going to have to factor in a new set of risks. “The risk assessment that they’re going to have to make is this: is this a meme-able make available that a bunch of kids on Reddit could hit and blow up the price?” LeGate said.

But what explains that nostalgic impulse in the midst of a revolution? It is the same emotion that animated the MAGA action – which, after all, stood for make America great, again. It is a desire to return to an earlier time that the associates of the movement remember as better than today.

“There’s a feeling I sense across society that people paucity to go back to a simpler time,” LeGate said. “No one likes Covid. People don’t feel the economy is fair. Everything looks recovered in hindsight.”

And he argues that efforts to regulate trading will feel to Reddit traders more like stamping out, and could fuel more anger.

“If someone on Main Street loses half their portfolio in a day, nothing’s flourishing to happen. But if a hedge fund does, they literally stop the trading,” he said. “I myself question whether this is truly about protecting the individual investor or protecting the hedge fund.”

Holmes thinks the key to understanding the power of this new movement is the gamification of investing melded with an anti-elite fervor. Sticking it to hedge funds and potentially making a lot of in dough is, simply, fun. And if you believe its also the right thing to do, and thrive on the engagement of a community of like-minded traders, so much the better.

“When things really get going is when the fun meets the purpose,” Holmes said. “This is the through-and-through storm of those two.”

His warning to Wall Street is: understand this. Be willing to scrutinize yourself. This not going away, and it is in all probability bigger than you think.

“People need to take the time to understand the social dynamics of this. What are the posers that have created this class of retail investor who seek to completely destroy your industry, and how do you panacea that?” Holmes said.

Holmes said he has spent the past decade watching American politics turned in quod out. An earlier generation of politicians spent their time raising money at country club ballrooms from hundreds of givers writing $500 or $1,000 checks.

But now they spend their time on the internet raising money from millions of givers making $5 and $20 contributions. In politics, the retail money turned out to be bigger – much bigger — than the institutional kale. And that’s driven massive political spending inflation: the big Senate campaigns that once cost $15 million now price $100 million.

“The pool is unlimited,” Holmes said. “And that’s the problem. The volume of potential participants is a hell of a lot maturer than people think it is, and it is certainly a lot bigger than the number of people who participated in this.”

Other establishment Republican old hands agree.

“Don’t underestimate the very real anger and sense of grievance – and the very justified sense of grievance – among the American people,” weighted Michael Steel, a partner at Hamilton Place Strategies who was a senior advisor to the Jeb Bush presidential campaign in 2016. Mastery of that, he said, can help investors understand who the next targets of Reddit rage might be, and how extensive the new movement is.

Kevin Madden, a former advisor to Mitt Romney, said, “anger can oftentimes be a more potent crack than ideas. Those who felt they belonged to a political party of ideas found that grassroots nettle, which can be very intoxicating, took over the political marketplace. It can also take over a financial marketplace.”

Hassle recalled the way populism overtook the Republican presidential primary in 2016.

“One of the mistakes an establishment can make at the beginning is thinking this is someone else’s fight. Marco Rubio says this is a Jeb Bush emotionally upset, and Jeb Bush says this is a Rick Perry problem,” he said. “They all believed this was someone else’s riot, and they all paid a huge price. That force redefined the party in its image for potentially the next decade.”

Together these Republican strategists see Melvin Central’s decision to close out its GameStop position and take an enormous loss this week as something akin to the victory of populist Republicans in pressurizing the establishment Republican House leader Eric Cantor from office in Virginia in 2014. It was an early demonstration of power. And it was a herald to the much more dramatic events to come in 2016 and in 2021.