Photo:
Brendan McDermid/Reuters
If ill-informed citizens can use social media to storm Capitol Hill, why can’t they launch the attack?
GameStop
Shares? You can and you did. However, it is a mistake to view this episode, which is unique in many ways, as a harbinger of a trend.
The message is as follows: A man bites a dog. This is often followed by a barrage of analysis about how dog biting by humans is our new normal.
Fortunately, the strange market phenomenon that hit several titles like GameStop this week and resurfaced on Friday is unlikely to be a new normal. Many occurrences that catch our attention tend to correct themselves. The Capitol Hill Stormtroopers left a series of self-defense and social media messages to help with their arrest. While the authors of the GameStop bubble probably won’t go to jail, many of them will certainly lose their huge paper profits. Day traders can temporarily manage GameStop shares from $20 to $483. You can’t make GameStop a $483 business.
The rebels behind this latest social media phenomenon, unlike those who invaded Capitol Hill, seem to have no base. When asked what they were against, they basically said What do they have? Answer: Short sellers.
Shorters, widely regarded as Wall Street’s sanitary engineers, play a useful role in countering the market’s mechanical upward trend. By betting on the actions of video game retailer GameStop and a few other struggling small businesses, they did nothing but get annoyed with the online potpourri that tried to make their lives miserable. On the contrary, by taking short positions, they were in effect giving long-term bulls the opportunity to make extra money by making their own shares available to traders who wanted to take short positions. Many bulls are probably shorting themselves to hedge their long positions in companies like GameStop and the movie chain AMC.
But here’s the real kicker. For every dollar taken from the big boy on Wall Street in a brief online push, $10 will likely be transferred from one pawn to another.
That’s when the tide turns, when some GameStop players manage to take money off the table before it disappears again. Note that nothing in this episode really helps GameStop management improve the company, which is the expected function of our stock markets. The people most intrigued by these events seem little different from those who have recently found themselves in the minority in their resistance
Donald Trump,
or posing as the saviors of freedom when they attacked Capitol Hill.
Judging by his tweets, his real gift is to conjure up heroic fantasies from the black comic reality created by his own actions.
Now the SEC is launching an investigation, although inducing volunteers to overpay for inventory to make a socio-political point doesn’t seem like a crime to me. The SEC will find out if the real pump and dump scammers were involved.
But it also seems pointless to equate the bubble at GameStop and a few other small companies that have been heavily discounted with the general valuation distortion caused by excess liquidity from the Federal Reserve. Many of these companies have no claim to intrinsic value. They brag about the ability of the uninformed horde to spend money to drive up stock prices because they can (which no one has ever doubted).
It is unlikely that this model of government participation in the market will overtake or supplant indexing, unless society is suddenly carried away by the loss of money. We know all too well how this will end – with huge financial losses for those who can least afford it. If reform is needed at all, it is to allow more pots of money to exist on the other side of these tariffs and to protect the rational integrity of prices in the first place. Moral: We need more short selling, not less, to counteract such periods.
None of this excuses brokers who prevent real, self-funded, high-risk clients from trading the stocks they want, as some brokers charged Thursday. The semi-populist slogans of some politicians, such as
Ted Cruz.
and Alexandria Ocasio-Cortez, who only suspected what was going on in the markets. The saddest part is that the Biden administration, which is always on the take, saw fit to respond to repeated claims that it was monitoring GameStop’s behavior.
Yes. The world would immediately look a lot better if the White House said that some things legitimately belong to the president and some things don’t, and that what the public chooses to pay for GameStop stock falls into the latter category.
Potomac Watch: While Senators Joe Manchin and Kirsten Sinema have vowed never to stop filibustering, their fellow Democrats are plotting to break Byrd’s power. Images : Getty Images Composite: Mark Kelly
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Appears in the print edition on January 30, 2021.
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