A Reddit forum-turned-decentralized hedge fund is engaged in an all-out short-selling war over a video game store that nobody likes. The blank-check company craze continues with a record month for listings. The Dow Jones Industrial Average crossed the 31,000 mark. A tweet sent bitcoin prices up 20%. And the financial markets have entered only the second month of the calendar year! The chaos, the toxicity, and the volatility – is this normal market behavior? This is the stuff of nightmares when the Federal Reserve pumps trillions of dollars into the financial system and slashes interest rates next to nothing in less than a year. The U.S. central bank corrupts traders’ souls.
Be it Bloody Monday or Black Monday – it has been close to a year since Wall Street was drowning in red ink, suffering monumental losses unseen since the Great Recession. After sitting on the sidelines, the U.S. central bank intervened and fired off the mother of all bombs with unlimited quantitative easing, near-zero interest rates, and corporate bond-buying. Federal Reserve Chairman Jerome Powell’s mad money-printing made Ben Bernanke blush, resulting in the creation of nearly $5 trillion out of thin air in a few months.
It turned out that 2020 was the time investors said goodbye to the fundamentals of what makes a stock valuable: a strong balance sheet, impeccable corporate leadership, and room for growth. Instead, armchair traders poured into speculative bets, pumping up bankrupt companies and then dumping shares soon after they soared. JCPenney, Hertz, Pier 1, and many other brick-and-mortar entities filed Chapter 11 and witnessed exorbitant success on the New York Stock Exchange.
But GameStop takes the grand prize. For years, die-hard gamers have complained about the store, from its corporate policies to egregious prices. The company has failed to adapt to a changing landscape, particularly with an e-commerce presence. A glance at its books shows falling sales, disappointing gross margins, and hundreds of millions of dollars in debt. There were reports about a potential bankruptcy.
Other runs in equities suggested that it was pure speculation. BB Liquidating Inc. (BLIAQ) is one of the few things left of Blockbuster, and the stock was driven up more than 2,500% by Redditors. BlackBerry shot up for no apparent reason other than Wall Street Bets bros spiked the punch bowl. The only stock that made a modicum of sense was AMC: The company secured the $900 million in financing it needed, and life will inevitably return to normal, meaning that consumers can once again pay overinflated prices for terrible Hollywood pictures.
Brokers have access to a sea of cash at record-low rates. Investors are offered margin trading options, allowing mom-and-pop traders to leverage their positions. Hedge funds, the ones that lost billions of dollars on the GameStop trade, can funnel money to each other after sipping at the well of QE. All of this is courtesy of the Fed.
Is the Stock Market a Casino?
Despite the moral hazards, bailouts, and the seemingly coordinated effort by the power players to suppress GameStop, it is important not to dismiss the stock market as a casino or a cigar room of exchanging dollars and cents. The equities arena remains a colosseum of information, signals, and, of course, making money.
Stock exchanges were critical to the industrial West’s creation and prosperity, from Belgium to the Netherlands to the United States. Capital investment came to fruition in parts of Asia, too. While they were primitive to begin with, they eventually became more sophisticated. Overall, studies have revealed that the establishment of strong stock exchanges has contributed to long-term economic growth and more significant capital investment.
And, as legendary economist Ludwig von Mises explained, the stock market is fundamental to a capitalist society:
“A stock market is crucial to the existence of capitalism and private property. For it means that there is a functioning market in the exchange of private titles to the means of production. There can be no genuine private ownership of capital without a stock market: there can be no true socialism if such a market is allowed to exist.”
The central planners bastardize an efficient system, wielding a money-printer to bail out powerful interests, support politicians’ transition to Santa Claus, and propagate the Keynesian ideas.
The Creature of Jekyll Island
The Federal Reserve is the most powerful and dangerous institution in the world today. It can make or break economies, stock markets, and bank accounts. Whether it is eroding Americans’ savings or facilitating the environment the public is witnessing today, the Eccles Building does a lot more harm than good, except if you are a politician seeking re-election or a Wall Street titan looking to make a quick billion. The stock market has metastasized into an island of junkies when investors take out a billboard on Times Square to promote GameStop. Perhaps one day markets will return to balance-sheet investing and decent prospects — when bulls and bears fly!
Read more from Andrew Moran.