Wednesday, May 12, 2021

The GameStop Action Frenzy Wasn’t About Class Revenge | Business and economic news

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There is excitement – a shock! – panic! – a series of foaming analyzes! – sociology and flatulent political commentary – about how GameStop stocks have traded.

It seems quite trivial to say that the surprise, confusion, and astonishment at all of this is a language problem. But they are.

If you read, listen to or watch financial news, you will hear from the people and organizations that buy stocks called “investors”. Their purchases and sales as “investments”. Wall Street, the Nasdaq stock market, and others around the world are called “capital markets,” places where companies set out to attract money that they can then use to do their business.

All of this is extremely misleading.

There is a point – only one – when the money going on the stock market is an investment in the useful sense of providing money to do something. This is the first time that a company has offered stocks for cash. Yes, of course, the bankers, brokers, lawyers and others involved in the initial public offerings (IPOs) froth a lot of cream and the people who owned the business before it was offered can earn a lot of money. ‘money. They will also often have significant paydays when they cash in – just like the owner of a successful racehorse. However, the bulk of these investments can be devoted to production.

Thereafter, all purchases and trades of stocks are betting, much like in horse racing.

People who bet on horses generally think their bets are based on a sensitive analysis of performance and conditions. For horses, it could be the length of the race, dry or muddy ground, jockeys, the health of the animal. For businesses, it could be management, a good or bad economy, peace or war, free trade or tariffs, new technologies.

But, beyond the first buy-in, it’s the game.

To understand what happened with GameStop, we need to understand the much bigger mystery of the stock market during this COVID time. If the stock markets represented what is happening in the “real economy” – that of production, employment, etc. – they would have stayed low after that initial crash, rather than happily floating up, up, and up, like a helium balloon. . But this is not the first factor that determines the amount of the bet on the stock market. It is the amount of money in the hands of the betting class that makes it, as well as the ease of betting, the effort against the reward, and the social approval of the process.

After the 2008 financial crisis, the bailouts went to the biggest banks and financial institutions. The Federal Reserve has inundated the economy with trillions of dollars. As Business Insider noted, the federal funds interest rate “was virtually 0% from December 2008 to December 2015”. Free money – if you were old enough to qualify.

In 2016, the interest rate started to rise. In 2018, it reached 2.5%. Then, under pressure from then-President Donald Trump – who understood that a lot of cheap money was pushing markets up – the Federal Reserve started cutting it again. Then in response to the COVID-19 crash, whoop, zoom, go back to zero.

Meanwhile, Trump had also introduced major tax cuts that transferred a lot of money to the top – that is, the betting class. Tax cuts for the rich, money to borrow for free, a host of other policies that have favored the rich and billionaires have seen their net worth increase by $ 500 billion during the pandemic. The money flowed into their favorite betting spot, the stock exchange.

The hedge fund guys – who think they are the smartest guys in the universe – were naturally doing all the legal manipulations they could in the market. One of them was short selling. Simply put, it’s a bet that the price of a stock will drop. The mechanics of it, go like this. The players – always called “investors” – borrow a stock. Let’s 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 $ 25 difference. If it doesn’t go down, they don’t make money. If it goes up and they have to buy the replacement for more than what they paid for, they have a problem.

The ideal target for short selling is a business that looks better than it really does, and if its flaws are exposed, its stock price will drop. GameStop was a poor target. It sells video games, new and used, and consumer electronics products related to games. A year or two ago, there was probably one at your local mall. But the business has been in decline – like most brick-and-mortar retail chains – for the past 10 years. Their actual activity was probably going nowhere, but lower. There was little risk in betting on their demise.

However, several other things had happened in the world beyond GameStop and the Short Sellers.

It wasn’t just the billionaires who were doing well during the pandemic. Quite a few people in the top 10 percent to even the top third were still making money. With restaurants, entertainment and sports venues closed, they had fewer places to spend it. Last year, the savings rate (money set aside per month) climbed from an average of around 7.5% to a high of 33.7% – a full third of income – before declining go down to around 13%, which is still quite high.

A very large group of people suddenly had more money on hand than usual. Also, they were bored and looking for things they could do from home on the computer.

In the meantime, many cheap or even free stock trading services had appeared: Ameritrade, E * Trade, Acorns, Betterment, Ally, WeBull, RobinHood, etc.

A few of the little guys – with plenty of spare time and access to online trading tools – told a lot of the little guys that if they all bet on GameStop buying stocks, the price would go up. This would force short sellers – who thought they had settled the race – to buy to hedge their bets as well before prices rose further. This in effect pushed prices up. It was exciting and profitable and more and more people heard about it and took the plunge.

There are articles that talk about empowerment, class resentment and revenge etc. A new era that is shaking up Wall Street.

It’s not so bad.

It’s just track play. A day when the grown-ups didn’t think to notice what the little ones could do if they got together. Do not worry. The little guys won’t stay together. The adults will take care of each other. They will make sure that over time they cannot lose.

The opinions expressed in this article are those of the author and do not necessarily reflect the editorial position of Al Jazeera.



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