Matt Levine: King of *The* Financial Newsletter
Matt Levine writes the popular daily newsletter “Money Stuff” on Bloomberg Opinion that has over 150,000 subscribers and a “cult-like” following on Wall Street and beyond. He is widely regarded as one of the most iconic, witty, and sophisticated financial writers of our age. Before Bloomberg, Matt was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer, a law clerk for the U.S. Court of Appeals for the 3rd Circuit, and a high school Latin teacher. He holds a heroic status especially amongst college economics majors, and he in fact inspired Tiger to start writing his newsletter on Substack.
The following is from Tiger’s 6/30 Substack email "Matt Levine recaps the GameStop saga..." about the interview:
Here’s a theory. You run a bank, and a smallish public company comes to you and asks you to lend it, say, $500 million. You say “okay I will need to know more about your revenue and expenses and assets,” and the company says “no no no never mind that […]”
These are the opening lines of Matt Levine’s Money Stuff newsletter on 6/17, the day I interviewed him for this podcast. You can read from the lines above that Matt does NOT write like a traditional financial columnist, which he said in our interview that he doesn’t consider himself to be one.
Matt is widely regarded as one of the most iconic, witty, and sophisticated financial writers of our age – a status that gradually solidified over the years and well-explained in a NYTimes profile last October titled “A Columnist Makes Sense of Wall Street Like None Other (See Footnote).”
It is not an exaggeration to say that Matt has built a “cult-like” following on Wall Street and beyond, and even many of the distinguished guests of this podcast proudly proclaim to closely follow his work. Forget about Bridgewater CEO David McCormick – you should’ve seen how my friends’ faces lit up when they heard that *the* Matt Levine is coming on this podcast…
Matt and I talked about his journey starting out as a high school Latin teacher after Harvard, how he decided to go to law school and ended up a Goldman Sachs banker, recent market events like GameStop & crypto, ESG, why everything is securities fraud, and how his newsletter could fail in 5 years…
The ideas explored in that interview will take many posts to articulate, so today I’ll just recap the parts related to GameStop. The few highlights below do NOT do justice to Matt’s many more brilliant arguments and nuances, and I’d highly encourage you to just listen to the original conversation. There were many hilarious moments in the interview; you could hear me laughing all the time and even catch me roasting Matt at the very end.
What actually happened to GameStop?
When the GameStop saga unfolded in late January, I was quarantining in Princeton to get ready for the in-person spring semester. I didn’t have much to do, so I wrote these very long Substack posts explaining the GameStop saga. (Princeton Professor Steven Kelts even used them as class readings for his political theory seminar on money… a small highlight of my writing career…) Well, a lot of my knowledge on the GameStop saga actually came from Matt’s writings at the time, so I asked him to revisit that dramatic period.
Tiger: [00:20:25] What happened to GameStop? And how did you piece things together when nobody seemed to know what was going on? All quotes are lightly edited for clarity:
Matt: [00:21:23] I'm like a dork who's had like a couple of stupid niche interests as a financial writer. I used to build equity derivatives, and I know a little bit about options gamma – no one cares and ever reads about that. I, for a while, was also writing about market structure, payment flow, order flow money, market internalization and market making – and nobody cares about that.
So these are two bizarre niches that I write about sometimes. And then GameStop became like the biggest story in the world – like Good Morning America was talking about it every day – it was the biggest story in the world for like three days. I mean, it's not really a story about the payment order flows and options gamma, but it's a little bit of a story about those things… So all of these nightly news anchors were like, "what do I need to know about options gamma?" And I'm like, "oh, lemme tell you about options gamma..." I don't know. Like it just so happens that this incredibly stupid, incredibly huge story touched on some of my interests.
I should say – it didn't touch on all my interests, and I still don't feel like I have a good handle on the social dynamics of Reddit, which is like really it was about, not options gamma. But I can certainly write about it and try to understand something about it.
What really happened? I don't know, man. I think it is still a deeply mysterious situation. I guess a shallow level of mystery is like "who pushed up the prices?" One thing that I did write about was like there is evidence that it was not a one-sided retail order flow buying GameStop options. There's evidence that would suggest that a lot of basic narratives were not that true. So did retail people buy all the shares? Well, some retail were selling; some were buying; on net it's hard to know.
Retail retail investors bought call options that were out-of-the-money, and that causes options market makers to buy stock and then to buy more stock as the stock goes up. Did that move the price a lot? I think there's evidence that the answer is not so much, but yeah who knows...
And then on the other hand, did a bunch of hedge funds buy GameStop stock to bet on a short squeeze or to sort of ride the retail momentum? The answer is yes. But what was the motivating factor in the stock moving? I think you have to say it was people on Reddit getting really excited about it all at once in a social way. But it's hard to sort of point to hard evidence of that because like, again, retail order flows weren't one sided.
The way the stock market works is that some fundamental thing happens, and there is a sort of ripple effect where some person buys stock for that fundamental reason and then a bunch of algorithms really move the stock. So I think there are a lot of knock-on effects with fundamental or non-fundamental things (like emotional things). I think clearly that played a role here as it plays a role in every day of trading for every stock. But it doesn't explain why the GameStop price went from $4 to $400.
I don't know, but the sort of shallow surface explanation of why the Reddit people liked the stock and decided to buy it seems to be more correct than some shadowy conspiracy theory explanation.
GameStop was new and weird…
Tiger: [00:25:20] Did you feel that the GameStop situation was an inflection point for Wall Street, that the anti-neoliberal, anti-establishment, populist sentiment really culminated to such an eruption point?
Matt: [00:27:00] I will say two things. One is that you can have a distributed phenomena where a bunch of people all get excited about a stock and buy it and it goes up a lot. I think that's a pretty old story. And you can have a coordinated phenomena where some whale (like a big hedge fund) buys a lot of stock, pushes it up, and manipulates it somewhere.
GameStop was kind of new in that it was both of those things at once. Instead of being a hedge fund being a whale, it was like thousands of individual retail traders who found a way to coordinate.
And I don't say that in a derogatory way. People say coordinated like it's illegal or some sort of market manipulation. People thought that a lot in January, and I think that talk has faded because it seems pretty clear that nobody did anything particularly illegal. So I think the fact that retail traders can coordinate in such a powerful way does seem new.
The other thing I'll say is that if you ask me by early February, I would say “yeah stocks go up; stocks go down; there are bubbles; there are pumps; and this felt like a pump,” right? Now, months later, the stock is still really high! The whole thing just seems more enduring, and I think it’s weirder.
GameStop’s stock price is still high because Bitcoin was invented…
Tiger: So why is the GameStop stock price still so high [more than $200 at the time of interview]? Are we just in a structurally different era with all the Federal Reserve liquidity? Are we in a bubble?
Matt: [00:30:49] I think one thing that is different is that Bitcoin was invented a decade ago. There's a lot going on, but a basic thing about Bitcoin is that it was a thing that was worth zero dollars. A guy wrote a paper about it, and then people coordinated around it, and the sheer social impact of them coordinating around it made it worth $4, and then $40,000, then $60,000… And people saw that.
Obviously, a part of why Bitcoin is valuable is for technological reasons, but a part of it is that the sheer social coordination ability turned out to be valuable. That is not exactly a new thing – we have U.S. dollar because of a social coordination mechanism, but it’s old and complicated..
But Bitcoin was like “we're going to put it on the web, and we’re going to attribute value to this thing.” And then people were like “well, if you do that, you can do it like this as many times as you want!”
So people immediately invented Dogecoin and stuff like that. All these things have high value because some community on the Internet coordinated around them, and the value is going to be sheerly dependent on our continued, durable willingness to exchange them for value rather than anything to do with underlying cash flows.
Once you've established that – you can buy the GameStop stock, why not?! GameStop is the new Dogecoin, right? I don't think that people consciously articulate it as they're buying it, but I think the proof of concept of you can like create value purely socially – that is something Bitcoin really foregrounded. I think that proof mattered a lot in ways that are novel and we're really still figuring out.
Tiger: [00:29:00] Do you still believe in the Efficient Market Hypothesis after seeing GameStop’s stock price today ?
Matt: [00:29:05] Well, I've never believed in the form of the theory that is like companies’ stock prices accurately reflect their future cash flows. I believe in the part of the theory that you will have a hard time picking stocks that go up. Supposedly, Eugene Fama [who devised the theory] would say to his students “the market is efficient... for you,” which I think is a good way of putting it.
The following is from Tiger’s 7/6/21 Substack email "Matt Levine is (kinda?) worried about losing his job over DeFi…":
Continuing from my last email “Matt Levine recaps the GameStop saga...” – another highly interesting part from my interview with Matt is his takes on crypto and DeFi (Decentralized Finance).
It’s hard to sum up what DeFi really is. It emerged out of the crypto ecosystem and recently garnered a lot of attention from legacy financial institutions and top regulators. DeFi is probably the ultimate vision of the crypto space at large – a large number of apps leveraging the blockchain technology to conduct peer-to-peer, decentralized financial transactions without needing centralized counterparties. You don’t have to go to J.P. Morgan to get a businsess loan, or list your stock on NASDAQ – these are all “centralized entities” that could screw you over one day when push comes to shove, and it’s much better to conduct your financial activities on the blockchain, which not one person has control over and which you can trust. So goes the predominant narrative…
Bubbles, frauds, and DeFi…
All quotes are lightly edited for clarity:
Tiger: [00:38:39] Do you think we're in a bubble right now? Because it seems like we're in a structurally different place; narratives play a greater role; and it's hard to have a hypothesis about what's going to bring this party down. You can't really short a technological innovation that doesn't have earnings because there's no way you can disprove the hypothesis that this is or isn't going to be a long term breakthrough, especially when people have a subjective psychological conviction that STONKS will just keep going up.
Like there's no way you can prove that decentralized finance (DeFi) will NOT be the future, but you also don't know what many of these projects are actually doing these, so how do you make of the space? It's just very weird, right?
Matt: [00:39:31] You look at the late 1990s, 2000 tech bubble – things went up and then down. But it's also it's like a period that produced a lot of important innovative companies. And then you could imagine something similar here where a certain amount of froth in the market is what enables capital raising for wacky ideas, some of which would turn out to be rotten ideas.
Like I think DeFi is really cool, and I think every actual project I read about wants me wanna sh*t myself, but you know... I don't know... that's like how it works, right?
I read there's like an ecosystem of 90 percent fraud and 10 percent innovation. We look at the electric vehicle companies and read about these EV SPACs, and you'd think "oh, that's a fraud!" But should we be funding research into electric vehicles? Yeah! That seems very socially viable.
The traditional financial capital is supposed to fund a business, so that they can hire a bunch of smart engineers and create incentives for people to get into that space. The ones who get into that space and succeed will get very rich. And the ones who get into that space and fail will get hilariously rich.
I think in 20 years if we're polluting a lot less because everything is electric, people are going to look back and be like "it's bizarre that we used internal combustion cars, and it's great that we fixed that, and so there were a few frauds, who cares?"
Crypto used to just be literal pyramid schemes…
Tiger: [00:41:27] Maybe in some sense, we should be looking for the frauds. That’s where the change is?
Matt: [00:41:58] I'd be a little careful in saying that fraud is where the innovation is happening. I think one thing that DeFi does is that it's a really good enabling mechanism with literal pyramid schemes. Like a few years ago, in the early days of the second-generation crypto stuff, you go to look at the crypto projects, and “pyramid scheme” would be like the name of the project, and then people put in tokens... just literally explicitly open Ponzi and pyramid schemes.
It's just like “we'll tell you exactly what's going to happen. If you get it at the right time, you'll make money. If you have the wrong time, you lose like whatever you put in.” That was it.
DeFi could take the opposite path from traditional finance
Tiger: [00:43:34] My friend sent me this platform that was like doing online casino in virtual reality with crypto currencies on DeFi blockchain... What is going on? I mean, how is this thing not...?! I mean I can see why certain people would be incentivized to use certain innovations, but don't you look at these things and go, "This is a joke! Whatever that is happening..."
Matt: [00:44:00] I think the knock on DeFi is that it is mainly a venue for self-referential speculation. People are not building factories and financing them with DeFi. It's hard to point to a real world object that was funded by DeFi.
But, you know, I think the counterargument is like if you make a really good system for trading financial claims, and then you go to people who issue financial claims to fund real projects and say "look at our really good system for trading claims," and maybe they will come!
You build the system first, which is the opposite of how traditional finance was built. In traditional finance, we kept optimizing the system for financial claims that started from issuing financial claims to fund world projects. But that doesn't prove that the DeFi approach is wrong.
An arguable problem with the DeFi approach is that because it is so hermetically sealed from the real world, you're optimizing exciting gambling, rather than the trading of financial claim, but the optimization in a world constrained by your financial claims to fund real-world projects is going to be different from the optimization of your pure abstract claims.
You build a really, really good exchange, and maybe some stocks will list on it. And you see some of that: I wouldn't say a lot of companies have listed their stocks on decentralized exchanges, but you'd see DeFi-curious companies doing so. I think there's promise to that. It hasn't really yet been achieved, but it's early days.
Matt is (kinda?) worried about losing his job over DeFi…
Tiger: [01:21:07] If your column is no longer popular in a few years, what do you think could be the reasons? When we have entrepreneurs on the show, we often ask “if your company fails in five years, what would be the reasons?” So maybe I could entertain this question with you.
Matt: [01:21:27] Gosh, I hope it's because I sell a book that becomes a movie and become too rich to write every day.
To me, the biggest risk is that you do this too long and you repeat yourself in various ways. You repeat arguments and themes and topics and stylistic text, and then eventually people get sick of me, and I get sick of myself, or some combination thereof.
There's a good argument that an op-ed columnist shouldn't have that job for more than five years, and I don't think of myself as an op-ed columnist – like I'm explaining things, butI do worry about people getting sick of me, and I worry a lot about getting sick of myself. Those are the big risks.
The other weirder risk is – when I started, I wrote a lot about [banks]. Five or six years after the financial crisis, as the statute of limitations was beginning to expire, the regulators brought all these cases against banks for doing stuff in the financial crisis. And it was this enormously illuminating period, because you learned about all these trading strategies and weird things that banks built that were not really publicly available but then they got publicly exposed by regulatory actions.
It was a great time to learn about how banks worked, and banks were really interesting in 2007; they were doing a lot of really complicated stuff. In 2021, banks are generally less interesting; they do less complicated stuff for competitive reasons, but also because regulators really tried to make them less interesting and succeeded.
So some of my expertise in what I write about comes from banks. Relatively little of my expertise is in DeFi, and now I write about I guess you'd call it a DeFi protocol. In five years, if all of finance is run on the blockchain and DeFi protocols, I hope that I will adapt. But I will have less native advantage over other people in doing that. So I think that's that's a risk, too.
It’s really fascinating how Matt didn’t just actively bring up DeFi just as a discussion point, but cited it as a specific (albeit “weird”) risk to his career. He also mentioned that his colleagues at Bloomberg are all fascinated by crypto and trying their best to learn about it.
I had previously written about the explosion of crypto reporting in financial media. Listening to Matt’s response – perhaps a large factor of that explosion is because financial journalists see this DeFi space as something that they have to understand, before it’s too late and they lose their job for not getting it? The threat probably isn’t immediate, but it seems that whoever gets a headstart on actually understanding the crypto space will be… maybe even the next Matt Levine?
Not much is happening with DeFi beyond finance?
We shall talk about DeFi in greater detail in another post, but indeed as Matt said, what DeFi is mostly doing today is just self-referential financial transactions. I remeber reading this Substack post by Bankless titled “7 Things You Can Do on Layer 2 Today.” Layer 2 is supposed to be the great technological breakthrough that powers the Ethereum and DeFi ecosystem, but the 7 supposedly great things listed in that post are all very esoteric and mostly finance-centric:
Borrow & Lend on Polygon with Aave
Trade Decentralized Perpetuals
Earn SNX Staking Rewards
Yield Farm LRC Rewards
Trade DeFi Tokens on DeversiFi
Donate to Ethereum Projects on Gitcoin
Stream Money on Superfluid
It’s great if you’re really into crypto, but all this is still very much distant from the average person. Perhaps one day DeFi will take over the financial system, but they will have to make the leap to having something to do with the real world at some point, or they will just stay being exciting for a very small group of passionate enthusiasts.
Matt Levine