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.
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.
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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A leading Australian economist says two years on, the long term implications of COVID for the economy have emerged
AMP chief economist Dr Shane Oliver says the effects of the pandemic continue to reverberate across the world, with seven key lasting impacts leading to “a more fragmented and volatile world for investment returns”.
“Perhaps the biggest impact is that the pandemic related stimulus broke the back of the ultra-low inflation seen pre-pandemic,” said Dr Oliver. “Together with bigger government and reduced globalisation, this means a more inflation-prone world. So, a return to pre-pandemic ultra-low inflation and interest rates looks unlikely.”
Here is a summary of Dr Oliver’s explanation of the seven key lasting impacts of COVID for investors.
The pandemic added to support for bigger government by showcasing the power of government to protect households and businesses from shocks, enhancing perceptions of inequality, and adding support to the view that governments should ensure supply chains by bringing production back home. IMF projections for government spending in advanced countries show it settling nearly 2 percent of GDP higher than pre-COVID levels.
Implications for investors: … likely to be less productive economies, lower than otherwise living standards and less personal freedom.
After the pandemic, labour markets have tightened reflecting the rebound in demand post-pandemic, lower participation rates in some countries and a degree of labour hoarding as labour shortages made companies reluctant to let workers go. As a result, wages growth increased, possibly breaking the pre-pandemic malaise of weak wages growth.
Implications for investors: Tighter labour markets run the risk that wages growth exceeds levels consistent with two to three percent inflation.
A backlash against globalisation became evident last decade in the rise of Trump, Brexit and populist leaders …. Also, geopolitical tensions were on the rise with the relative decline of the US and faith in liberal democracies waning ... The pandemic inflamed both with supply side disruptions adding to pressure for the onshoring of production [and] heightened tensions between the west and China … we are seeing more protectionism (e.g.,with subsidies and regulation favouring local production) and increased defence spending.
Implications for investors: Reduced globalisation risks leading to reduced potential economic growth for the emerging world and reduced productivity if supply chains are managed on other than economic grounds.
Inflation [due to stimulus payments to households and supply chain disruptions] is now starting to come under control … but the pandemic has likely ushered in a more inflation-prone world by boosting bigger government, adding to a reversal in globalisation and adding to geopolitical tensions. All of which combine with ageing populations to potentially result in higher rates of inflation.
Implications for investors: Higher inflation than seen pre-pandemic means higher than otherwise interest rates over the medium term, which reduces the upside potential for growth assets like shares and property.
… the lockdowns and working from home drove increased demand for houses over units and interest in smaller cities and regional locations. As a result, Australian home prices surged to record levels. Meanwhile, the impact of higher interest rates in the last two years on home prices was swamped by housing shortages as immigration surged in a catch-up. The end result is now record low levels of housing affordability for buyers …
Implications for investors: Ever worse housing affordability means ongoing intergenerational inequality and even higher household debt.
There are huge benefits to physically working together around culture, collaboration, idea generation and learning but there are also benefits to working from home with no commute time, greater focus, less damage to the environment, better life balance and for companies – lower costs, more diverse workforces and happier staff. So the ideal is probably a hybrid model.
Implications for investors: Less office space demand as leases expire resulting in higher vacancy rates/lower rents, more people living in cities as vacated office space is converted, and reinvigorated life in suburbs and regions.
Lockdowns dramatically accelerated the move to a digital world. Many have now embraced online retail, working from home and virtual meetings. It may be argued that this fuller embrace of technology will enable the full productivity-enhancing potential of technology to be unleashed. The rapid adoption of AI will likely help.
Implications for investors: … a faster embrace of online retailing … at the expense of traditional retailing, virtual meeting attendance becoming the norm for many … and business travel settling at a lower level.
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