The GameStop inventory frenzy was not about class revenge | Enterprise and Financial system Information
There is excitement – shock! – panic! – a flood of foam analyzes! – Sociology of gas and political commentary – on trading GameStop stocks.
It sounds extremely trivial to say that the surprising, confusing, and amazing parts of it all are a linguistic problem. But they are.
As you read, listen to, or watch the financial news, you will hear the people and organizations buying stocks called “investors.” Your purchases and sales as “investments”. Wall Street, the Nasdaq stock market, and the like around the world are referred to as “Capital Markets.” This is where companies can attract money that they can then use to conduct their business.
All of this is extremely misleading.
There is a point – only one – when money going into the exchange is an investment in the useful sense of providing money to get something done. This is the first time a company has offered stocks for money. Yes, of course the bankers, brokers, lawyers and the like involved in the IPOs can skim a lot of the cream and the people who owned the company before it was offered can make lots of money. They also often have significant paydays when they cash out – as does the owner of a successful racehorse. Nevertheless, the majority of this investment can flow into production.
After that, everything is bought and traded, similar to horse racing.
Most of the time, people who bet on horses think that their bets are based on a reasonable analysis of performance and conditions. For horses, it can be the length of the race, dry or muddy ground, the jockeys, the health of the animal. For companies it could be management, good or bad economy, peace or war, free trade or tariffs, new technology.
But beyond the first buy-in, it’s a game of chance.
To understand what happened to GameStop, we need to understand the far more important secret of the exchange during this COVID era. If the stock markets represented what is happening in the “real economy” – production, employment, and the like – they would have stayed down after that initial crash instead of floating back and forth happily like a helium balloon. However, this is not the main factor that determines how much is wagered on the exchange. It is the amount of money in the hands of the betting class that does this, as well as the ease of betting, the hassle versus the reward, and the social approval of the process.
After the financial collapse in 2008, bailouts went to the largest banks and financial institutions. The Federal Reserve flooded the economy with trillions of dollars. As Business Insider found, the Fed Fund rate was “near zero percent from December 2008 to December 2015”. Free Money – if you were tall enough to qualify.
In 2016 the interest rate started to increase. In 2018 it reached 2.5 percent. Then, under pressure from then-President Donald Trump, who understood that a lot of cheap money drives the markets up, the Federal Reserve began to bring them down again. Then, in response to the COVID-19 crash, whoop, zoom, back to zero.
Meanwhile, Trump had also introduced big tax cuts that had brought big bucks to the top – that is, to the betting class. Tax cuts for the rich, money to borrow for free, a host of other measures that favored the rich and billionaires, saw their net worth jump $ 500 billion during the pandemic. Money flowed into their preferred betting location, the stock exchange.
Hedge fund people – who think they are the smartest in the universe – of course, did all the legal manipulation of the market they could. One of them was short selling. Simply put, this means that the price of a stock will go down. The mechanics of it goes like this. The players – always referred to as “investors” – borrow a share. Say it sells for $ 100. They sell it for that amount. Let’s say they have to return what they borrowed within three months. If the stock price drops to $ 75, they can buy a stock at that price, give it to the lender, and keep the difference of $ 25. If it doesn’t go down, they’re not making money. If it goes up and you have to buy the replacement for more than you paid for, you have a problem.
The ideal short selling target is a company that looks better than it really is, and if its flaws are exposed, its stock price will fall. GameStop was a mediocre target. It sells both new and used video games, as well as game-related consumer electronics. There was probably one at your local mall a year or two ago. But the company – like most brick and mortar retail chains – has been in decline for the past 10 years. Your real business would probably only go further down. There was little risk of betting on her death.
Beyond GameStop and the short sellers, however, several other things had happened in the world.
It wasn’t just billionaires who did well during the pandemic. Quite a large number of people between the top 10 percent and even the top 1 third were still making money. With restaurants, entertainment and sports venues all closed, they had fewer places to spend it. Last year, the savings rate (the money put away each month) rose from an average of about 7.5 percent to a high of 33.7 percent – a full third of income – before falling to about 13 percent, which is still quite high.
A very large group of people suddenly had more money on hand than usual. They also got bored and looked for things to do on the computer from home.
In the meantime, there have been many inexpensive, even free, stock trading services: Ameritrade, E * Trade, Acorns, Betterment, Ally, WeBull, RobinHood, etc.
Some of the little boys – with plenty of time and access to online trading tools – told a lot of little boys that if they all wagered on GameStop by buying stocks, the price would go up. That would force the short sellers – who thought they had fixed the race – also to buy to cover their bets before prices got any higher. This has indeed pushed prices up. It was exciting and profitable and more people heard about it and jumped in.
There are articles that talk about empowerment, class resentment and vengeance, and the like. A new age that is exciting Wall Street.
It’s nowhere near as serious.
It’s just a gamble on the racetrack. On a day when the big boys didn’t even think about noticing what the little boys might do when they got together. No worries. The little boys won’t stay together. The big boys will take care of each other. They will make sure they cannot lose over time.
The views expressed in this article are from the author and do not necessarily reflect the editorial stance of Al Jazeera.
Comments are closed.