The GameStop stock frenzy was not about class revenge
And it does not mean we are entering a new age where the power of Wall Street will be truly challenged.
There is excitement – shock! – panic! – a spate of frothing analysis! – flatulent sociology and political commentary – over how GameStop stocks have traded.
It sounds utterly trivial to say the surprise, confusion, and astonishment parts of all this are a linguistic issue. But they are.
If you read, listen to, or watch the financial news, you will hear the people and organisations that buy stock referred to as “investors”. Their purchases and sales as “investments”. Wall Street, the Nasdaq stock market, and such around the world, are referred to as “capital markets”, places where businesses offer themselves to attract money which they can then use to do their business.
All that is extremely misleading.
There is one point – just one – when money going into the stock market is an investment in the useful sense of providing money to get something done. That is the first time a company offers shares for money. Yes, of course, the bankers, brokers, lawyers, and such, involved in the initial public offerings (IPOs) skim lots of cream off the top and the people who owned the company before it is offered may make lots of money. They will frequently, also, have significant paydays when they cash out – as might the owner of a successful racehorse. Still, the bulk of those investments can go towards production.
Thereafter, all the buying and trading of stock is betting, a lot like in horse-racing.
People who bet on horses mostly think their bets are based on sensible analysis of performance and conditions. For horses, it might be the length of the race, dry or muddy ground, the jockeys, the animal’s health. 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 is gambling.
On the way to understanding what happened with GameStop, we need to understand the far more important mystery of the stock market during this COVID time. If stock markets represented what is happening in the “real economy” – the one of production, employment, and such – they would have stayed down after that initial crash, rather than happily floating back up, up, and up, like a helium balloon. But that is not the prime factor that determines how much is bet in the stock market. It is the amount of money in the hands of the betting class that does it, as well as the ease of betting, the effort vs reward, and the social approval of the process.
After the 2008 financial meltdown, the bail-outs went to the biggest banks and financial institutions. The Federal Reserve flooded the economy with trillions of dollars. As Business Insider noted, the fed funds interest rate “was at virtually 0 percent from December 2008 until December 2015”. Free money – if you were big enough to qualify.
In 2016, the interest rate began creeping up. In 2018, it reached 2.5 percent. Then, under pressure from then-President Donald Trump – who understood that lots of cheap money pushes the markets up – the Federal Reserve started to lower it again. Then, in response to the COVID-19 crash, whoop, zoom, back down to zero.
Meanwhile, Trump had also introduced large tax cuts which had shifted lots of money to the top – ie the betting class. Tax cuts for the rich, money to borrow for free, a host of other policies that favoured the wealthy and billionaires saw their net worth increase by $500bn during the pandemic. Money flowed into their favourite betting venue, the stock market.
Hedge fund guys – who think they are the smartest guys in the universe – were, naturally, doing whatever legal market manipulations they could. One of them was short selling. Simply put, this is betting that a stock’s price will go down. The mechanics of it, go like this. The gamblers – always called the “investors” – borrow a stock. Say it is selling for $100. They sell it for that amount. Say, they have to return what they borrowed within three months. If the stock’s price goes down to $75, they can buy a share at that price, give it to the lender, and keep the $25 difference. If it does not go down, they do not make any money. If it goes up, and they have to buy the replacement for more than they paid, they have a problem.
The ideal target for short selling is a company that looks better than it really is and if its flaws are revealed, its stock price will plummet. GameStop was a so-so target. It sells video games, both new and used, and game-related consumer electronics. A year or two ago, there was probably one at your local mall. But the company has been in decline – like most brick and mortar retail chains – for the past 10 years. Their actual business was not likely to go anywhere but further down. There was little risk involved in betting on their demise.
However, several other things had happened out in the world beyond GameStop and the short-sellers.
It was not just billionaires doing well during the pandemic. A fairly large number of people somewhere between the top 10 percent and even the top one-third were still making money. With restaurants, entertainment, and sports venues closed, they had fewer places to spend it. Last year, the savings rate (the money put away per month) shot up from an average of about 7.5 percent to a peak of 33.7 percent – a full third of income – before going down to about 13 percent, which is still quite high.
A very large group of people suddenly had more money on hand than they normally did. Also, they were bored and were looking for things they could do from home, on the computer.
In the meantime, a lot of low-cost, even free, stock trading services had come along: Ameritrade, E*Trade, Acorns, Betterment, Ally, WeBull, RobinHood, etc.
A few of the little guys – with lots of time on their hands and access to online trading tools – told lots of little guys that if they all bet on GameStop by buying shares, the price would go up. That would force the short-sellers – who thought they had fixed the race – to also buy in order to cover their bets before the prices went even higher. This indeed pushed the prices higher. That was exciting and profitable and more people heard about it and jumped in.
There are articles talking about empowerment, class resentment and revenge, and such. A new age, upsetting Wall Street.
It is not nearly that serious.
It is just racetrack gambling. On a day when the big guys did not think to notice what the little guys might do if they got together. Do not worry. The little guys will not stay together. The big guys will take care of each other. They will make sure that over time they cannot lose.
The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.