In another chapter of “This is not how I expected our systems to be overturned: Memoir of America in the second roaring 20s” (working title of my thoughts) this week average American consumers took back the rightful place of leadership in the capitalist system of America by surging the price of GameStop stock. As FPF’s resident MBA (I’m basically a doctor), here’s what happened in layman’s terms:
Hedge fund managers on Wall Street (boo!) were, in relatively normal order, conducting short speculation transactions or “shorting” GameStop stock in large volumes.
Quick aside: What is a short?
Basically someone borrows stock and sells it even though they don’t own it yet with the expectation that they will be able to buy it back tomorrow for less than its value at the time of borrowing meaning they will make a profit on the overall transaction. Shorting can devalue a stock artificially if it becomes a well known trend.
Back to our story:
The practice of shorting is not common in 401ks or mutual funds and is pretty much limited to the higher risk more speculative market or as we know them – hedge funds. So these hedge fund managers borrowed a lot of GameStop stock clearly speculating that GameStop does not have a lot of actual market value (a brick and mortar retailer who sells physical video games in an era where online shopping and digital downloads are king). They sold the stock for about $17 a share which was the value about a week ago. Unfortunately (for them) some of these traders took to Reddit (an online blog and chat site famous for civil disobedience and cultural revolution) to essentially brag or at minimum discuss their shorting strategy.
The demographic of Reddit users happen to be GameStops key shopper. So some savvy and passionate Redditers acted fast to save GameStop and increase its value. Using legal, transparent, retail methodologies (such as through trading apps like Robinhood), thousands of users bought up GameStop stock all at once causing the stock to spike dramatically. Tech giant Elon Musk got in on the action and used social media to promote buying GameStop (perfectly legal and transparent) which caused the stock to go even higher. It peaked at $492/share and at the time of this article is resting at $250/share which is clearly a lot higher than $17/share.
The problem? These hedge fund
pony boys managers still owe that borrowed stock back to its rightful owner. So now instead of buying it back for less than what they bought it at like they thought they’d do, they have to buy it back for about 15 times what they paid. These guys aren’t buying stocks in single digits. That difference in price cost their funds billions of dollars and likely cost some of them their jobs.
So now a bunch of rich Wall Street elitists who were gambling other people’s money on the likelihood of a company losing value (and artificially lowering its value in doing so) are crying because regular Americans dared to mess with the system in which they consider themselves Gods.
Major retail trading services like Robinhood (the major app most users on Reddit used to participate) stopped allowing GameStop to be purchased while financial brokers were allowed to continue. Cries from the left came to regulate the entire industry to stop this “catastrophe” from happening. Those who claim to hate Wall Street so much are the first to decry the actions of GameStop.
But while the elite tear their hair out, some unlikely allies have shown up to defend the free market and defend those Americans like us who have every right to buy a stock based on whatever we want. If 100,000 people want to buy a share of GameStop at $100/share because they have good memories there then why can’t they? Why is this the problem of GameStop and the Reddit investment crew and not the problem of a bunch of rich liberal voters with Ivy league educations who were practicing risky financial behavior?
Ted Cruz and Alexandria Ocasio Cortez found (un)common ground today when they called for a probe into Robinhood’s decision to block the sale of GameStop while elitist traders were still able to do whatever they want.
America’s consumers have the right to access, manipulate, and participate in OUR financial markets with OUR money as much as any fund, broker, or bank. These GameStop users acted in total transparency using information available to all members of the public. I hope this serves as a warning of much more common user control of the system and a break down of the current regulatory system which serves only to keep special interest buddy funds from having to follow the same rules as the rest of us.
Watch out for calls for increased regulation from the left. They will do it with a badge of truth and justice strapped to their chest but big hedge fund donors tucked in their back pocket. Most of the time the rules they come up with just make it easier for these hot shot hedge funds to operate without competition from the retail and common user space.
Once again we have proved that capitalism is the best force to stop cronyism. Wall Street out of control? Don’t worry. Just buy GameStop.