Ep.78: China Slowdown & The Revenge Of The Meme Stocks

Welcome to the Market Maker podcast hosted by me, Anthony Cheung, where every Friday I talk to a member of the team about what happened in markets this week. From macro themes and single stock news to cryptocurrencies and careers in finance, our aim is simple: to make finance interesting and easy to understand for everyone. So let's get to it. Hello and welcome to episode 78 of the Market Maker podcast, where I'm joined as ever by my partner in crime, co-founder of Amplify, Piers Curran. And this week we are going to focus on a couple of things. The two key themes are going to be the economic challenges being faced in China after they surprised markets this week, they cut rates, and also We're going to talk about the revenge of the meme stocks as reports have circulated that short sellers have lost an estimated $1.65 billion in just one month. Before we begin though, couple things, uh, just wanted to talk about, Piers, before we go into the, the nuts and bolts of the week and then those two stories, uh, is a, is a congratulations to everyone who's got their A-level results. I, I did pop into town yesterday. I saw a lot of people carrying brown envelopes and either looking euphoric or depressed. But yeah, I just wanted to say that, you know, if you didn't get the grades that you were hoping for— and one thing actually, I was looking at a couple of stats this morning. There was an artificial bump up through teacher-assessed results in A-levels over the 2 years on COVID. And actually results have gone down as an overall this year. So I think that perhaps then there's possibly more disappointed people this time round, given that they might have done well in their mocks and so on, but the sitting exams now, uh, and just wanted to say, just don't beat yourself up. Like, um, I did shockingly bad in my A-levels. I had to go through Clearing Uh, I had to kind of beg and plead to get into a non-target uni. And, uh, I remember rocking up on day one and I was sat there talking to who became my best friend still to this day, and I was like, what grades did you get? And he went, AAB. And I went, oh my God, you've been mis-sold, because I didn't even get half that. I feel sorry for you having to sit beside me, but, um, yeah, there's just the thing I wanted to say was, look, I mean, it's not the end of the world and far from it.

Um, yeah, it's, it's difficult for, like, when you're going through life though, it is hard because ultimately what, whatever the, whatever challenge you're currently on feels like It's the most important challenge you've ever had, and the outcome of that challenge is the most important thing ever in your life. So I'm talking about like obviously younger people coming, going up the ladder, like GCSEs, right? When you're doing your GCSEs, it's like, oh my God, this is, this is the be-all or end-all, and it's the most important thing that's ever happened. And so obviously the pressure's there. Then it's A-levels, right? And then when you're doing your A-levels, you think, well, actually yeah, that GCSE thing, what was I worrying about? And A-levels becomes the next thing. And then you're in— if you go to university, you're then like, all right, wow, you know, forget A-levels, actually it's my degree now that's the most important thing. And there's always this cycle. And yeah, it's— it's— so it's very difficult, like, when you're telling a younger person, if you're telling, you know, writing a letter to your younger self And you say, look guys, just don't worry. It's not as important as you believe it is in this moment. I mean, it's easy and fine to say that, but it's incredibly difficult to actually, you're the 18-year-old to really appreciate and understand what you're talking about. I mean, and I also think that, you know, just going through life, success, success, success, success. Honestly, I don't think— ironically, I don't think that's the best path. Because I think you need some kind of setback. You need some kind of— it doesn't have to be a failure, but a setback where an outcome is not what you wanted. And then having to deal with that, I think, is an incredibly important life experience that you can then take with you. When you get past all of these qualifications and jump over these hurdles that are put in front of you and you actually get into the world of work, then, you know, work's not plain sailing, right? Especially it depends what role you do. But like in my experience, markets-based roles, um, that's huge. There's huge downs, um, you know, there's huge failure, there's huge disaster when it comes to P&L swings. And, you know, I honestly think dealing with some of my setbacks in my early years actually really equipped me much better to be able to then deal with those situations. So one of the biggest kind of failures I had, or wake— I'll call it a wake-up call because I did, I actually did well in my A-levels and I like did better than, much better than I was expecting. Let's put it that way. And so great, happy days, went to university. I actually took a year out, so I didn't— so I took a year out, and that was perhaps my error because I did engineering, so it's quite a technical degree subject. And I started at uni, and like they said, right, first week of my degree program, right, we're going to revise the whole of A-level maths in one week. And then we're gonna have a test at the end of the week. And I'd done nothing in terms of maths for over 12 months, right? A load of the people on the course hadn't had a year out. And I got some great Greek friends who are still my good friends to this day. And the Greeks, they're just geniuses when it comes to maths, right? And I did this first week and I think I got 23% in the maths test at the end of the week. And I was like flailing, I was drowning in the deep end. Basically. And my Greek mate got 99%. I was like, what? And that was like one wake-up call. Then the end of that first year, um, I did a— we had our end-of-year exams. And for me, most, most degree subjects, first year doesn't count, or it doesn't matter so much. For me, it counted to my degree, and actually to the point where if you didn't pass all of your modules, then You're kicked out. And one module I didn't pass, it was fluid dynamics, and I got 27%. And I honestly thought I'd smashed it and done really well. And I got 27%. I said, I demand a remark. They remarked it 26%. And I was like, oh, okay. And so you do a retake, right?

Right?

That's your last chance. If you fail the retake, you're out. They literally kick you out and you have to get 70% in the retake to stay in. And that was like my biggest, that was the big one where I had to go back and really cram. And actually then I understood that I'd completely misunderstood the concepts and the topics. Anyway, passed the retake somehow. And then fine, I was off and running. But it was that kind of reality check, that kind of getting smashed in the face. Wow, okay, I'm not very good. Actually, I need to up my game here. And kind of dealing with that, I think definitely those life experiences can be seriously valuable. So if you're sat there with A-level results that aren't what you wanted, then I know it's hard in the moment right now to appreciate this, but you know, these are great challenges to, go at, you know, you are where you are, it is what it is, it can't be changed now. So now you take what you've got and you move forwards as best, you know, you can, and, and, and you'll learn great things from this.

Yeah, and a couple of, um, stats that I saw were quite interesting, uh, on this, on this topic. In London, 39% of A-levels were graded A* and A, as compared to 30% of exam grades in the northeast of England. So there's almost a 10% gap there. Um, the actual marking body— 58% of private school candidates in England were awarded an A* or an A. State school pupils, 30%. So it's half. Yeah, yeah. And I'm just shocked when I saw that. Like, geographically, it's just insane. And then, yeah, looking at the difference in, yeah, independent school all the way kind of going downward, it was, yeah, there's a big, big divide there in the results. Yeah. Um, but yeah, I mean, what, this is one of the things why I think, you know, I'm super excited about the simulations and the tech that we do because, you know, I was definitely part of the the state school system and I guess my grades were a function of that. They were fine, but fine would be terrible, probably at a private school.

Right. Yeah.

And so, yeah, if it, you know, all the other things though that I was doing external to then studying, because I used to basically play sport half the time, study half the time, meant that all of the characteristics I think that I had. So you mentioned things like resilience. Things like that. They're just built in. Yeah, from a very young age. And so, um, yeah, through, you know, if you haven't done it yet, like our Finance Accelerator, which is our kind of introduction to kind of markets. And even if you've never scored well in an exam, even if you don't have an A-level to your name, like you should just get involved. Like, who knows, you could just have this natural ability. And I honestly believe the job that I'd done for the first part of my career I'd sit there and my job was basically to be quarterback for traders. I'm watching the game unfold and I'm calling out the plays so that traders can then trade and execute. When I think about that in the role I facilitate in the sport I played, is exactly the same role, right? It's just like in a different, you know, context. That was all. A lot of the actual core principles of the innate skills I was using were the same. Yeah, little did I know, because of a lack of education about the application of my skills, which again we tried to address of course with the simulation and why people I think might be surprised about what they're good at and what they're bad at. Um, and then the fact that a lot of it was non-technical because I was communicating, my job was to communicate, and communication, given my background, felt quite quite natural in that way.

You always hear people talk about, and I'm definitely in this camp, say that what they learned at university, that nothing from what I learned at university have I used in my job, like nothing. So it kind of goes back to the point, well, it's a bit, it's a bit flawed, this system. Where you're recruited based on your university grades or your A-level grades, when actually that's measuring something that's not related to your ability to do a job. So the system's broken, and this is what we're trying to, you know, our big mission at Amplify is to try and fix it by creating a simulation that simulates the job and actually measures how your, your potential to perform in that role. And that's how you should get hired, not whether did you get a 2:1 in, in your degree. Um, and there was some great news this week from PwC, um, the big accounting giant, who have scrapped that. So up until this point, they'd had a minimum requirement for their new hires to have at least a 2:1 degree score, and they've just scrapped it, and they said we no longer require a minimum degree score. And this is all about just trying to, well, recognize a few things. What I've just said, maybe, that actually your degree doesn't necessarily measure your ability to do the role, but it also ties into your other point around the, you know, that gap between the rich and the less well-off and how the education system, right, is unfair because the rich go to public school where the education seems to be much better and the, the less well-off are at state schools. And so you can't compare like for like. So that's why these single, you know, grades from these exams, you know, whilst it's of interest, it's definitely not really measuring what's more important, and that's your ability to do the role.

Yeah. And then, you know, that, that move by PwC, I think that, that is addressing much more, um, of a credible solution to this diversity challenge that all corporations have. So it isn't just like, okay, we run these very targeted ethnicity-type days and things like that. It's no, it's like you know, from a socioeconomic perspective, which does then feed down into ethnic groupings.

Yeah, it's—

look, you know, it isn't equal. The opportunity is not the same. And so therefore, you know, I think their move is— yeah, I applaud it, and I think it's a really positive thing.

So yeah, and they won't be the last. I think this is, this is just the tipping point.

Yeah, cool. Well, look, let's move in to the news section first to go over a couple of highlights of the week before we delve into, to China and the meme stocks. So starting off with the UK, and I'm afraid I'm going to sound like a broken record, UK inflation hits 10.1%. So we're now at the first double-digit print in 40 years. You shouldn't be shocked by that. That number is going to go Unfortunately, well north of that. The thing here though is that surging inflation has resulted in the fastest fall in real pay on record. Consumer confidence then this morning has now fallen to its lowest since 1974. And just to throw in to boot, UK retail sales as we can expected year on year as well this morning. So yeah, it's all looking rosy in the UK at the moment. Nothing much really more to add. It's more of a continuation. And I, and I guess that definitely conscious of the fact that there are some severe challenges for, you know, forget markets, for just people's lives at this point in time. And, you know, don't want to belittle that at all. But, you know, things are going to get progressively worse during the coming months as we go particularly into the inflation peak, which is anticipated around October. And we talked about, I think market pricing was like 150 or so, um, 150 more basis points to price in. I think that went up to 200+ following the inflation print because it was higher than expected, which means we might overshoot, as we have done on every step, the Bank of England's forward guidance. So if we get to 14, 15, that would be, I think, not entirely surprising, but would further mean that the market does need to recalibrate even further, because at the moment we're not set that high. So that was the UK, but we won't, we won't dwell on that for too much longer. The other thing was Saudi Aramco. Um, I don't know if you caught— I shared with our community a fantastic graphic. And so basically Saudi Aramco has posted a 90 90% rise in their Q2 profits. That's a second straight quarterly record. And the graphic basically showed their net income, which was $48.4 billion US dollars. That was more than the net profit at Microsoft, Apple, Meta Platforms, Tesla combined.

Yeah, you might have heard of those names. I have to say, when I was reading the— because this was in our Market Maker Daily Market Maker newsletter. Uh, if you're, if you're not a subscriber, then what, what are you playing at? Go and, uh, go and get subscribed at AmplifyMe.com. But I was reading that, that piece, and I looked at that chart, and it actually— there's very few charts that kind of shock me just because I'm really old and I've seen a lot of stuff. Um, and that chart really did. I thought What? Is that true? And I kind of drilled in and did a bit of analysis and it is. I mean, yeah, the Saudi Aramco profit bigger than Microsoft, Apple, and Meta combined. I mean, I'm not including Tesla, their profit's not that big. But because Apple's profit was $19.4 billion. But yeah, Saudi Aramco, $48, just a casual $48 billion. But that's just in 3 months, by the way.

The context though is that, yeah, like the consistency of the profit generation at Apple is different, right? Because all oil majors have hit records. Shell, BP, uh, TotalEnergies, like they've all smashed it given what's been going on.

Yeah, it's good times. I mean, yeah, to put that into context, their Q2 profit in 2020, right, was $7 billion.

Oh, okay.

Yeah, yeah, not $48, it was $7 billion, which was— yeah, so you're right, the consistency of— and look, that's the nature of the beast, right? They're selling oil, and that— the price of oil is very volatile. So yeah, their revenues are very volatile.

Um, well, talking of Apple and talking of consistency, Is that what the rationale is then for Warren Buffett's Berkshire Hathaway? Now, he's topped up his stake. So there's something called the 13F filings that all came out this week, and that allows us to see these fund managers and changes to the composition of the, the companies they're invested in, essentially. And we can look at who they've come out of, who they've gone into, and it allows us to see the kind of bullish/bearish appetite they have. You know, it gives us a little bit of a granular individual micro level, but also a macro kind of view on the world as well. And he's topped up his stake in Apple. A couple of things here. Um, he— it now, Apple, makes up 41% of his portfolio. When I read that, I was like, I've read that wrong. Surely that's typo. 41%. Like, yeah, I understand that he now— he basically owns 5.6% of Apple, which is pretty mind-blowing. We are talking about a multiple trillion-dollar company and he owns 5.6%. His dividend income is $800 million— was the figure I saw— $800 million in a year, which is insane. But 41%, surely that's not sensible, even for a cash cow juggernaut consistent Apple.

There's a few angles here. Um, if you believe in Apple long term, which clearly he does, then Q2 was a really good time to buy, buy more, because Q2 was when we saw, you know, the big tech giants, you know, their share prices starting to really, you know, get hammered. I think Apple topped out end of last year at $178, and then in Q2 it bottomed out at $135. Um, yeah, so that's like a 20-plus percent sell-off. So, you know, if you're a long-term believer, you're buying dips, right? So that's what Buffett's just done. Um, so that's one point. The other point, yeah, on the face of it, that 43% of his portfolio, that seems incredibly Well, we always use the word diversification in portfolio management and in the asset management world, and diversification is key. You know, spread your money across lots of different companies because you never know. It doesn't matter how good a company may look, there's, you know, there's skeletons in the closet and stuff can happen. You know, think BP and the Horizon disaster in 2010. 2010, think the Volkswagen emissions scandal, you know, and there's others, right? And so you never know. So you should really be spreading your money. So from a diversification point of view, yeah, this doesn't look good. However, in his defense, I mean, if you go back 3 years, the share price of Apple has more than tripled. So it's been an amazing trade. And the, the fact Apple's done so well has meant that the proportion of his portfolio that's made up by Apple has been increasing and increasing and increasing. So yeah, and then, and then the other issue he has, more than— more so than most other people on the planet— he's got a real problem with the size of his positions because he's got a liquidity issue. How do you get out of these kind of trades? Um, and so even if you wanted to kind of book some profit, then unfortunately his position's so large that engineering a way out of that would cause a big sell-off. So it's a bit like that Elon Musk situation with his Tesla holding that we've been talking about over the years.

So I've got one more thing about Apple, and that is the index weighting. 7.3% now for the S&P 500. It's the largest weighting for an individual company going back to 1980. So all those previous peaks that we've had, whomever they might have been— Microsoft or IBM or whomever— no one's ever been this big. Um, but a stat I thought was quite interesting, and you've talked about this before, Apple has bought back $522 $1 billion in stock over a 10-year period. That figure in itself is greater than the market cap of 494 companies in the S&P 500 alone.

That's a good stat. That's— I like that a lot.

All right, well, look, we'll move on, and I want to tell you what Tom Cruise has got to do with Airbnb. Well, I know I—

well, again, if you are a subscriber to our Daily Market Maker newsletter, you'd know the answers to this.

Yeah, or if you know Tom Cruise, because what's happened here is Airbnb— I love this headline— they've introduced new anti-party technology. They're rolling it out in US and Canada, and it's just funny because I've definitely been there, tasked with being the best man for a wedding and you're like, oh, I've got, I've got to fit like 20 blokes in a flat. I can't tell them that I'm going to put 20 geezers in a flat for a weekend of like debauchery. So what do you do? You're like, oh no, it's just like, uh, we're all alumni friends from our college and we're having a catch-up, something more reasonable. Um, but actually what Airbnb are doing now is they've got a new system where they're gonna look at factors like history of positive reviews or lack of, the length of time a guest has been on Airbnb, length of trip, distance to the listing, weekend versus weekday, amongst other factors. But this got me thinking about obviously Tom Cruise's Minority Report, right? And the reason for that, if you haven't seen that film, is like here there's that saying, right, of innocent until proven guilty. Right, you're guilty until proven innocent. You're basically saying that your previous behavior dictates then that you are— you're making a judgment before something has even happened. I'm not sure how comfortable I feel about that judgment of using that technology in that way. Um, you know, if you ever— if you believe in like reforming, in like a prison structure sense. It's like you're basically saying with this technology that, nope, you've offended, you should never be trusted ever again, and we will not lend our services to you. It's kind of like— I don't know, I don't— I read that and I was like, well, okay, it's quite funny headline, but I was like, yeah, but then can't you—

but I guess you need to build up your approval rating. If it's that bad, then obviously you have, um, been to too many stag dos, so you need to go on a weekend with your girlfriend for a few weeks.

Now I can't book the nice weekend with my girlfriend, okay? Yeah, even though I've got genuine intention, right? I want to have a nice sophisticated weekend away with my partner, but the system has blacklisted me now. Yeah, because of my previous behavior.

Yeah, yeah, you've got a point. I also think that that's got to be the worst or the least popular bit of technology I've ever heard of. The anti-party technology.

No one wants that. I mean, they need, they need to have a sub-listing within the website where it's like, fill your boots, party time Airbnb rentals, where you can just go mental, right?

Yeah. Well, that, well, that's actually a very good point. Now there's a bit of a gap in the market, isn't there?

Okay, so yeah, should we do seed round, or how are we going to do it?

Yeah.

Um, the other, the other kind of funny headline was, uh, Manchester United, the football club, because earlier this week their shares in pre-market trade— because they're listed, I think they're listed in New York They momentarily popped 17% following a tweet from none other than your man Elon Musk, who basically tweeted, amongst other things, oh yeah, I'm gonna buy Man United, by the way. And their shares popped nearly 20%. Until then, and classic Musk, he left it hanging for, I think, 4 hours.

How is it that long?

And then he came out and said, ah, you know, I'm just kidding, of course. And then obviously reversed course. I think their shares actually were up on that day, about 3 or 4%, because the Glazer family are considering selling a minority stake in the club. There's lots of rumors going around. Um, but yeah, I just thought, what a world.

The power, the power of the Musk.

Um, and then The final, the final one, a little bit more on a serious note, um, on geopolitics, was that Chinese President Xi has come to light this morning, uh, on Bloomberg, is going to meet with Russian leader Vladimir Putin. They're both planning on attending in person the G20 summit in November, the end of the year. The presence of Xi and Putin at the meeting sets up a bit of a showdown, of course, because Joe Biden is going to be there as well as other Democratic leaders, and all of whom have not met in person at all since the Russian invasion of Ukraine. Not have you had all of them in the same room— China, Russia, Putin, Biden, and everyone else. So that's going to be an interesting event.

Yeah, so what's the date for that?

Sorry, uh, November. Right, sure, the exact date, can't remember now, but yeah, there's a little way to run.

But God, Joe, Joe, Sleepy Joe's got a busy November. Yeah, with the midterms that month as well, all going off.

Yeah, and you've got the, the Communist Party's Congress as well, so yeah, true. Yeah, but look, let's talk about China. Yeah, because they surprised the market earlier this week, they cut their medium-term lending rate for 1-year loans in the banking system by 10 basis points. That level now is at 2.75%. It's the first cut since January, the start of the year. Um, official statistics early in the week reflected worse than expected consumer and factory activity. And one stat that a lot of the wires were pumping was the fact that youth unemployment in China now is nearly 20%. Um, so there's a lot of pressure points at the moment on Xi Jinping's administration to reinvigorate this economy. So whether through traditional forms, stimulus through fiscal, um, building essentially and funding, or through monetary means. But this has led to the likes of Goldman have come out this week, uh, Nomura have come out They've cut their outlook on China again. I should say this isn't like a new thing, they just continuing to downgrade them. Um, the rationale at Goldman's was weaker demand, uncertainty stemming from zero COVID. That's still very prominent at the moment, several regions across China. And then the energy crunch. Um, actually there's a heat wave at the moment, much like everywhere in the world, um, and that's causing energy shortages in several provinces, forcing factories to actually shut down. Um, so from a growth perspective, Goldman lowered their full-year growth forecast for China for this year to 3%. They're previously looking around 3.3. Nomura slashed it to 2.8, so even more bearish. I think what China's goal is, is it 5 now? 5.5?

So it's 5.5.

Yeah, they're significantly below what Beijing is, is saying. So Yeah, what are your thoughts on these, these developments this week?

Um, well, yeah, they— well, China's, uh, it's obviously a huge piece in the jigsaw of the global economic system, uh, second biggest economy. Um, and so, you know, if you're an investor anywhere on the planet, then China should be right at the top of your list of risks And what we have is, I would say, a steadily and progressively worsening environment. And you've just put the stats there, so they themselves have a 5.5% growth target for this year. So at this IKEA, what happened was there was someone got detected someone was in the shop, and it turned out that they had been in proximity to someone else that had now been tested positive, right? And all of a sudden, the shop went into lockdown because their principle for zero tolerance is, right, any cases found, lock down that site immediately. No one in or out. And then shift everyone in that location to quarantine. So in this IKEA, it's like suddenly the lockdown process started and it triggered this massive stampede, people trying to fight their way out of the shop.

But trying to find a good shop to be locked in, like I'd say, you don't need to quarantine me, I've got a bedroom, I've got a kitchen, I've got meatballs, I've got everything I need.

Oh, meatballs for a month, sign me up. But they were stampeding and trying to fight past the security guards to get out. So the point here is that they're now living in this environment. Yes, lockdowns have gone. Well, unless you're in these islands or whatever. But now there's a fear that you're going to get trapped and shoved off to quarantine. So actually, there's a reluctance to go out. So the retail spending boom— post-lockdown has not happened. And so no one foresaw this, right? And so it's really, I think, yet another kind of chapter in what I personally think is a— has been a really bad strategy from China, that this zero COVID tolerance thing. I think in— when, when COVID hit in 2020, it looked amazing the way they dealt with it, and it definitely almost certainly reduced the number of deaths, which is clearly a fantastic thing. But now this is turning into a nightmare, and it's turning into a nightmare for the people living in that country, and it's turning into a progressively worse kind of economic situation. And I think now it's becoming super bad, and they're just reluctant to change. That's the thing. Xi Jinping doesn't want to step down and say, all right guys, you know, perhaps we have got this wrong. Let's kind of pivot in this direction because that is a sign of weakness. And obviously he doesn't want to be seen as getting things wrong and being weak. So they've got a particularly difficult economic situation. This is feeding into the housing market, and this is perhaps where the big risk lies, in my view. Basically, I mean, you've kind of been reading about the housing situation, but, um, what happened this week which was of note— there's a big company called Country Garden, which is one of the biggest Chinese property developers, but they're that— they're like— they're, they're supposed to be the healthy ones, right? They're the least risky. Um, but they reported earnings this week, and for the first half of the year, their profits were down 70 which I guess isn't a surprise, right? But Fitch, which is one of the global ratings agencies that kind of rate the quality of corporate debt and essentially give a score as to how creditworthy these corporate borrowers are. So Fitch downgraded Country Garden into junk status. This was on Tuesday. Because up until this point, because of their rating, Country Garden have been able to tap into foreign investment when they're issuing bonds to raise capital. Well, the rug's just been pulled out. So they've kind of, I would say, lost access to foreign markets now. So what's happening in the property market? Well, sales are down in July, sales are down 28% year over year, which means now prices are starting to drop sharply. To give you an idea of the square footage or square meterage. So on average, in Q2 of 2021, on average, property developers sold 156 million square meters per month. In Q2 of 2022, it's down by— well, yeah, it's down 106 million square meters per month. Um, so, you know, obviously the situation is incredibly distressed, and obviously we're worried about what happens now, and do we get defaults? And we've seen the central bank cut interest rates, but the problem there is it's probably not going to have any impact because the whole thing around cutting interest rates is to try and encourage people to borrow more and then spend more. It's supposed to boost demand, right? But they're cutting rates, there's just no demand for people. People don't want to borrow, so you can cut rates all you want, but if ultimately it's broken in terms of demand on the, on the credit side, then it has very little effect. So I would say we're kind of back to this point where it's only really fiscal policy that can turn this around. And what their appetite is to bail out the housing market, well, at the moment they're kind of dragging their heels. They have told China Bond Issuance, that's the state-owned credit insurer, they've told them— the government told them to underwrite bond sales by a handful of private developers. So people like Longfor Group and so on who are very distressed. They're also now told— there's rumors there's going to be some kind of rescue fund that's in the order of about 300 billion yuan for property developers. But they've fallen short of going— of kind of backstopping. Because basically the problem is a lot of people, a lot of consumers have bought houses off-plan and now are paying mortgages. They've taken a mortgage out to buy that property off-plan, but now the property is not being built. Because the property developer is in a serious distressed situation and doesn't have any money and can't borrow any money. And they're being so desperate, they're kind of borrowing money off local governments at crazy rates. But ultimately, you know, there needs to be some kind of bailout situation. And it's a trickle-down effect because local governments are very dependent on revenue that comes from selling land to property developers. But property developers aren't buying land anymore, and the regional governments— it's thought that about 30% of their revenue has been from land sales over the last few years. That's just gone. So now the local governments are having to borrow money to plug the cash flow shortfall, and they're borrowing at 9% when the government's bonds are yielding 3%. Um, so as this thing progressively unfolds. It's either you're going to get mass casualties where the big developers are going to go bankrupt, consumers are going to lose a lot of money because there's people sat there with huge mortgages and no property. And if that property doesn't materialize, then they're screwed. So the government at some point is going to have to step in, and we're just not quite sure how big the bat is going to be when they come and step in. That's the big kind of— that could be the straw that breaks the camel's back, right? What happens in the property market and how does the government decide to deal with it?

So, so beyond China then, let's say that the, the risks are accumulating at the moment. And so what about the Fed and the bigger, broader global economy beyond the current inflationary pressures that are mounting now, and we're yet to determine peak or not. What about in 2023 if then we see the full slowdown coming from China, worst case does materialize, and demand just drops globally on the back of the Chinese situation? Are we going to end up in a situation where inflation is going to turn into deflation, growth's going to slow spectacularly on a global level? What are your thoughts on the kind of more the, the nature of how that could impact then onto the Fed? Yeah, over 12-18 month period, right?

So China's, as I was saying, huge. So If China have a big kind of crisis, then it's going to impact everyone on the planet, even the US. Okay. What just in the short term, from that inflation angle, everyone's suffering from this inflation crisis. There is ironically a little bit of a positive spin you can put on this China situation in terms of their housing, their property sector being so distressed. There's a positive spin you can in the short term. And that is that this is good news for the inflation problem globally. It's just because China's such a huge buyer of commodities, right? The biggest buyer of commodities. I mean, for example, China buys two-thirds of the world's iron ore. Two-thirds of the entire planet's iron ore sales goes to China. Coal, it's about half of the coal demand. Copper, even China buys 40% of the world's copper. Now, if China are suffering, certainly on that iron ore side in the construction sector, then the demand side for iron ore is looking incredibly negative. And iron ore prices are already down 50% as a result. Copper prices are down 25%, coal prices are down 30-odd percent. So this is actually playing into a positive for the commodity price inflation problem the whole globe is facing. Okay, now, so you could say it's a short-term good thing, and maybe the Fed can get away with stopping their rate hiking cycle by the end of the year. But if then this cycles into a full-blown, you know, housing crisis, a property sector collapse in China, and then the subsequent kind of recession that that brings, then that would then turn into a very large deflation scenario. It would be an incredibly negative situation from a kind of global GDP point of view. And this is where, yeah, you might see worst-case scenario, you are going to see the Western central banks not only end their tightening cycle but start their loosening cycle.

So you're telling me to buy stocks again? Is that what you're saying? You're saying I should get in now before I hit my 4,600 and then we go to 5K?

Yeah, where are we? Where are we on that actually? Let's have a quick look because yeah, I guess it's still, it's still kind of in the balance, isn't it? That's on our 4,600 or 3,700 argument from last week. Um, yeah, I mean, I think that a Chinese, a full-on Chinese proper collapse, that's not good news for anyone. I don't care how many times you can cut rates, right? Well, that's, that's the worst case scenario, right?

Yeah, yeah, yeah. Well, let's, let's, um, finish with the, the revenge of the meme stocks. And the reason why is because it's hit the headlines again because of an estimated $1.65 billion dollars the short sellers have lost in this month alone. AMC has rallied about 50% and has pushed mark-to-market losses for short sellers to around— said to be over $650— $650 million, that is. Similar bets. So it's all the favorites, the Reddit favorites. So Bed Bath Beyond, GameStop, um, they had surged. Bed Bath Beyond you know, 360%. GameStop, not quite as much, but short sellers apparently got hit for a billion on the back of that. But the thing that was the real standout article of the week—

yeah—

was a headline in the FT of a 20-year-old university student in the US called Jake Freeman who made $110 million. This kid's 20, by the way. He's in the middle of his studies, made $110 million trading Bed Bath Beyond. So when I saw that headline, I was like, wow. I was like, this isn't like, you know, I can buy myself a Tesla or something like that. This is $110 million. And so you started reading the article and you're like, okay, so he's an applied mathematics econ student at University of Southern California. Okay, fine. He acquired— I read he acquired nearly 5 million shares in Bed Bath Beyond. And I was like, hang about, doesn't Bed Bath Beyond trade at like $5 apiece or something like that? And he— sorry, he's bought 5 million shares. I was like, how does that work? And then the kicker was his initial stake cost $25 million. Just to remind you, this is a college student And he said, yeah, I raised most of the money from my mates and my family. Yeah, I'm hanging out with the wrong kind of people here. 25 million of your mates and your family.

Yeah, it's a classic clickbait media headline, right? 20-year-old uni student makes 110 million. But yeah, this ain't no ordinary uni student. Who's built up— well, anyway, he's got ties with Polaris Capital, I think, which is a New Jersey hedge fund that he's been— I guess he's got family ties. I don't know. But apparently, in his words, he's interned there for years. He's 20 years old. I mean, how many years has he interned there? Anyway, he's obviously got some ties with them. So, you know, look, they're obviously from an incredibly wealthy family with a hedge fund sort of capacity and angle, and they've built up— and I'm sure it's not just him, but together with his mates at the hedge fund, I'm sure— built up this $25 million activist investor stake. Because you were saying, you know, they— he sent a letter, didn't he? This— he was actually 19 years old at the time. This 19-year-old kid, uh, having built up a 5% stake in the company, then sent an open letter to the to the board, basically massively criticizing the way that they're running their business and that, right, here's a list of things that you now need to do to turn it around. I'd have liked to have seen the face of the people sat on the board when they were reading that out.

But yeah, I mean, one of the things was he literally couldn't have timed it better because literally 2 days later, Bed Bath Beyond tumbled 20%. On Thursday this week. The kind of meme stock champion Ryan Cohen disclosed on Wednesday evening that he intended to sell his entire stake, and that stake is about 12% of the company. Um, but one of the things here, this with the meme stocks and the whole kind of pump, pump and dump, there's kind of a couple of things here, two concepts really, that I was hoping that you could just deconstruct into layman terms, one being that of a short squeeze which is the kind of the rationale behind the kind of pump, if you like, and why it happens and why they get targeted by the kind of Reddit WallStreetBets kind of threads. And then call options— how then from an investment point of view people try to play out this view that they have on a particular company via call options.

Yeah, so first one, um, why do the Reddit gang— why are they targeting these specific companies? And there's got to be— there's a kind of set formula here. Um, so you need a company that's got like two things, right? So number one, a very low free float. So this is describing the number of shares that are in private hands. So you want a small number of— a small free float, because there then the supply of shares is very low. Secondly, you want a company that's got a very high proportion of short sellers. So that, by definition, that means the company is doing really badly, or it's got an out-of-date business model, Um, like AMC was, was the classic example of that, right? But, um, so they're the kind of two things, okay? Really low free flow, and then the hedge fund world massively short thinking this stock's going to zero. So this is when then the retail gang get together on, on via Reddit and team up, and together— and you can only do it together because as a single retail punter you're going to have zero impact on the market. But if you can get hundreds of thousands of retail traders all acting as one, okay, then it's powerful. So what they're doing is they're buying, okay, even though the company's shockingly bad. And to put some stats on that, by the way, um, yeah, Bed Bath Beyond for quarter 2 sales dropped 25%, um, their net loss widened $358 million for the quarter. That compared to $51 million last time. Their cash position, this is the most dangerous. Their cash position at the start of 2022 was $1 billion. It's now just $107 million. Wow. So their burn rate is just off the scale. So you're like, wow, this thing's going bankrupt, right? Which is why all the hedge fund community is short. So this is where the retail guys are stepping in and buying. And together they're lifting the price. And the whole point here is they're trying to create what's called a short squeeze, because if you're short and the price is going up, well, you're losing money, right? And these hedge funds will have risk systems in place that says, look, we can only, we can only hold on here if the loss is X, and if the loss goes above X, right, we're out. So a short squeeze is you're forcing the price so high so that you're forcing hedge funds to cover their short position. That means get out of their short position. As you get out, you buy. So they're trying to force the price up, force hedge funds to buy to get out of their shorts. That's more buying power. And because there's such a low free float, the liquidity is really low. So if you all have got— if all of a sudden you've got a spike in buying, then it spikes the price ever higher. Which of course forces even more hedge funds out. And it's like this snowball effect, okay? So the retail guys are trying to profit by engineering a temporary large spike higher in the share price. And they've done— and this was a phenomenon that came to the fore in 2020 with, with GameStop, right, and AMC and so on. And so now we're kind of having round 2 of this situation just this month.

Um, so Citadel have had a good few weeks then.

I can't comment.

Call options then, how does that work?

Well, call options, I mean, so one way to play this— so a call, a call option is a derivative that enables an investor to profit if the share price goes up. If you're long a call option, you can profit from the share price going up. But to be long a call option, you need a counterparty to that trade who's short the call option, OK? It's normally the big financial institutions that are what we call the writers and the sellers of these options, OK? So the short call option position, you profit if the price goes down. You're going to lose money if the price goes up. Well, no, sorry, you just take the premium and you lose money if the price goes up, right? It's quite a high-risk position to be in. Now the problem is, if you're— if you've bought a call option and the price has rocketed, great, you're going to exercise that option and you're going to buy, okay, at the strike price. But your counterparty therefore has to sell the shares to you. So as this price has been rising these financial institutions are having to go ahead and sell stock to the options counterparty who's exercising. But to sell shares, well, you need to own them. So they're actually having to buy shares in order to then sell to fulfill their call option, um, obligation. Okay, so again, more buyers And this is on the financial institution side. This is the David versus Goliath story where the retail trader is trampling all over the big financial institutions and the big hedge funds. And it's a great story for the media. It's, you know, yeah, it's that David-Goliath thing. And yeah, and Jake Freeman, who's your retail trader in inverted commas, has massively profited. There are hedge funds on the right side of this, by the way. So Ryan Cohen, who you mentioned, a big hedge fund guy, he, he was— he held a— he held a 12% stake in the company. So much bigger than that student Jake Freeman. Um, and he was buying, uh, about a month or so ago, he bought an average price of $15.34. 5 months ago, sorry, he bought. Um, and he's now sold all of his stake at a— in a price range between $18 and $30. Uh, so he's made a chunk of money. But his massive sell, along with Jake Freeman's sell, together they make 17%, right? So they've both sold. So now obviously that big buying power that drove it all up has turned into big selling power that's now driving it back down. Pump and dump.

You see, the thing— the thing I have a problem with, with this from a philosophical point of view is that it's kind of like this anti-Suits, Wall Street, the hedge funds. I was just having a look. So Bed Bath Beyond employ about 32,000 people. So whilst we're all having fun and games and we're talking about pump and dump and let's make $110, let's short squeeze them and teach them a lesson, those hedge funds there's 30,000 regular Joes who go to work every day to earn their keep. And, you know, if you talk about supply chains and you compound that impact that one firm going down will have— those guys don't matter though, do they?

Yeah, I mean, I, I would say this is like a sideshow, right? It's a short-term market manipulation thing. Ultimately, Bed Bath Beyond are struggling as a business, and what happening— what's happening to their share price doesn't change that. Unless— so two things: some of these staff might own some share options, so then it is good for them. But secondly, if you take— was it the GameStop example? They've kind of reinvented themselves and they're getting involved with NFTs and God knows what, right? So it I don't know, with Bed Bath Beyond, I, I— is this an opportunity for the board to go, you know what, our business model's broken, let's be brave and be radical about how we evolve this business? In which case, fine, they might, I don't know, reinvent themselves, turn it around, and their staff are safe in their, in their jobs. I think if you didn't have this market event then Bed Bath Beyond was going one way and nothing was going to stop it. It's still going that way, but now you might say there's a tiny chance it might pivot, but still unlikely.

Yeah, I don't disagree with what you're saying, makes complete sense. What I disagree with is then when the WallStreetBets mob says that they're doing a good thing on the face of humanity, right, which is which is playing out just looking at the world through one lens.

Well, that's the Robin Hood thing, isn't it? About stealing from the rich, the hedge funders, and giving to the poor, the retail investor, your poor Jake Freemans of this world. So, Jake, yeah, I mean, he was really struggling before this, before this, this windfall, um, so Yeah, well, look, with that, we'll wrap things up.

Um, as ever, if you enjoyed the show, please do leave us a rating and a review, um, on Apple or Spotify. Really does help push this out to as many people as possible. And yeah, hopefully everyone, um, has had a good week. We'll be back as ever, as per normal, next week. And, uh, yeah, enjoy. Thanks, Piers.

Yep, catch you later.