We are in the middle of one of the most interesting stock market related stories that I can remember
in a really long time, and when I say we're in the middle of it, we are really in the
middle of it.
So I hope to do justice to what's gone on so far.
And the way I'm describing this is a game stop short squeeze that is potentially going
to nuke some hedge funds.
And let's just start at the beginning.
Companies exist and some of them are publicly traded, meaning you can buy shares in those
companies.
I know I'm going very, very basic here.
One such company is GameStop.
GameStop is a chain of stores where you can buy video games.
And of course, with the advent of buying video games online and having them delivered digitally
through, for example, steam, a service that is available to download games, GameStop had
been struggling for some time.
Coronaviruses then hit, which dramatically decrease the number of people that were doing
in-person shopping, especially for something like video games when you can just get them
on the Internet already.
So GameStop stock started to decline and this led to a lot of people and subsequently hedge
funds short selling the stock.
Now, what does it mean to short sell a stock?
Again, we're not going to do an hour on short selling, but the gist of it is as follows.
The way most of us think about investing in stocks for what we might call the long term
is that we are long on a stock, meaning you buy it at a certain price.
The plan is to hold it.
Hopefully the price goes up and then you sell the stock if you buy it.
Fifty dollars a share sell at a hundred dollars a share, you make fifty dollars per share,
but you can do essentially the reverse.
You can short sell a stock.
And what that means is you are placing a bet that the stock goes down rather than up.
And instead of first doing the buying and then doing the selling, you are first selling
borrowed stock and then you are repurchasing it in the future.
And with that same 50 and 100 dollar number in reverse, you can make fifty dollars per
share.
If there is a stock trading now at one hundred dollars per share that I believe in the future
will trade at 50.
I can borrow and sell shares for a hundred dollars.
When it drops to 50, I buy them for fifty dollars and now I've made fifty dollars per
share.
The risk is there is only so much a stock can go down zero.
Meaning if you invest a thousand dollars that could end up being worth zero and you're out
a thousand dollars when you short sell, there's really no limit to how much you can lose.
You can borrow shares and if they go from a thousand to 2000 dollars, you've lost a
thousand dollars.
But if they go from one thousand to three thousand dollars, you've now lost two thousand
dollars.
And as you can see, there's no limit to the amount that you can lose.
Indeed, what took place is that a bunch of different hedge funds and big investors were
certain of the demise of GameStop stock.
They shorted it.
And A now this is where they start to be different opinions about exactly the sequence.
But the long and short of it is that some online enclaves where stock trades are discussed,
including a sub Reddit called Wall Street Bets, pointed out, hey, look at this.
There are a lot of shorts here that could potentially be squeezed.
I am going to start buying and buying and buying this stock.
That is exactly what tons of people did.
And the the price of the stock exploded, meaning that these hedge funds are now very upside
down.
Soon, many of these hedge funds are going to remember your first selling and then buying
when you short, they are going to have to buy and they are going to have to buy at way
more than they sold, putting them underwater and in fact, putting some hedge funds, as
far as we are being told, at risk of insolvency, at risk of going out of business.
A few interesting takes on this.
Congresswoman Alexandria Cassio Cortez tweeted, Got to admit, it's really something to see
Wall Streeters with a long history of treating our economy as a casino, complain about a
message.
Board of posters also treating the market as a casino.
Our friend Anna Kasparian from the Young Turks tweeting, tweeting.
So market manipulation by Federal Reserve pumping money into.
Failing banks and corporations is OK.
But Reddit users rallying GameStop is wrong and must be regulated.
The entire stock market is disconnected from reality.
Funny how quickly the financial press cries for hedge funds.
So here's my take on this.
This run up of the stock price of GameStop is no more wrong than the other types of speculation,
including the shorting that others do just because it's being organized on Reddit instead
of by hedge funds high up in skyscrapers in Washington.
New York City doesn't make it any more right or wrong.
What this does expose, again, in case you forgot, is that the stock market is not the
economy.
And so much like when we say, oh, stocks are up, but it's hedge funds making money, that's
not really the economy.
The posters on Reddit that are doing this now, making a bunch of money, it's also not
the economy.
It just reminds us the stock market is not the economy.
Now, these hedge funds made risky deals.
And if the stock market if the stock price kept declining, they would have made a bunch
of money.
It went up.
So now they're at risk of losing money.
There are now a bunch of hedge funds that are saying this isn't OK and we need regu
this shouldn't be allowed to happen.
Well, hold on a second.
If you want to do risky things, it's risk reward.
The possibility of a big reward comes with risk.
You can't now say you want the big reward, but you want the risk taken off the table
by the government.
They are saying it, but it is extraordinarily hypocritical.
Now, there's a really important aspect to this, which is that many of the commentaries,
the hot takes are people debating whether the Wall Street bets, posters who are running
up the price of the stock are sincerely buying GameStop stock because they believe it's a
good company with good prospects or whether they are ironically buying GameStop stock
or cynically buying the stock.
That doesn't matter.
That could not be less relevant.
That's what hedge funds do.
Do you think that hedge funds and other investors are saying we only buy long or short, sell
a stock based on our sincerely held deep down beliefs about the ethics and business prospects
and management of the company?
No, they're making speculative bets either way.
And the idea about, oh, these aren't genuine pumpers, what difference does it make?
That's the whole point of many of the people who have been saying the behavior by the hedge
funds is predatory and cynical.
Now they are saying, well, no, no, no, the Wall Street bets people are the cynical ones
who thought to apply that to when Kelly Lefler, senator, former senator from Georgia, made
those stock moves once she was briefed about what was happening and what was incoming with
the pandemic, was she saying, oh, I don't think the management of these companies, you
know, she predicted that there were going to be general shocks to the system that would
make these shares be worthless.
And so she decided to sell.
It wasn't she thought it was a good company or she thought the management team over the
long she just got out in order to avoid losing money.
And by the way, what's a stock buyback at its core when a company buys back its own
stock?
The point is to pump the price back up.
It is not.
Well, we feel so confident in our business model that we are going to invest in our own.
Come on, come on.
That it would be cynical to think that's what's going on.
So there's a case here to be made for transaction taxes, which eliminates this issue of are
they genuine or cynical stock trades and why would you expect anything else when this is
the way that the stock market operates?
There's two sides to it, and I am as curious as everybody else to see what happens with
this.