Institutional Trust: The Real Meme - Exploring Public Sentiment

Greetings everyone, welcome to this Week in Review.

In the previous week, I examined the augmented reality strategies of both Apple and Facebook and considered their implications for the evolution of the internet. This week, my focus is on the surge in meme stock activity that captured significant attention in American media, and I’ll explore potential lessons from it, particularly as they relate to the future of the web.

If you are viewing this on the TechCrunch website, you can subscribe to receive this directly in your inbox each Saturday morning through the newsletter signup, and you can find my updates on Twitter at @lucasmtny.

The Core Issue

The past week presented a multitude of interpretations. It could be viewed as a surge of popular empowerment, a demonstration of the power of misinformation, or a call for either greater or reduced oversight of financial systems. Ultimately, it was a period defined by instability, evolving into a more broadly appealing form of disruption.

The outcome has left many established financial professionals perplexed, numerous online users utilizing funds earmarked for essential expenses to invest in stocks like Tootsie Roll, and several billionaires discovering the appeal of cultivating a “champion of the common person” image on social media. Meanwhile, I find myself contemplating whether any organization worldwide is secure enough to withstand the internet’s capacity to distort its reputation.

This analysis centers on the phenomenon of meme stocks, but more importantly, on the concept that a diminished need for critical evaluation of trust can lead to a willingness to place faith in increasingly unreliable sources, particularly those connected to areas where trust already exists.

The Dow Jones experienced its most significant weekly decline since October as individual investors, partly coordinated through Reddit, transformed America’s financial markets into a prominent feature of the online landscape. While established companies like Facebook and Apple reported earnings and saw corresponding market adjustments, the financial news was also dominated by the rapid gains of “meme stocks.” Although surges in the value of speculative stocks are not unprecedented, the notion that a stock can achieve substantial gains with little fundamental basis and potentially sustain that value through a newly established collective belief is a novel and concerning development.

GameStop stands as the most well-known example of this trend. (For those interested in GameStop’s recent activity, a wealth of information is available online; here is one such article. Interestingly, our collective attention spans appear to have lengthened since the Trump presidency.)

Currently, Americans generally exhibit a lack of strong faith in institutions. Examining long-term Gallup data reveals a considerable decrease in trust towards organized religion, the media, various branches of government, large corporations, and banks compared to the beginning of the century. The exceptions to this trend are small businesses and the military, which enjoy comparatively higher levels of trust.

It is therefore likely problematic that public trust in institutions is so low, and my belief that the internet could potentially undermine every trusted organization except the military may simply reflect a limited imagination regarding the web’s capacity for positive change. I do suspect, however, that the internet’s disruption of institutional trust is far from over, for better or for worse.

The idea of democratizing financial systems appears appealing from a populist perspective, until one considers that individual investors are competing against entities operating with different resources and strategies, utilizing funds that do not belong to them. This situation will have significant consequences for many, but is unlikely to result in positive outcomes for most individuals involved in high-risk “infinite upside” day trading.

Prior to this week, I viewed Robinhood as irresponsible for exposing consumers to risks they may not have been prepared to handle, or “democratizing access to” – as they described it. Now, I believe they were reckless for failing to anticipate the potential for such widespread disruption and the possibility of their own financial ruin. The company was compelled to secure a $1 billion line of credit this week after temporarily halting trading in meme stocks, a decision that severely damaged their reputation and made them the target of widespread online criticism. (Facebook experienced a relatively quiet week)

This situation underscores the dangers of scale. Platforms require a substantial workforce to serve a global audience, and most are understaffed. Facebook revealed in its earnings call this week that it employs nearly 60,000 people. This is a company that now possesses its own Supreme Court; it is simply too large. If an organization is going to be massive and centralized, it will likely require a significant number of personnel to effectively manage it. This is at odds with the current structure of most internet platforms. In reality, the internet might function more effectively with fewer dominant institutions and more intimate, interconnected communities. While network effects over the past two decades have made this more challenging, regulations promoting data portability could facilitate such a shift.

As I write this newsletter, I am frequently reminded that while things often appear to be constantly changing, many elements are not entirely new. This insightful 2001 New York Times profile by Michael Lewis serves as a reminder of this, detailing the story of a 15-year-old who manipulated the markets using a network of false accounts, faced scrutiny from the SEC, but still managed to profit by $500,000. It is a compelling read.

Ultimately, the situation at Robinhood will likely stabilize. However, there is also a possibility that it will not, and that these meme traders will trigger a crisis that bankrupts the company and destabilizes global markets, but it is probable that things will eventually return to a more normal state.

 

Until next week,
Lucas Matney

Other things

The SEC is expressing disapproval.
I will endeavor to keep these updates separate from GameStop-related news, but here’s a brief observation. The Securities and Exchange Commission has voiced its discontent regarding recent market activity, and this concern is largely directed toward Robinhood. Their official statement was notably direct. Further details are available.

Facebook Oversight Board Seeks Input
The independent body overseeing Facebook is requesting public feedback as it considers whether to reinstate Donald Trump’s access to his Instagram and Facebook accounts. It’s likely that Facebook’s leadership would have reconsidered aspects of the platform’s development if they had foreseen the complexities of content moderation, though the current market capitalization might have altered their perspective. More information can be found here.

Apple’s privacy-focused update is scheduled for release this spring.
Following a period of postponement, Apple has confirmed its commitment to launching the “App Tracking Transparency” feature this spring, a move that has generated significant opposition within the advertising technology sector. This update will require applications to obtain explicit user consent before tracking their activity across different apps. More on this development is available.

Robert Downey Jr. invests in emerging companies.
Celebrity involvement in investment has long been prevalent, but it has become increasingly common in the venture capital landscape in recent years. The combination of reputation enhancement and the ease of access to capital for founders means that investors may favor well-known figures like The Chainsmokers. In related news, actor Robert Downey Jr. has established a rolling fund to support climate technology startups, and comprehensive details are accessible.

WeWork is pursuing a SPAC merger.
Despite past challenges, Adam Neumann and SoftBank’s venture, WeWork, appears to be moving forward with a plan to become a publicly traded company through a special-purpose acquisition company (SPAC) merger. It seems the timing wasn’t ideal in the past, and a more favorable market might have yielded different results, but the process is now underway. Additional information is available.

Cook and Zuckerberg engage in a public exchange.
Traditionally, interactions between leaders of major technology companies are characterized by politeness, with any criticisms reserved for political opponents. However, this week, Tim Cook and Mark Zuckerberg displayed a less cordial tone. Zuckerberg publicly criticized Apple during their earnings call, suggesting potential unfair advantages held by the company. Cook responded with a carefully worded statement that subtly conveyed his disapproval of Facebook. More details are available.

Extra things

Insights from our subscription-based Extra Crunch articles:
Five Key Errors of a New Startup Founder
“My colleagues and I consistently dedicated twelve hours each day, every day of the week to our work. This intensive schedule extended to numerous team members. I routinely communicated via email, text message, and Slack messaging platforms during evenings and weekends without hesitation. As is common with many startups, exceptionally long working hours were considered standard practice.”

Potential $100 Billion in Fintech Liquidity Projected for 2021
“Publicly listed fintech companies have significantly exceeded the performance of traditional financial institutions and major stock market indexes for the fourth consecutive year. The strong performance of these businesses was further enhanced by the pandemic, as consumers shifted away from in-person shopping and banking experiences. They instead embraced — and discovered — digital solutions.”

Increased Venture Capital in Africa Fuels Fintech and Clean Tech Investments in 2020
“What factors are contributing to the generally favorable venture capital outcomes in Africa recently? Giuliani explained to TechCrunch via email that ‘investment in Africa is being stimulated by a growing network of organizations supporting the early stages of the ecosystem, including accelerators, seed funds, syndicates, and angel investors,’ and by “market consolidation,” which is supporting both “later-stage investments and a developing mergers and acquisitions landscape.’”