By David Randall
NEW YORK – It sounds like the start of a parable: Investors stuck in a pandemic start bidding on an asset until its price becomes independent of reality. The value rises until the market one day runs out of buyers and freezes, causing prices to fall, and some unfortunate few lose fortunes more than ten times their annual income in a matter of hours.
Date: February 3, 1636. That day, the infamous Dutch tulip bubble burst during an outbreak of the bubonic plague, illustrating that asset prices can plummet as fast as they hover, leaving only pain.
Now, almost exactly 385 years and another pandemic later, Wall Street is waiting to see how long it will take before history repeats itself.
Shares in video game retailer GameStop Corp have risen 1.625% since early January. Driving the rally are individual investors who have been stuck at home for the past ten months. Many have approached online forums like WallStreetBets on Reddit and bought the stock, some as a form of protest against hedge fund managers betting that it would fall.
These amateur investors are encouraged by savings built over the coronavirus pandemic, two rounds of stimulus payments and near zero interest rates. Some, such as billionaire entrepreneur Elon Musk, have referred to the phenomenon as ‘Gamestonk’, a game about the intentional misspelling of the word ‘stock’ on social media.
The stock price rises to over $ 300 per share. The stock has inspired some small investors to pour even more money into a company that Wall Street analysts tracked by Refinitiv believe is worth a little more than $ 13 per share. Shares. The wave increases the risk of individuals being caught in the euphoria and looking past warning signs and consequences of a possible crash.
“I dumped my savings in GME, paid my rent for this month with my credit card and dumped my rent money in more GME (which for people here at WSB I would not recommend),” a Reddit user with the handle ssauron https: // www .reddit.com / r / wallstreetbets / comments / l6omry / an_open_letter_to_melvin_capital_cnbc_boomers_and wrote on WallStreetBets on Thursday. “And I hold on. This is personal to me and millions of others.”
One form of class warfare through stocks from a video game retailer differs particularly from the financial market way, such as the dotcom bubble in 2000 or the US real estate bubble that culminated in the financial crisis in 2008, both of which were driven by assumptions about broad economic growth.
But for those who buy GameStop at the wrong time, the results are likely to be the same.
“The reality is that GameStop is not hurting Wall Street. It could hurt a few hedge fund managers out there, but no one will cry for them. The people who are losing their life savings are small retail investors,” said Ben Inker, head of asset allocation at GMOs.
The total value of short positions in Reddit-favored stocks like GameStop is about $ 40 billion. Dollars, limiting the pain among professional investors to a handful of hedge funds, according to Barclays.
Overall, GameStop shorts had fallen by about $ 5 billion for the year to Tuesday, according to S3 Partners. In comparison, Tesla Inc, another strong short-circuiting stock among professional investors, caused short sales of $ 245 billion. Dollars in losses in 2020, the company noted.
“While we expect some more cuts, the scale of the problem ultimately seems quite limited,” Barclays said.
The likelihood that most of the losses from the rally in GameStop will come among the same group of retail investors that stuck it higher leaves many on Wall Street confused as the bubble continues to grow. GameStop rose 67.9% higher Friday to close at $ 325 per game. Shares.
“GameStop is not worth $ 500, not worth $ 400, not worth $ 300, not worth $ 200, not even worth $ 100, not even worth $ 50,” billionaire investor Leon Cooperman told CNBC on Thursday. “I do not condemn them. I just say from my experience that this ends in tears, “he added.
The dotcom bubble peaked in March 2000, and over the next two years, the tech-heavy Nasdaq Composite Index slipped nearly 77% as companies declared unavoidable for investment ran out of funding. When the Nasdaq bottomed out in October 2002, about $ 6.2 trillion in household wealth had been destroyed, according to Amir Sufi, a professor at the University of Chicago.
The 2008 financial crisis, meanwhile, wiped out about $ 16.4 trillion from U.S. households through a combination of steep stock losses and plunging equity, according to the Federal Reserve.
No one expects the GameStop bubble to cause anything close to the same levels of financial pain as the financial crisis or the dotcom chest before it, partly because the company has a low number of shares and was not widely owned by institutional or retail investors before the start of the year . With revenue of $ 6.5 billion in the last fiscal year and fewer than 53,000 employees worldwide, it does not have an excessive economic impact.
Still, a fall will be concentrated on those who helped upgrade Wall Street’s perception of what retail investors can do.
“There will be some blood on the floor when this is over, but it will be some hedge fund blood and a lot of retail blood,” said Donald Langevoort, a professor at Georgetown Law who studies retail investors and securities regulation.
Melvin Capital and Citron Research, two prominent GameStop short sellers, said earlier this week that they had already closed their positions.
Securities legislation, which typically protects smaller investors from fraud, can be of little help to investors who buy shares in GameStop at elevated levels, Langevoort said.
“I do not know if there is an organization or orchestra that uses deception and fraud, especially when the motivation seems to be ‘Let’s support GameStop and show them,'” he said. “The SEC must take a deep breath and ask itself if it has a strong enough case to stop this.”
The big rally in GameStop is happening at a time when valuations across financial markets appear to be stretched. The S&P 500 index is trading at a futures ratio of 23.1, close to its peak during the dotcom bubble, while cryptocurrency bitcoin jumped 14% on Friday after gaining 265% over the past 12 months.
The rise of commission-free trading platforms like Robinhood has helped blow asset bubbles by lowering the line for retail investors to trade, said Ronnie Sadka, a finance professor at Boston College.
“Retail investors are becoming a systemic risk,” which the SEC is ill-prepared to deal with, he said. “The challenge with regulation is that this is not a case where Wall Street is squeezing the mother and popping, this is a case where short sellers are being pressured.”
The rising value of GameStop shares is attracting investors who are likely to be burned in the end, says Michael Pachter, an analyst at Wedbush Securities, which has a $ 16 price target for the company.
“This is the tulip bubble again,” he said, adding that he received a call from a friend who boasted that he put $ 1,000 into Reddit favorites like GameStop, AMC Entertainment Holdings Inc and BlackBerry Ltd and now raised $ 400,000 in two weeks. “He does not even know what GameStop is selling,” Pachter said.
How does GameStop mania end? If it’s like the original tulip bubble, it could lead to a “short-term crisis of confidence” in the financial markets, said Anne Goldgar, a professor at the University of Southern California.
Each jump in the price of the GameStop, meanwhile, brings more short sellers lured by ever-growing potential winnings and more buyers wanting to keep a thumbs up in Wall Street, causing the bike to continue, Pachter said.
“This thing has its own life,” Pachter said.