Playing Games With Stocks

The GameStop saga—can we call it an insurrection?—wants easy heroes and villains. Both are available.

 

The populist version of the story goes like this: a few thousand angry gamers, colluding via the now infamous WallStreetBets subreddit, brought at least one powerful hedge fund to its knees. Melvin Capital and other short sellers, completely blindsided, lost a reported $5 billion in what must have seemed like a sure-bet opportunity for their model of vulture capitalism.

 

Meanwhile GameStop, the plucky brick-and-mortar retailer thought to be going the way of Blockbuster Video, gained a reprieve from its looming execution date. Robinhood, the “free” app masquerading as a stock trading platform for the little guy, was exposed as a data-mining operation—one happy to shut down the casino when too many of the wrong kind of people started winning.

 

 

above: GameStop investor Keith Gill (aka Roaring Kitty) testifies via Zoom before the House Financial Services Committee on Thursday, Feb. 18, 2021 (House Financial Services Committee/Zoom)

 

And for once, at least a few ordinary retail investors were able to pump a stock and make a killing. Turnabout is fair play!

 

But things are never so cut and dried. GameStop’s position was not quite as precarious as advertised; its financials are reasonably solid and the management team recently gained former Amazon executives, who presumably would not jump onto a sinking ship.

 

It turns out there was plenty of institutional money on the long side of the GameStop trade as well, including hedge funds as big and rich as Melvin. Apparently it takes more than a gang of Reddit bros to pump a stock price from less than $20 to an all-time intraday high of nearly $500 in a single month. Robinhood, meanwhile, had express authority under its terms of service to stop heavily one-sided margin trading so it could cover collateral requirements.

 

So the perception of Reddit’s David to Wall Street’s Goliath may well be facile. If we view these kinds of revolts as stepchildren of the broader Trump revolution—and we should—the results similarly may not match the rhetoric.

 

But every story is clearer with hindsight. GameStop is more than just a tale of greed, mania, manipulation, or vengeance. It is a story of power dynamics and a challenge to those dynamics. Tellingly, that challenge came—at least ostensibly—from the right. Democrats, not fading country club Republicans, are the hedge fund class today.

 

Financial media dismissed this populist forest and focused on the trees, asking only the obvious and instant questions. Can a traditional gaming retailer, weighed down with rent and salaries at more than 5,000 stores, survive in an era of digital downloads? Should short selling on margin, especially the naked version, be more heavily regulated? Should a bunch of Redditors be able to manipulate an entire stock price against the interests of (suddenly noble) professional fund managers?

 

As a result—and because journalists think the right by definition cannot have legitimate political grievances—the far more interesting and pressing questions go unasked: What is the purpose of capital markets? Do they work? And whose interests do they serve?

 

These are the kinds of questions which should answer themselves as self-evident and obvious. Yet we all know the real and true answers, which is why they go unasked. In short, the United States Federal Reserve, U.S. Treasury Department, Wall Street, stock markets, and large public companies are ensconced in a cozy revolving door relationship which enriches a professional banking class at the expense of ordinary Americans. The process is complicated, but grounded in what we term the Cantillon effect, the change in relative prices due to changes in the money supply, named after the seminal 18^th-century economist Richard Cantillon. At the center of it all is money, which is always manipulated by central banks. Money isn’t neutral: it flows through the economy unevenly and unequally, and its creation heavily benefits those at the front of the line.

 

Ordinary Americans, needless to say, generally find themselves at the back of that line.

 

We want to believe the market is us. Conservatives, for their part, once took pains to promote an “ownership society.” One Gallup poll indicates some 55 percent of Americans own at least some shares of stock (this is ominously down from 62 percent before the Great Recession of 2008). But before happily concluding that somewhere north of half of us are “in the market,” consider that stock investors skew overwhelmingly older, whiter, and better educated. And many of them are invested through 401(k) retirement plans or simple mutual funds, rather than actively trading or following markets closely.

 

In truth, relatively few Americans engage in stock trading to any extent. Pitted against institutional investors and the increasingly algorithmic forces of Wall Street, a large majority of retail investors in fact lose money.

 

 

Can the GameStop short squeeze be replicated and weaponized against other Wall Street interests, as an emerging populist guerrilla tactic? How about the silver market, rumored as Redditors’ next play?

 

The appeal is clear enough. Gold bugs and sound money types see themselves as underdogs fighting the Fed and its fiat dollar, having long suspected central bankers of manipulating precious metals prices. And silver is the Miller High Life to gold’s Dom Pérignon. Throw in an enormous hundred-to-one disconnect between the paper and physical markets and the situation seems ripe.

 

But silver is not a stock, and there is no shortage of it. Central and commercial banks have the ability to flood the market with more of it quickly, and congressional committees chaired by the likes of Maxine Waters are already assembled to make sure another GameStop won’t happen. Big market players and politicians have an enviable track record when it comes to protecting incumbents.

 

Populists should take heart, however. Ordinary people may have little interest in the details of the GameStop affair and even less interest in economic theory. But they do care quite a bit about understanding who is ripping them off. Ordinary people have lost the ability to be thrifty and earn compound interest in simple savings vehicles. Subprime borrowers still pay 18 percent on credit cards and car loans, while private equity firms borrow at near-zero rates to fund M&A. And the rotten Fed fights deflation, the market’s natural tendency to make average workers better off even with stagnating wages.

 

When elites screw up money and banking as badly as they have over the last century, populist blowback is both inevitable and justified. Expect more of it.