The Fourth Law of the Internet
Everything that seems one way is actually the opposite.
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There are few things I think about more often than Alex Balk’s Three Laws of the Internet.
Everything you hate about the Internet is actually everything you hate about people.
The worst thing is knowing what everyone thinks about anything.
If you think the Internet is terrible now, just wait a while.
And here we humbly submit a fourth law:
Everything that seems one way on the Internet is actually the opposite.
The Fourth Law is not a judgement on truthfulness or factfulness.
We have poked fun of the PoiltiFactification of what passes for truth in the sphere of a two-sided public discourse in this space before. Reality on the Internet always what we make it and each character presents their own version.
The Fourth Law, then, does not offer a process for sussing out anything like The Truth, but is a guide for seeing what is happening and why. And if the most common mode of information dissemination on the web is that of disinformation, of telling your truth and also telling that truth slant, then we can only operate off a baseline of “seems” as passing for something like robust conviction on the Internet.
And it is against this framework of understanding that we posit the Fourth Law.
Because this is a newsletter that is directionally about business, tech, markets, etc., let us think quickly about this past week’s biggest business/markets event — the GameStop hearings on Thursday — as an example of the Fourth Law in action.
As the prepared remarks from each of the witnesses rolled in this week — particularly the comments of Keith Gill and Gabe Plotkin — it became clear that the broad conception of what needed to be discussed was mistaken. Both Plotkin and Gill took pains to remind members of the Committee that their involvement in the GameStop saga was not conspiratorial. Gill went so far as to remind everyone that he is not, in fact, a cat.
To quote directly from their statements with emphasis added:
I understand that part of the focus of this hearing is the decisions of stock trading platforms to limit trading in GameStop. I want to make clear at the outset that Melvin Capital played absolutely no role in those trading platforms’ decisions. In fact, Melvin closed out all of its positions in GameStop days before platforms put those limitations in place. Like you, we learned about those limits from news reports.
I did not solicit anyone to buy or sell the stock for my own profit. I did not belong to any groups trying to create movements in the stock price. I never had a financial relationship with any hedge fund. I had no information about GameStop except what was public. I did not know any people inside the company, and I never spoke to any insider.
With the perspective of a few weeks between the most acute phase of the crisis and the convening of this hearing, it became clear that the idea of GameStop and WallStreetBets serving as some kind of populist revolt against the moneyed elites was increasingly preposterous. And worse: the opposite of what happened. But the Fourth Law already told us this was the case.
Several hedge funds have been revealed as reaping huge profits from this event. The main vultures that circled this carcass in late January are back to pumping Bitcoin or reviewing fresh pizza. No one is going to jail. The lawsuit filed against Keith Gill in this matter is literally incoherent.
Any disillusions one may have had around what the deeper meaning of the rapid run-up in the price of GameStop shares may have meant would have been easily disposed of by applying each of Balk’s Laws and our Fourth Law.
Everything that seemed tedious about the chaotic trading in GameStop shares was actually about the tedium of the self-promoters who rallied to the ball on this one.
A tedium that was increased as all casual conversations with friends and family involved a requisite reference to something no one actually cared about — the price of GameStop stock.
What we witnessed Thursday was worse than whatever was happening at the depths of this crisis; it will get worse.
And everything some far-flung business-adjacent personality claimed we learned from this episode was actually the opposite. The “bad guys” — i.e. hedge funds — still won. Small guys lost. Robinhood’s brand suffered not a bit.
The entire episode did allow for the kind of dark comic enjoyment the internet enables at its best when applying Balk’s Laws before we got to the Congressional hearing stage of misunderstanding. But instead we were subjected to the commercial impulses the internet unlocks at its worst.
We even see the Fourth Law at work in how Robinhood CEO Vlad Tenev continued to discuss the role his company played in this situation.
In his prepared remarks before Congress, Tenev railed against T+2 settlement in what remains a baffling and misguided effort to change securities laws when the best decision for his extremely popular and successful company would just be to apologize for this incident and take a few simple steps to prevent it from happening in the future.
“The existing two-day period to settle trades exposes investors and the industry to unnecessary risk and is ripe for change,” Tenev said. Of course, the problem is not two-day settlement. The problem is Robinhood’s product.
The suicide of a young Robinhood user who was erroneously informed that they owed hundreds of thousands of dollars played a prominent role in this hearing. It became clear through Tenev’s responses to questions regarding this young man’s suicide that the misunderstanding was caused by a Robinhood-specific product issue, not an issue with securities regulations or any actions the user took. And “caused by a Robinhood-specific product issue” is ultimately a better explanation for why the entire hearing took place at all than anything else. Every wildly fantastic meta-take about GameStop that emerged last month discounted the role Robinhood’s product played in this drama; a product-forward explanation, however, is more coherent than anything since argued.
Take, for example, the de facto creation of a margin account for new users. Tenev said the company — “as a courtesy” — allows users to immediately trade with up to $1,000 worth of deposits that haven’t yet settled. This is not a practice unique to Robinhood. In some situations the “courtesy” not-margin being extended to customers at other brokerages might be even larger. The reason this becomes a Robinhood-specific product issue, however, is that the product is designed to allow easier sign-up at faster rates creating a scale for unintentional margin heretofore unseen in markets.
Ease, speed, scale are the heart of Robinhood’s product. These elements are also at the heart of this episode. So much for a revolt of the proletariat.
And so a few hundred or a few thousand investors trading on not-margin isn’t a big deal. As Ken Griffin outlined during the hearing, there are trillions of dollars sloshing around markets all day and covering what might seem like huge sums to outsiders are just numbers: a billion here, a billion there.
And so what seems like the issue — T+2 settlement, as framed by Robinhood — is actually not an issue at all. This mechanism for clearing trades is a sideshow, the collateral damage perhaps, to the events surrounding GameStop in January. Events caused by millions of people swarming to a single idea at the same time because 1: the internet creates the conditions for the most extreme outcome of any situation and 2: Robinhood’s product makes it unprecedentedly easy to act on this extreme view.
And not only is T+2 not the issue that caused this situation but it is what actually saved Robinhood in its time of acute stress. As the Fourth Law says.
Over the last few issues of this letter a theme has emerged: an exploration of how the logic of the internet has become the logic of markets.
Last week’s letter argued that the choice to use the SPAC structure to bring companies public is just the internet’s tendency to endorse — and then foster growth in — the most extreme version of anything arriving in financial markets.
To think about this phenomenon using a slight reframing of Balk’s First Law: Everything you hate about SPACs is really just everything you hate about markets.
And the Second Law: The worst part about SPACs is that everyone has one.
And the Third Law: If you think SPACs are scammy now, just wait.
And the Fourth Law: Whatever SPAC sponsors say they want to accomplish with their investments, the opposite will happen.
And so on and so forth.
It’s not entirely clear, of course, that this so-called “logic of the internet” isn’t just a reframing of basic human tendencies mapped onto new mediums. The entire premise from which investor psychology draws its authority is the idea that nothing really changes or matters, at least not fundamentally. Time is a flat circle or something and the only things that change are the details. We’re sympathetic to this view in a way, and Richard Thaler’s books are kind of interesting.
There’s also a detachment here which doesn’t interest us, a detachment that requires viewing every new cycle as the mere bastard son of some prior moment.
And yet there is, from our perspective, something novel in the internet’s tendency to work towards the most extreme conclusion that follows from any premise. A tendency that seems increasingly present in markets and investing.
So better to work towards understanding what’s happening now than wait for things to level out. As if level ever exists.