If there is one thing that the Trump years have proved, it’s that there is almost no relationship between the stock market and the rest of the economy. “The stock market hates unpredictability,” I’ve always heard, and there is no one more unpredictable than Donald Trump. The only thing predictable about him is his unpredictability.
The 2017 Tax Cuts were supposed to stimulate the economy through “trickle down,” but, of course, mostly resulted in stock buy-backs, which lined the coffers of ultra-wealthy investors, but didn’t do much for the rest of us.
It’s in this context that we get the Game-Stop short squeeze, which has riled up some strong feelings on various sides. The short-squeeze involves a bunch of small investors from a Reddit group deciding to bid up certain stock targeted by short-sellers to give them some comeuppance.
What is Short-Selling?
First of all, we should quickly explain short-selling. In brief, this happens when investors think a stock is likely to tank. What happens is this:
- An investor borrows shares of the company, normally from a broker.
- The investor quickly sells the borrowed shares into the market and hopes that the shares will fall in price.
- If the share prices do indeed fall, the investor buys those same shares back at a lower price.
- The investor then returns the shares to the lender and makes a profit by pocketing the difference.
So the key in all of this is that the investor is borrowing the stock instead of buying it. That means both that the investor can make a profit without really having to invest anything and that there are theoretically also no limits to how much the investor can lose.
If a stock in which a lot of investors have a short position and it gets bid up, that is known as a “short squeeze.”
Back during the 2007-08 housing implosion, several investors made huge profits betting against the continued expansion of the housing market, a phenomenon which was chronicled in detail in Michael Lewis’ “The Big Short.”
What is GameStop?
GameStop is an old-fashioned video and game cartridge retailer that’s been in business since 1984. They used to have lots of stores inside malls before they got lapped by the on-line game industry. I remember buying a few cartridges there when my niece and nephew were quite little, like 25 years ago.
Not all that surprisingly, they’ve been losing money and closing stores, and their stock hasn’t performed so well over the last decade.
What is Robinhood?
Robinhood is an electronic trading platform that allows small investors to trade in the stock market without having to use a broker or be a professional investor. They are important in this story because it is one of the main vehicles that certain users to trade up the GameStop stock.
What is the WallStreetBets subreddit?
This is the particular subreddit, known for high-risk stock transactions, that bid up the GameStop stock. Users from this group made a lot of stock purchases, ultimately pushing up the stock price up from $19.94 to $347.51 in 16 days.
Who is Roaring Kitty?
“Roaring Kitty” is the pseudonym for for Keith Gill,is a 34-year-old marketing professional and Chartered Financial Analyst from Massachusetts, who began investing in GameStop during the summer of 2019, after believing the stock to be undervalued. Gill generated a lot of interest on the WallStreetBets subreddit after sharing his experience investing in GameStop.
What Happened after the Short Squeeze?
Hedge funds and other institutional investors heavily invested in short positions started losing a bundle of money. As a consequence, on January 28, Robinhood halted purchases of GameStop as well as a number of other “legacy” companies whose stock had been bid up (AMC Theatres, BlackBerry, Nokia and others). Other exchanges soon followed suit, allowing leveraged traders to sell their shares but not to buy new ones. This made many small traders furious, with some of them calling for class-action lawsuits.
Since then, the value of these stocks have come back down to earth, and they aren’t likely to go very high again.
Why is this Important?
People are starting to understand in a very visceral way that a lot of these financial funds don’t do anything but make money for the very rich. It doesn’t “trickle down” to the rest of us. As Elizabeth Warren noted, hedge fund managers and large investors have “treated the stock market like their own personal casino while everyone else pays the price.”
Some people have compared the GameStop phenomenon to the Occupy Wall Street rallies. Will this produce any kind of lasting change?
One can always hope.
But still, it got politicians as diverse as AOC and Ted Cruz to be one the same side of an issue, at least at first blush.