Showing posts with label GameStop. Show all posts
Showing posts with label GameStop. Show all posts
Wednesday 17 March 2021
Monday 8 February 2021
The biggest lesson of GameStop
Rana Foroohar in The FT
Much has been written about whether the GameStop trading fiasco is the result of illegal flash mobs or righteous retail investors storming a rigged financial system. Robinhood’s decision to block its retail customers from purchasing the stock while hedge funds continued trading elsewhere has turned the event into a David and Goliath story.
But that story is predicated on a false idea, which is that markets that have been “democratised” and that people trading on their phones somehow represent a more inclusive capitalism.
They do not. Markets and democracy are not the same thing, although most politicians — Democrats and Republicans — have acted since the 1980s as if they were. That period was marked by market deregulation, greater central bank intervention to smooth out the business cycle via monetary policy following the end of the Bretton Woods exchange rate system, and the rise of shareholder capitalism. This combined to begin moving the American economy from one in which prosperity was based on secure employment and income growth, to one in which companies and many consumers focused increasingly on ever-rising asset prices as the most important measure of economic health.
Right now, short-term fiscal stimulus aimed at easing the economic pain from Covid-19 is distorting the picture. But putting that aside, the US economy is at a point where capital gains and distributions from individual retirement accounts make up such a large proportion of personal consumption expenditure that it would be difficult for growth to continue if there were a major correction in asset prices.
That is one reason why the GameStop story has so unnerved people. It reminds Americans how incredibly dependent we all are on markets that can be very, very volatile.
The 40-year shift towards what President George W Bush referred to as an “ownership society” came at a time when the nature of the corporation and the compact between business and society was changing, too. The two phenomenon are of course not unrelated.
The transformation of markets put more short-term pressure on companies, which cut costs by outsourcing, automating, using less union labour and dumping defined benefit pensions for 401k plans, which put responsibility for choosing investments, and the risks of bad outcomes, on individual workers. In 1989, 31 per cent of American families held stock. Today it is nearly half. Now, it seems, we are all day traders. My 14-year-old recently told me I should “buy the dip,” which did nothing to quell my fears that we are in the midst of an epic bubble.
GameStop is the perfect reflection of all of this. The ultimately unsuccessful effort to squeeze short-sellers by pushing up the share price illustrates the risks of the markets. At the same time, the company itself illustrates how the nature of employment has changed. In a 2015 Brookings paper, University of Michigan sociologist and management professor Jerry Davis tracked the job growth linked to every initial public offering from 2000 to 2014 and found that the single largest creator of organic new employment was, amazingly, GameStop. The then-fast growing retail chain had an army of mostly part-time game enthusiasts who generally made just under $8 an hour. They were “the new face of job creation in America, ” wrote Davis, whose 2009 book Managed by the Markets is a wonderful history of the rise of the “ownership” society.
I contacted Davis, who is now at Stanford University working on a new book about the changing nature of the corporation, to ask his thoughts about GameStop and the controversy surrounding it. He sums up the big picture about as well as anyone could: “Rescuing an extremely low-wage employer from short-sellers by pumping up its stock is not exactly storming the Bastille.” What’s more, he adds, “Robinhood easing access to stock trading does not democratise the stock market any more than Purdue Pharma democratised opioid addiction. Democracy is about voice, not trading.”
I hope that politicians and regulators keep this core truth in mind during the coming hearings about GameStop and Robinhood. I fully expect Treasury secretary Janet Yellen will, based on her recent pledge to staff to address long-term inequality.
While apps and social media have led more people to trade shares, that has not made our system of market-driven capitalism stronger. Our economy is largely based on consumer spending, and that consumption rests on asset price inflation which can now be brewed up by teenagers in their bedrooms. If current employment trends continue, many of the latter will end up working gig economy jobs without a safety net to catch them when their portfolios collapse.
That is neither sustainable nor supportive of liberal democracy. That is why I applaud Joe Biden’s core economic promise to move the US economy from one that prioritises “wealth” to one that rewards work.
The details of the GameStop debacle should be parsed and any villains punished. But we must not lose sight of the main lesson: an economy in which individual fortunes are so closely tied to the health of the stock market rather than income growth is fragile. Speculation, no matter how widely shared, isn’t democracy.
Saturday 30 January 2021
The GameStop affair is like tulip mania on steroids
It’s eerily similar to the 17th-century Dutch bubble, but with the self-organising potential of the internet added to the mix writes Dan Davies in The Guardian
Towards the end of 1636, there was an outbreak of bubonic plague in the Netherlands. The concept of a lockdown was not really established at the time, but merchant trade slowed to a trickle. Idle young men in the town of Haarlem gathered in taverns, and looked for amusement in one of the few commodities still trading – contracts for the delivery of flower bulbs the following spring. What ensued is often regarded as the first financial bubble in recorded history – the “tulip mania”.
Nearly 400 years later, something similar has happened in the US stock market. This week, the share price of a company called GameStop – an unexceptional retailer that appears to have been surprised and confused by the whole episode – became the battleground between some of the biggest names in finance and a few hundred bored (mostly) bros exchanging messages on the WallStreetBets forum, part of the sprawling discussion site Reddit.
The rubble is still bouncing in this particular episode, but the broad shape of what’s happened is not unfamiliar. Reasoning that a business model based on selling video game DVDs through shopping malls might not have very bright prospects, several of New York’s finest hedge funds bet against GameStop’s share price. The Reddit crowd appears to have decided that this was unfair and that they should fight back on behalf of gamers. They took the opposite side of the trade and pushed the price up, using derivatives and brokerage credit in surprisingly sophisticated ways to maximise their firepower.
To everyone’s surprise, the crowd won; the hedge funds’ risk management processes kicked in, and they were forced to buy back their negative positions, pushing the price even higher. But the stock exchanges have always frowned on this sort of concerted action, and on the use of leverage to manipulate the market. The sheer volume of orders had also grown well beyond the capacity of the small, fee-free brokerages favoured by the WallStreetBets crowd. Credit lines were pulled, accounts were frozen and the retail crowd were forced to sell; yesterday the price gave back a large proportion of its gains.
To people who know a lot about stock exchange regulation and securities settlement, this outcome was quite inevitable – it’s part of the reason why things like this don’t happen every day. To a lot of American Redditors, though, it was a surprising introduction to the complexity of financial markets, taking place in circumstances almost perfectly designed to convince them that the system is rigged for the benefit of big money.
Corners, bear raids and squeezes, in the industry jargon, have been around for as long as stock markets – in fact, as British hedge fund legend Paul Marshall points out in his book Ten and a Half Lessons From Experience something very similar happened last year at the start of the coronavirus lockdown, centred on a suddenly unemployed sports bookmaker called Dave Portnoy. But the GameStop affair exhibits some surprising new features.
Most importantly, it was a largely self-organising phenomenon. For most of stock market history, orchestrating a pool of people to manipulate markets has been something only the most skilful could achieve. Some of the finest buildings in New York were erected on the proceeds of this rare talent, before it was made illegal. The idea that such a pool could coalesce so quickly and without any obvious sign of a single controlling mind is brand new and ought to worry us a bit.
And although some of the claims made by contributors to WallStreetBets that they represent the masses aren’t very convincing – although small by hedge fund standards, many of them appear to have five-figure sums to invest – it’s unfamiliar to say the least to see a pool motivated by rage or other emotions as opposed to the straightforward desire to make money. Just as air traffic regulation is based on the assumption that the planes are trying not to crash into one another, financial regulation is based on the assumption that people are trying to make money for themselves, not to destroy it for other people.
When I think about market regulation, I’m always reminded of a saying of Édouard Herriot, the former mayor of Lyon. He said that local government was like an andouillette sausage; it had to stink a little bit of shit, but not too much. Financial markets aren’t video games, they aren’t democratic and small investors aren’t the backbone of capitalism. They’re nasty places with extremely complicated rules, which only work to the extent that the people involved in them trust one another. Speculation is genuinely necessary on a stock market – without it, you could be waiting days for someone to take up your offer when you wanted to buy or sell shares. But it’s a necessary evil, and it needs to be limited. It’s a shame that the Redditors found this out the hard way.
Towards the end of 1636, there was an outbreak of bubonic plague in the Netherlands. The concept of a lockdown was not really established at the time, but merchant trade slowed to a trickle. Idle young men in the town of Haarlem gathered in taverns, and looked for amusement in one of the few commodities still trading – contracts for the delivery of flower bulbs the following spring. What ensued is often regarded as the first financial bubble in recorded history – the “tulip mania”.
Nearly 400 years later, something similar has happened in the US stock market. This week, the share price of a company called GameStop – an unexceptional retailer that appears to have been surprised and confused by the whole episode – became the battleground between some of the biggest names in finance and a few hundred bored (mostly) bros exchanging messages on the WallStreetBets forum, part of the sprawling discussion site Reddit.
The rubble is still bouncing in this particular episode, but the broad shape of what’s happened is not unfamiliar. Reasoning that a business model based on selling video game DVDs through shopping malls might not have very bright prospects, several of New York’s finest hedge funds bet against GameStop’s share price. The Reddit crowd appears to have decided that this was unfair and that they should fight back on behalf of gamers. They took the opposite side of the trade and pushed the price up, using derivatives and brokerage credit in surprisingly sophisticated ways to maximise their firepower.
To everyone’s surprise, the crowd won; the hedge funds’ risk management processes kicked in, and they were forced to buy back their negative positions, pushing the price even higher. But the stock exchanges have always frowned on this sort of concerted action, and on the use of leverage to manipulate the market. The sheer volume of orders had also grown well beyond the capacity of the small, fee-free brokerages favoured by the WallStreetBets crowd. Credit lines were pulled, accounts were frozen and the retail crowd were forced to sell; yesterday the price gave back a large proportion of its gains.
To people who know a lot about stock exchange regulation and securities settlement, this outcome was quite inevitable – it’s part of the reason why things like this don’t happen every day. To a lot of American Redditors, though, it was a surprising introduction to the complexity of financial markets, taking place in circumstances almost perfectly designed to convince them that the system is rigged for the benefit of big money.
Corners, bear raids and squeezes, in the industry jargon, have been around for as long as stock markets – in fact, as British hedge fund legend Paul Marshall points out in his book Ten and a Half Lessons From Experience something very similar happened last year at the start of the coronavirus lockdown, centred on a suddenly unemployed sports bookmaker called Dave Portnoy. But the GameStop affair exhibits some surprising new features.
Most importantly, it was a largely self-organising phenomenon. For most of stock market history, orchestrating a pool of people to manipulate markets has been something only the most skilful could achieve. Some of the finest buildings in New York were erected on the proceeds of this rare talent, before it was made illegal. The idea that such a pool could coalesce so quickly and without any obvious sign of a single controlling mind is brand new and ought to worry us a bit.
And although some of the claims made by contributors to WallStreetBets that they represent the masses aren’t very convincing – although small by hedge fund standards, many of them appear to have five-figure sums to invest – it’s unfamiliar to say the least to see a pool motivated by rage or other emotions as opposed to the straightforward desire to make money. Just as air traffic regulation is based on the assumption that the planes are trying not to crash into one another, financial regulation is based on the assumption that people are trying to make money for themselves, not to destroy it for other people.
When I think about market regulation, I’m always reminded of a saying of Édouard Herriot, the former mayor of Lyon. He said that local government was like an andouillette sausage; it had to stink a little bit of shit, but not too much. Financial markets aren’t video games, they aren’t democratic and small investors aren’t the backbone of capitalism. They’re nasty places with extremely complicated rules, which only work to the extent that the people involved in them trust one another. Speculation is genuinely necessary on a stock market – without it, you could be waiting days for someone to take up your offer when you wanted to buy or sell shares. But it’s a necessary evil, and it needs to be limited. It’s a shame that the Redditors found this out the hard way.
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