GameStop Is A Bubble In Its Purest Form
It is tempting to see GameStop’s soaring stock as merely the result of clownish behaviour in a chat room. That would be a mistake.
4 min
GameStop is the platonic ideal of a stock bubble.
A combination of easy money, a real improvement in the company’s prospects, technical support from a short squeeze and a mad rush to get rich or die trying pushed stock in the retailer up 64-fold from late August to Wednesday’s close. Anyone who has held on for 10 days made gains of more than 10 times their money.
It is tempting to see GameStop as merely clownish behaviour in a chat room having some amusing effects on a stock few care about. That would be a mistake.
Sure, the wildly popular Reddit group Wall Street Bets—slogan: like 4chan found a Bloomberg terminal—is full of childish chat. Several users report that they have bet their parents’ pension fund on GameStop or that the boss’s daughter has bought in. There are plenty of calls for the stock to go to $1000 or more (it started the year at $18.84).
But GameStop’s soaring stock—and similar moves in BlackBerry, Nokia and others—is a bubble in microcosm, with lessons for those of us worrying about froth elsewhere in the market.
GameStop’s rise started with some genuine good news, just as bubbles always do. Ryan Cohen, who built up and sold online pet-food retailer Chewy, started building what is now a 13% stake for his RC Ventures in GameStop last year. He pushed for the staid mall-based seller of videogames to improve its internet sales. This month he joined the board.
Mr Cohen’s arrival means GameStop at least has a chance of joining the 21st century. From the first disclosure of his stock purchases in August up to the end of November the shares tripled, helped too by the improved prospects for the vaccine-driven reopening of the economy.
Along the way, some private investors latched on to the stock, helping its rise, and it became an item of discussion on Wall Street Bets, or r/WSB as it’s known.
This month the stock moved into the pure speculative phase, producing several daily jumps of 50% or more, and fundamentals were abandoned. Many cheerleaders on r/WSB stopped even making the pretense of arguments about Mr Cohen’s chances of turning the company around. Instead, there were two justifications for buying: wanting to get in on the price action to avoid being labelled, in the abusive parlance of the forum, a “retard” who missed gigantic profits, and the self-fulfilling prospect of hurting the large numbers of short-sellers.
As the late economist Charles Kindleberger put it: “There is nothing as disturbing to one’s well-being and judgment as to see a friend get rich. Unless it is to see a non-friend get rich.”
The scale of trading in GameStop shares is as extraordinary as the daily gains in price, suggesting widespread disturbance to people’s judgment. On Tuesday, $22 billion of shares changed hands, more than in Apple, the world’s largest company, and double GameStop’s market value. Adam Smith, the founder of economics, called speculative manias “overtrading,” and this is what they look like.
The hope of getting rich is only part of what’s inflating the bubble. Kindleberger argued that speculative manias needed innovative sources of financing, and the private traders on r/WSB have one: the shift last year to make trading in options free on Robinhood and several other platforms.
Options, like other derivatives, allow traders to use implied leverage to boost their bets, similar to borrowing money. In the same way that Japan’s bubble in the 1980s was fueled by cheap mortgages, and low Federal Reserve rates combined with collateralised debt obligations to support the housing bubble of the 2000s, the bubble in GameStop is aided by an increase in the money supply of private stock traders. Stimulus checks from the government can’t hurt, either.
Bubbles also frequently have support from technical factors that prevent the asset from being priced correctly. In the late 1990s, many dot-coms had a small float available, and none for short-sellers, making it hard or impossible for those who doubted the story to have their views expressed in the share price.
In GameStop, there are plenty of short-sellers, but they are making things even worse. The stock is caught in a vicious short squeeze. Short sellers had borrowed and sold more than 100% of the stock outstanding, as some was borrowed again. As the price rose, at least some of the hedge funds bought back shares to prevent further losses, so pushing the price up even further.
The most obvious parallel here is to K-Tel, the TV retailer of compilation tapes and the Veg-o-matic food processor, among other things. It announced in 1998 that it was moving online, prompting a jump in the shares that turned into an extraordinary short squeeze. K-Tel’s appropriately named public relations representative, Coffin Communications, gave this wonderful justification to the Washington Post: “Which do you think has more likelihood of success, a pure start-up that has never sold a product, or one like K-Tel that has been in business for 35 years?”
It turned out the answer was a pure startup, and K-Tel’s shares collapsed—but not before they had soared from $3.34 to more than $35 in under a month.
The difference with GameStop is that the r/WSB mob is actively engineering a short squeeze, discussing the pain they hoped to inflict on the short sellers and encouraging buyers not to cash in their profits.
Because there are so many shares that need to be repurchased by short-sellers, this offers an exit route for those who sell. But not everyone can do this, and those who are left holding the stock when demand eventually evaporates will watch the price plummet as it reverts back to something closer to what is justified by the company’s profit potential, just as K-Tel did.
Warren Buffett attributed to his mentor, Ben Graham, the line that “in the short run, the market is a voting machine—reflecting a voter-registration test that requires only money, not intelligence or emotional stability—but in the long run, the market is a weighing machine.”
The absence of emotional stability on r/WSB is obvious and has worked out beautifully for buyers of GameStop so far. But when the stock is weighed, many will be found wanting, as they always are in bubbles.
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Competitive pressure and creativity have made Chinese-designed and -built electric cars formidable competitors
4 min
China rocked the auto world twice this year. First, its electric vehicles stunned Western rivals at the Shanghai auto show with their quality, features and price. Then came reports that in the first quarter of 2023 it dethroned Japan as the world’s largest auto exporter.
How is China in contention to lead the world’s most lucrative and prestigious consumer goods market, one long dominated by American, European, Japanese and South Korean nameplates? The answer is a unique combination of industrial policy, protectionism and homegrown competitive dynamism. Western policy makers and business leaders are better prepared for the first two than the third.
Start with industrial policy—the use of government resources to help favoured sectors. China has practiced industrial policy for decades. While it’s finding increased favour even in the U.S., the concept remains controversial. Governments have a poor record of identifying winning technologies and often end up subsidising inferior and wasteful capacity, including in China.
But in the case of EVs, Chinese industrial policy had a couple of things going for it. First, governments around the world saw climate change as an enduring threat that would require decade-long interventions to transition away from fossil fuels. China bet correctly that in transportation, the transition would favour electric vehicles.
In 2009, China started handing out generous subsidies to buyers of EVs. Public procurement of taxis and buses was targeted to electric vehicles, rechargers were subsidised, and provincial governments stumped up capital for lithium mining and refining for EV batteries. In 2020 NIO, at the time an aspiring challenger to Tesla, avoided bankruptcy thanks to a government-led bailout.
While industrial policy guaranteed a demand for EVs, protectionism ensured those EVs would be made in China, by Chinese companies. To qualify for subsidies, cars had to be domestically made, although foreign brands did qualify. They also had to have batteries made by Chinese companies, giving Chinese national champions like Contemporary Amperex Technology and BYD an advantage over then-market leaders from Japan and South Korea.
To sell in China, foreign automakers had to abide by conditions intended to upgrade the local industry’s skills. State-owned Guangzhou Automobile Group developed the manufacturing know-how necessary to become a player in EVs thanks to joint ventures with Toyota and Honda, said Gregor Sebastian, an analyst at Germany’s Mercator Institute for China Studies.
Despite all that government support, sales of EVs remained weak until 2019, when China let Tesla open a wholly owned factory in Shanghai. “It took this catalyst…to boost interest and increase the level of competitiveness of the local Chinese makers,” said Tu Le, managing director of Sino Auto Insights, a research service specialising in the Chinese auto industry.
Back in 2011 Pony Ma, the founder of Tencent, explained what set Chinese capitalism apart from its American counterpart. “In America, when you bring an idea to market you usually have several months before competition pops up, allowing you to capture significant market share,” he said, according to Fast Company, a technology magazine. “In China, you can have hundreds of competitors within the first hours of going live. Ideas are not important in China—execution is.”
Thanks to that competition and focus on execution, the EV industry went from a niche industrial-policy project to a sprawling ecosystem of predominantly private companies. Much of this happened below the Western radar while China was cut off from the world because of Covid-19 restrictions.
When Western auto executives flew in for April’s Shanghai auto show, “they saw a sea of green plates, a sea of Chinese brands,” said Le, referring to the green license plates assigned to clean-energy vehicles in China. “They hear the sounds of the door closing, sit inside and look at the quality of the materials, the fabric or the plastic on the console, that’s the other holy s— moment—they’ve caught up to us.”
Manufacturers of gasoline cars are product-oriented, whereas EV manufacturers, like tech companies, are user-oriented, Le said. Chinese EVs feature at least two, often three, display screens, one suitable for watching movies from the back seat, multiple lidars (laser-based sensors) for driver assistance, and even a microphone for karaoke (quickly copied by Tesla). Meanwhile, Chinese suppliers such as CATL have gone from laggard to leader.
Chinese dominance of EVs isn’t preordained. The low barriers to entry exploited by Chinese brands also open the door to future non-Chinese competitors. Nor does China’s success in EVs necessarily translate to other sectors where industrial policy matters less and creativity, privacy and deeply woven technological capability—such as software, cloud computing and semiconductors—matter more.
Still, the threat to Western auto market share posed by Chinese EVs is one for which Western policy makers have no obvious answer. “You can shut off your own market and to a certain extent that will shield production for your domestic needs,” said Sebastian. “The question really is, what are you going to do for the global south, countries that are still very happily trading with China?”
Western companies themselves are likely to respond by deepening their presence in China—not to sell cars, but for proximity to the most sophisticated customers and suppliers. Jörg Wuttke, the past president of the European Union Chamber of Commerce in China, calls China a “fitness centre.” Even as conditions there become steadily more difficult, Western multinationals “have to be there. It keeps you fit.”
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
