If you’ve spent any time on the Internet in the last 48 hours, you would have come across the story about GameStop, where a group of Reddit users have effectively hijacked stock markets in America, exposing one of the biggest flaws in the system.
Users on the subreddit Wall Street Bets, led by a user called DeepFuckingValue began talking up the stock and buying shares for the video game retailer, GameStop. Not only was this motivated by money, it was motivated by the desire to bankrupt hedge-funders who have been playing these same tricks for decades, leading to inflated stock values, big bonuses for CEO, and effectively profiting off of an economic crisis and hard times for people in general. But to understand how this works, we need to look at how two “tricks” played in the stock market that often go unnoticed and artificially inflate the market or profit personally through mere speculation.
Shorting
Shorting stock, or short selling, has been a popular technique used by speculators, gamblers, arbitrageurs, hedge fund managers, and individual investors, who are willing to take on the risk of losing capital. It involves selling a stock that you don’t own or selling the shares that the seller has on loan from a broker. A seller will take on this risk because they believe that a stock’s price is set to plummet and, should they sell today, they’d be able to buy it back at a far cheaper price tomorrow.
To accomplish this, they’ll make a profit consisting of the difference between their buy and sell prices. Some do it purely for speculation, while others want to hedge (protect) downside risk if they have a long position – owning shares of the same, or related stocks outright.stock buybacks
Stock buybacks
Stock price appreciation (a rise in value) and dividends are one of several ways that a company can return wealth to their shareholders. A stock buyback happens when a company buys their own shares from the market. The buyback reduces the number of outstanding shares, which therefore increases the ownership stake of the stakeholders. While this can be very profitable for investors, it doesn’t actually add any long-term value to the company, but merely boosts share prices in the short term.
Furthermore, companies open up vulnerabilities when they take on dent to purchase stock. Obviously, if a company repurchases shares at a certain price and it the value of their stocks drop, it can prove incredibly costly. Buybacks also merely enrich corporate executives, which appear to be evidence of growth in the stock’s value, but creates long-term declines in wealth.
How GameStop has exposed Wall Street
The concepts above are somewhat difficult to wrap your head around… but that’s kind of the point. The layman can’t really understand the mechanism, but when a guy like Donald Trump boasts about having an amazing economy and points to the value of the stock market, which is not a measure of a healthy economy. It’s value is artificially manipulated.
So these renegade Reddit users began buying GameStop stock in size (en masse). And they targeted hedge-funds, notably Melvin Capital, who had shorted GameStop stocks after Ryan Cohen, founder of online pet food merchant, Chewy, started buying shares and tripled their price in three months by moving GameStop stores online.
When Reddit users began to accumulate a huge amount of GameStop shares, Melvin were forced to cover the short. The demand for GameStop stocks shot through the roof.
Last year, GameStop shares were selling at $4. As of yesterday, it was valued at $339, while on Tuesday it was valued at $148 and Monday it was selling for $38, according to Jacobin. GameStop sold shares at a higher volume than Apple – the biggest stock of them all – on Tuesday. However, this market bubble will inevitably crash and some reddit users who haven’t sold their shares could be in for a substantial loss. Melvin closed out its short position on Tuesday, but this doesn’t seem to have dampened enthusiasm. Nobody knows how long the bubble will last, but this form of what is effectively financial trolling is going to have very real consequences that Wall Street elites are not going to like.
While they’re up in arms about this, they have now been exposed, because these are the games, the techniques, the market tricks that they have been using for decades and the general public has had to suffer the consequences, such as those that the 2007/08 Financial Crisis brought about, through the deliberate creation of a housing bubble. Following that meltdown, massive corporations received federal bailouts to cover their losses in an economic policy known as “Quantitative Easing” (QE). Then you get guys like Business Insider columnist, Josh Barro.
Don’t let him fool you. The stock market very rarely actually raises money for productive investment other than through initial public offerings (IPOs), when firms issue most of their stocks. Over the last two decades, IPOs have raised as much as $657 billion, which sounds like a lot, but only accounts for 2% of business investment overall. Firms raise their investment funding internally, through profits. Businesses that make up the S&P 500 have spent $8.3 trillion on stock buybacks since 2000, equaling roughly 20% of all business investments in that time frame.
Where this can go wrong
So, while most people don’t currently invest in the stock market, their pension funds often are. As we saw with the 2007/08 crash, millions lost the money that they saved their entire life. GameStop’s losses when the bubble bursts, however, will be nowhere near the scale of that market collapse, but the endless rise in stock market prices, brought about by the Trump administration’s pro-business policies, have been on an endless rise for over a decade, with the exception of the brief interruption of the Covid-19 pandemic. In desperate times, many have chosen to invest (read: gamble) whatever money they have in the hope of staving off the pandemic. In it’s current form, the American economy doesn’t incentivise saving, it incentivises this kind of gambling. And even if GameStop pales in comparison to the housing market bubble created by George Bush, a bubble is a bubble and a market shock is a market shock. Direct or indirect, this middle finger to the rich is surely going to have its fair share of economic casualties.
But GameStop is about much more than getting shits and giggles out of upsertting wealthy stock owners or purely making money… GameStop has exposed huge flaws in both American stock exchanges, as well as many around the world. It has exposed how easy it is to cheat the system and make a quick buck. It has exposed how stock markets add no real value for the vast majority of people and measuring an economy by the value of various stock exchanges is ridiculous. And now that GameStop is hurting the rich, they may support proper market regulation, particularly when it comes to shorting and buybacks.
It has raised awareness about the immorality of using these techniques for self-enrichment, adding no value whatsoever to the economy. It’s making the rich uncomfortable and more open to change. In short, I’d say GameStop may end up being one of the most important stories of the year and will be prevelant in the discussions of what our post-Covid-19 economies will look like.
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