Why the GameStop stock frenzy is likely to end in financial crisis
- The drama unfolding around GameStop is a tale of the internet levelling the playing field between at-home retail investors and Wall Street. The US stock market may become as retail dominated, and as volatile, as the Chinese market
A blood sport is emerging on Wall Street. A band of millennials is buying stocks that big hedge funds have heavily shorted. The surging stock prices have triggered heavy losses for these funds. This game of hunting short-sellers may bankrupt many big hedge funds, which could take their financing banks down with them. The potential for a financial crisis is high, and rising.
The short-sellers have suffered paper losses of around US$20 billion. They are still holding onto the shorts, hoping the “troublemakers” will turn on each other and leave. The internet trading platforms seem to have helped them by limiting buying to one share per person.
To justify their fat fees, they have shorted some stocks to show they are hedge funds, not mere speculators. This is turning out to be their Achilles heel. Internet-based platforms are giving retail folk the same tools that big financial institutions have. They too can use leverage to play. When millions work in tandem, they can topple big hedge funds.
What’s happening illustrates that the internet has levelled the playing field between retail and institutional investors. Online coordination is making the retail impact explosive in some segments of the market.
Is the US economy an oligarchy?
Millennials are the first gaming generation in the digital age. They can spot the vulnerabilities and cracks in the financial system. Financial products are priced on past trends. But millennials have the numbers to change trends and make the big boys lose big time.
The democratisation of high finance is not only transforming the financial system, it is also changing how the monetary system functions. Little guys can exploit cheap liquidity from the Fed, as big banks or hedge funds have been doing seemingly forever.
As the masses figure out how to tap into the central bank’s cheap liquidity, money spreads around faster, and the benefits from financial inflation are distributed wider. This may recouple money with inflation. When financial inflation is concentrated among a few, it spills into real inflation in small segments like art or luxury property.
Hence, the central banks could pretend not to see inflation. But when millions benefit from financial inflation, the wealth effect will be far more inflationary. Thus, even if the financial bubble doesn’t pop on its own, the resulting inflation could force the Fed to raise interest rates and pop the bubble.
The GameStop story is so gripping because it fits the classic mould of David vs Goliath. In the medieval age, aristocrats had a monopoly on weapon possession, because weapons were expensive. When cheap guns became available, it levelled the playing field, which led to the downfall of the ruling class.
What is unfolding today is similar. The internet has made tools available to every little guy that the financial elite have had for three decades. Millennials grew up with electronic toys. They are very good at using internet tools and are likely to dominate the market in the coming years.
The margin debt in the US market is at an all-time high. It will keep surging as long as the market keeps rising. As China has shown, this trend has no soft landing; a crash is inevitable.
Andy Xie is an independent economist