If little-informed members of the public can be egged on by social media to storm the Capitol, why can’t they be egged on to storm
stock? They can be and were. The mistake, which will nevertheless be made, is treating an episode unique and singular in many respects as heralding a trend.
News is “man bites dog.” What often follows is a deluge of “analysis” about how men biting dogs is our new normal.
Happily, the bizarre market phenomenon that engulfed a few stocks like GameStop this week, and that resumed on Friday, is not likely to become any kind of new normal. Many episodes that command our attention tend to be self-correcting. The Capitol Hill stormers left a trail of selfies and social-media posts to help with their arrest. Though promoters of the GameStop bubble probably won’t land in jail, many are certain to end up losing their giant paper gains. Day traders might be able to drive GameStop shares temporarily from $20 to $483. They can’t make GameStop a $483 company.
The rebels behind this latest social-media phenomenon, unlike those who invaded Capitol Hill, seem to lack any cause at all. When asked what they are against, they’ve basically responded, “Whaddya got?” Answer: short sellers.
Usually seen as Wall Street’s sanitation engineers, shorts play a useful role in countering the market’s mechanical bias toward bullishness. In betting against the shares of videogame retailer GameStop and a few other troubled smallish companies, they did nothing to invite the hostility of the online hordes that decided to make their lives difficult. On the contrary, by taking their short positions, they actually gave long-term bulls a way to earn extra money by lending their own shares to assist the trades the shorts wanted to make. Many bulls likely have short positions themselves to hedge their long positions in companies like GameStop and the movie theater chain AMC.
But here’s the real punch line. For every dollar being taken from a Wall Street big boy in an online-orchestrated short squeeze, $10 are likely being transferred from one peasant to another.
This is where the real windfalls will be made if any of the GameStop players manage to take money off the table before it disappears again. Notice that nothing about this episode actually helps GameStop management make a better company, the presumed function of our stock markets. Those who are most enthralled by these events seem hardly different from the people last seen self-dramatizing their “resistance” to
or who posed as saviors of “freedom” when they attacked the Capitol.
Judging by their tweets, their real gift is for spinning heroic fantasies out of the black-comedy reality spawned by their own actions.
Now the Securities and Exchange Commission is investigating, though fomenting volunteers to overpay for a stock to make a sociopolitical point does not strike me as a crime. The SEC will find out if genuine pump-and-dump fraudsters were in the mix too.
But it also seems unnecessary to equate the bubble in GameStop and a few other heavily shorted smallish companies with the general distortion of valuations created by excessive Federal Reserve liquidity. Many of the boosters of these companies aren’t making any claim at all about intrinsic value. They are boasting about the ability of an uninformed horde to spend money to drive up share prices because they can (which nobody previously doubted).
This model of market participation by the public is unlikely to catch on or displace indexing, unless the public suddenly becomes infatuated with losing money. We already know too well how it will end—with massive financial losses for some who can least afford it. If any reforms are needed, it’s to enable a bigger pot of money to take the other side of such bets and protect the rational integrity of prices in the first place. Moral: We need more short selling, not less, to counter such episodes.
None of this justifies brokerages cutting off genuine, self-funding, risk-accepting customers from trading the stocks they want, as some brokerages were accused of doing on Thursday. Also unneeded were the more-populist-than-thou wheezes of certain politicians like
and Alexandria Ocasio-Cortez who were merely guessing about what was happening in markets. Saddest of all was the Biden administration, still finding its sea legs, feeling the need to rush out repeated statements saying it was “monitoring” the behavior of GameStop shares.
Uh huh. The world would have become instantly a better place if the White House had said that some things are rightly the president’s business and some things aren’t, and what the public chooses to pay for GameStop shares falls into the latter category.
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Appeared in the January 30, 2021, print edition.