For those of us who are as intimate with the inner workings of the stock market as we are with the circuitry of the Large Hadron Collider, the brouhaha over GameStop has been illuminating. While the story may seem esoteric, it is highly revealing of the way economic and political power operates today, laying bare both the irrationality of the market and the reach of corporate privilege.
For those who don’t know, GameStop is a US video game retailer that has lost much of its market share to online trade and whose stock plummeted from $56 (£40) a share in 2013 to about $5 in 2019. It is set to close 450 shops this year. Some big hedge funds decided that they would cash in on GameStop’s misery by shorting its shares. A short is a bet that an asset, such as a share, will decline in price. It’s a manoeuvre that can generate huge profits. But if the asset price doesn’t fall, investors can also lose a lot of money.
And that’s what happened with GameStop. A bunch of Reddit geeks on the online forum r/wallstreetbets, an investment discussion group that boasts more than 6 million users, decided to buy GameStop shares en masse. Perhaps they saw it as an investment, perhaps they were bored, perhaps they wanted to inflict pain on Wall Street. Whatever the reason, the consequence was to push GameStop’s share price up. And up. Once it became a global story, others piled in too, boosting the share price from about $40 to almost $400 in a matter of days. As a result, big investors lost big, one hedge fund, Melvin Capital Management, even being forced to seek a rescue package. The story, however, is not just about traders getting their comeuppance, but also about the absurdity of the stock market.
One might naively imagine that it exists to allow people to invest in companies. But share trading often has little to do with productive investment. According to the writer Doug Henwood, IPOs – initial public offerings through which people can buy shares in private companies – have, over the past 20 years, raised a total of $657bn (£479bn). Over that same period, the companies in S&P’s 500 stock index have spent $8.3tn (£6trn) buying their own stock to boost its price.
A stock buyback – a company purchasing its own shares to reduce the number openly available and so push the price up – is a form of market manipulation that was illegal in the US until Ronald Reagan decided that to ban it was to restrict market freedom. As a result, many corporations, instead of building factories, now plough money into their own shares.
It has helped raise the stock market to record levels and provided shareholders with a huge largesse. But few others have benefited. The pharmaceutical company Merck insists that it must charge exorbitant amounts for its medicines to help fund new research. In 2018, the company spent $10bn on research and development – and $14bn on share repurchases and dividends. One report suggests that had Walmart diverted half the…
Go to the news source: An uprising against Wall Street? Hardly. GameStop was about the absurdity of the…