￼any thoughts on the ridiculous gamestop shorting/Reddit thing? it’s wild and i can’t get “the stock market is fucking FAKE” out of my head because of it
It’s pretty funny. For those unaware, a bunch of Redditors with Robinhood accounts have been buying Gamestop stock as a meme, thus sending the price of the stock skyrocketing. This has, for the moment, majorly screwed over professional hedge funds who had more rationally shorted Gamestop (betting they’d do poorly, in other words). Shorting stock is a super risky game, and they made the exact wrong bet.
But it’s also been frustrating seeing people react to it because I can tell a lot of people don’t really get what’s happening. All the “the stock market is FAKE” memes are a good example of this: there’s nothing fake about what’s happening here! Real people are using real money to buy real shares of real stock, thus negatively impacting other real people also investing real money. I’m not really sure what people mean by the stock market being “fake,” but if it was literally fake, as in stock prices just being picked at random out of a hat, none of this would be possible!
I think what people mean by the stock market being “fake” is simply that A.) this whole thing is silly, and B.) the stock market isn’t functioning the way it’s expected to. Both of those reactions are correct: this is example #10 billion of how the stock market is not fully rational, meaning it isn’t acting how you’d expect given a market full of informed individuals making wise decisions according to their self-interest.
The purpose of a financial market is capital intermediation: matching people with money they’re looking to invest (supply of capital) to people looking to borrow money for their business, etc. (demand for capital). Stocks are one form of this: companies issue ownership shares of their company, and investors looking to earn a return buy those shares if they think the company will do well. When they think the company will do poorly, they sell their shares (or short the company, which is a slightly different process). This buying and selling of shares determines the price of the company’s shares, and thus the total worth of the company.
A lot of free market ideology is based on the idea that markets are highly (if not perfectly) rational, that no one would make a move like the one the Redditors are making right now. What we’re seeing with the Redditors here is a deviation from this. Investors are “irrationally” buying Gamestop shares not because they think the company will do well, but just for the fun of it. Irrational investment (buying shares based on something other than a calculation of future profit) is actually fairly common in the stock market- John Maynard Keynes called it the “animal spirits” of human behavior, and the field of behavior economics has done tons of research building on this insight.
But because this is very simple irrational behavior without any higher market manipulation, the natural tendency will be for this to self-correct.* No one seriously thinks that Gamestop is going to do well enough in the future to justify their current share price, so the Redditors will begin to sell their recently-purchased shares at the current high prices, expanding supply and sending the price downward, thus screwing over all the other Redditors who don’t sell quickly. Most of the Reddit investors will lose their money.
“But Brett,” you ask, “couldn’t any coordinated group of people cause havoc on the stock market like this?” Yes, they could, and the combination of widespread access to stock markets (Robinhood) and semi-serious internet investing forums (Reddit) clearly makes this a possibility. But they’ll have little success in achieving anything by doing this beyond causing a lot of people in Southern Manhattan to sweat more for a few hours. You’ll have to have a large group of people willing to invest a large enough amount of money to compete with the rest of the stock market, and most will have to be willing to knowingly lose money each time they do it. It just introduces a new form of potential volatility to stock markets, it doesn’t fundamentally change anything about them.
*Note that this “it will eventually self-correct” thing is true of a simple incident like this, but does not necessarily hold for larger-scale or more complex phenomenon in financial markets. Indeed, in larger and more serious situations, it rarely does hold.