The recent surge in the stock price of GameStop has all the usual suspects commenting on “The Greater Meaning of it All”. As usual, very few of these recently minted experts know what they are talking about. Among the more mindless analyses being tossed about is a populist “narrative” that claims that Everyman has risen up to squeeze short selling Wall Street hedge funds. These hedge funds, it is alleged, have been stealing from the common man in a rigged game for years.
Among those making variations of this charge are: Ted Cruz, Alexandria Ocasio-Cortez (AOC), Elizabeth Warren and Bob Frank. That these four are in rough agreement ought to be the first sign that something is seriously amiss. Consider for a moment the backgrounds of those who are busy defending Everyman against wicked elites. For instance Ted Cruz is a product of Princeton (BA in public policy 1992) and Harvard Law (magna cum laude 1995). Elizabeth Warren worked as a Law Professor both at the University of Pennsylvania and at Harvard Law School before becoming a Senator from Massachusetts. Hardly downtrodden.
AOC, who does not have the same pedigree, made a point of noting that the “solution” to the non-problem of GameStop is to tax the rich. Her reasoning being that taxing the rich is pretty much the solution every problem, real and imagined. Then there is the commentary of Robert Frank, a journalist at CNBC. His contention is that the Reddit inspired run up in GameStop is “calling attention to” the vast inequality of stock ownership in the United States. It has to be seen to be believed.
The interesting thing is that Frank has spent an awful lot of time writing books and columns about the horrors of inequality of outcomes, but apparently sees no relationship between savings, investment, risk-taking and financial reward.
Frank seems to be bothered by the fact that the upper 1% owns the lion’s share of financial assets. Well of course they do. That same 1% is the cohort that is an important source for risk-taking, innovation, investment and, not to put too fine a point on it, bearing an outsized share of the tax burden. The upper 1%, for instance, pays about 45% of all income taxes.
The population up and down the (ever changing) income scale makes choices about how to allocate its funds between consumption now, investment and deferred consumption. Nobody needs Bob Frank shouting audibles from the sidelines.
But let’s look a little further. Why would anyone who has the slightest clue of how the stock market works lament the fact that most retail investors are not involved in the GameStop fiasco? The undeniable fact is that a bunch of amateurs bought the stock not because it is a fundamentally good investment; they bought it because they thought they would profit from an old fashioned short squeeze. And a small minority will profit. But the vast majority of retail traders are now in the process of getting their clocks cleaned. And rightly so. They are in way over their heads.
As of this writing, GameStop is down 113 points or 50% from yesterday’s close, after yesterday’s 40% drop. All of which means that the stock market is doing what it’s supposed to do.
Despite all the anguished cries from the ignorati, the stock market is not broken. It is doing exactly what it is supposed to do. In the process it is separating fools from their cash. That is hardly a novel occurrence.