State of Play: What the GameStop Bubble Says About the COVID Economy
By: Arjun Joshi
When I saw that GameStop was trending on Twitter and being mentioned on finance channels, I thought that the universe was pranking gamers such as myself. After all, the only time we’d seen “shorting” alongside GameStop was when we complained our $50 video game was traded in for $3.50. But while this phenomenon is being treated as hedge funds vs. the people, I don’t believe this GameStop bubble is either good for the economy or an outright win for anyone.
How did we get here?
First, we should establish the context: the economic downfall from COVID-19 coupled with the natural decline in physical video game sales has weakened GameStop’s profits and growth to the point that the company wasn’t expected to make a profit until 2023 at least! Despite this, major investor figures like Michael Burry (the hedge fund manager played by Christian Bale in “The Big Short”) revealed that they held GameStop stock for their fund, and that formed the core of an initial investment for the company. After all, if a bunch of smart guys are investing in a stock, that portends good omens, right? Parallel to this, smaller or “retail” investors, notably concentrated on the subreddit r/WallStreetBets, started investing heavily in GameStop’s stock, partially as a meme and partially due to the market signs that came from the aforementioned hedge funds and larger investors.
Thus, we are in a fascinating situation. Hedge funds are essentially going on life support, in need of cash transfusions and begging for bailouts because a subreddit targeted GameStop as a worthy investment. It is hedge funds whose job is to essentially bet against the idea of stock gains; if GameStop stock does well they lose money, and if it loses value they gain money. As the losses mounted, retail trading apps like RobinHood have begun to limit the ability of users to buy more stock not only in GameStop, but other recently targeted companies like AMC Theaters and Bed, Bath, & Beyond. This practice has brought disparate forces such as Representative Alexandria Ocasio-Cortez, Senator Ted Cruz, and David Portnoy into agreement that such practices are anti-consumer or anti-capitalist in nature.
In fairness to RobinHood, and at risk of diving too deeply into the recesses of how stock trading works, the company stopped the trading on these stocks to protect themselves. Brokers have to put up collateral to allow stock trading to occur for their clients. And while stable stocks from blue-chip companies have relatively low collateral requirements, rapidly fluctuating GameStop was going to have a dangerously high collateral for any of these intermediary apps. While it’s fair to criticize RobinHood’s messaging and ability to convey these problems - I myself had to Google the answers and research the rules of stock trading - the fact in the matter is that they put the trades on freeze because these high-volume, high-fluctuation stocks threatened to leave them unable to operate. But all of this just builds into the status quo, where the SEC’s investigation into possible market manipulation and the hand-wringing of established traders has created a narrative that “the little guy” is being unfairly persecuted when hedge funds and larger financial institutions have been the perpetrators of widespread market manipulation for ages. After all, the 2008 Recession was partially due to bad actors in the financial world taking advantage of loose regulations.
Double Edged Sword
I can’t bring myself to rage against either group, and see a larger dysfunction in the system. I couldn’t care less about the day-trader hedge funds. After all, they do engage in market manipulations on a larger scale, and it’s a touch hypocritical to rail against the retail traders for investing exactly where they were. Additionally, I will never criticize the smaller retail investors, because if you peruse r/WallStreetBets, you find the stories of cash-strapped investors using the gains from their GameStop investments to get necessary and expensive medications and operations, pay their bills, or support their families. This pandemic has exposed the flaws in our social safety net, and in lieu of widespread relief efforts on the state or national level, I applaud investors for looking where they might not have previously.
I didn’t do especially well in macroeconomics courses, but one of the fundamental principles I learned was that while an action may be healthy for an individual household, it can be devastating when applied on a large scale. While traditionally applied to austerity measures, I think this principle works well for the recent flurry of investments and trades that have driven the price on GameStop, AMC, and BB&B stock through the roof. The rapid exchange of stocks and rising price is completely unsustainable, and while hedge funds get into the business knowing the risks and how dangerous it can be for their investors to invest in volatile stock, retail investors often don’t have either that training or consideration when they’re trying to get the past due bills paid. I’m worried that this frenzy will spread to other retail stores and similar companies. It’s one thing for a single and relatively niche store like GameStop to bubble, but what if it spreads into other industries? The fervor has already expanded, and it will inevitably jump to companies like GAP, Target, and supergiants like Walmart. Whatever my issues are with their store policies, people working in these stores don’t deserve to lose their jobs when market volatility destroys their place of employment, and by extension, their paychecks. In fact, the tremors could shake the economy and make the COVID-induced recession even worse than it was at its peak.
A Keynesian Perspective
At my core, I’m a Keynesian and believe there are multiple angles to tackle this problem beyond RobinHood’s forced limitations on trading. I won’t whip out the CollegePrep’s AP Macro textbooks for you, but John Maynard Keynes believed that the primary components necessary to combat economic hardship, especially one where demand for goods and services has been suppressed, were the dual remedies of strong regulation and injections of cash for consumers.
While these views formed the basis of the New Deal and the post-war American economy, those pillars are in dire need of TLC. For one thing, the regulatory mechanisms for stock trading and shorting need to be shored up. The Obama White House never truly closed them in their efforts to alleviate the recession, and the Trump Administration actively dismantled regulations for ideological reasons. By closing tax loopholes and bringing certain types of trading under closer supervision by the SEC, we can head off this problem before it starts. Secondly, and contingent on the Senate reaching its power-sharing and structural agreements, Democrats need to fully commit to the $2000 stimulus package; not just building on the Trump Administration’s previous $600 checks, but even beyond that. As Keynes taught us, government injections of money in the economy revitalize businesses and services because that cash can recirculate and change hands between consumers and businesses, rebuilding normal functions in the economy. With all the unemployment in the wake of the pandemic, the extra checks will reduce incentive for risky stock trades and the aggregation that could lead to a bubble bursting. Finally, and this will be a longer-term solution, the SEC needs reforms that allow it to go after hedge funds for engaging in market manipulation and risky trades.
If you remember “The Wolf of Wall Street,” the characters in that film literally pumped up the price of the stock before dumping it for immense personal profits, and considering these practices didn’t stop after the setting of the film, it simply needs to be policed more closely. I don’t believe there’s a “market manipulation” case for r/WallStreetBets since it isn’t a unified firm and there isn’t insider trading, but driving a stock’s price up to spite the hedge funds is neither profitable in the long run or a particularly wise way to manage the economy.
This isn’t an especially popular solution. I understand that I sound like a buzzkill and anti-consumer when I place the onus on them for potentially damaging the economy and putting employers out of business. But two things can be simultaneously correct: the hedge funds have committed gross manipulation of the stock market and American economy, and the inflation of GameStop’s stock is both dangerous and unsustainable. It’s in everyone’s best interest to have more equitable enforcement of stricter regulations, and a bit more cash in the pockets of the people doesn’t hurt either.