The rapid rise, steep fall and continuing oscillation of the stock price of GameStop, a chain of video-game stores, is motivated by the same greed-driven speculative mania that has gripped the stock market periodically over decades.
Initially some smaller-scale capitalist investors gathered on Reddit’s WallStreetBets forum and bought up GameStop shares through fee-free online brokers such as Robinhood, driving up prices in a frenzied rally. Some investors claimed they were “punishing” hedge-fund bosses who specialize in short selling — betting on stock price plunges when weak companies face collapse.
The fortunes of GameStop owners have been languishing for years. After closing more than 300 of its 5,000-plus stores in 2019 bosses announced a further 300 store closures at the start of the pandemic, throwing hundreds more workers onto the streets.
The company’s stock traded at around $17 at the start of this year. Following the recent orgy of stock purchases it peaked at $513 on Jan. 28. Those engaged in such frenzied speculation share the delusion that there will always be a greater fool willing to pay more for what they have just purchased. Over three days GameStop shares changed hands 554 million times, more than 11 times the number of total shares.
GameStop’s share prices then plunged to $53.50 the following week.
Billionaire Tesla CEO Elon Musk lauded the price rises as well as the hedge-fund losses of those betting against GameStop, claiming that somehow what hedge-fund owners do is less moral than other capitalists.
In contrast, hedge-fund manager Michael Burry, who famously bet against the market in subprime mortgages prior to the 2008 financial crash, slammed investors for working together to drive GameStop prices up. Burry insisted federal regulators probe Reddit investors, labeling them “dangerous.”
Melvin Capital hedge fund faced huge losses as a result of the trading in GameStop, with its funds dropping 53%. Chicago-based Citadel Securities, one of the largest U.S. hedge funds, and Point72 quickly came to its rescue, sending almost $3 billion to keep the fund afloat.
These speculative market gyrations are rooted in a much deeper long-term profit crisis facing the capitalist rulers. Instead of investing in plant and equipment that would expand production and provide jobs, some investors plow funds into speculation in stocks, bonds, derivatives and bets on other various paper securities. They seek a higher rate of return through exchanging these worthless pieces of paper.
The speculative mania is driving stock market prices way above the value of companies’ actual earnings. The market is “more overvalued than at any time in recent U.S. history,” reported MarketWatch Dec. 28. At some point this bubble is bound to burst, with devastating impact on working people.
Origins of stock market
In an addendum to Karl Marx’s Capital, Frederick Engels, a founder of the communist movement, wrote that capitalist development “tends to concentrate all production, industrial as well as agricultural, and all commerce, the means of communication as well as the functions of exchange, in the hands of stock exchange operators, so that the stock exchange becomes the most prominent representative of capitalist production itself.”
It plays a crucial role providing finance for capitalist owners.
But Engels writes, “All nations characterized by the capitalist mode of production are periodically seized by fits of giddiness in which they try to accomplish the money-making without the mediation of the production process.”
That has accelerated in the decades since Engels wrote. Over the past half century especially investors of all stripes have built up huge debts, borrowing larger and larger amounts to buy and sell various forms of paper securities at a profit.
New money and the old
In response to feverish trading in GameStop’s stock, Treasury Secretary Janet Yellen said she would look into it. She’s had a lucrative relationship with hedge fund Citadel, which paid her some $810,000 in speaking fees for a trio of talks over the past 14 months.
Media commentators routinely describe Robinhood and other traders who led the purchase of GameStop shares as “the little guy.” In fact giant older financial institutions like Citadel are also putting huge amounts of funds into so-called upstart online traders like Robinhood and are making money doing so.
“Wall Street trading firms paid almost $3 billion to retail brokers such as Robinhood to handle their trades last year,” reported the Financial Times. These firms buy stocks at prices slightly higher than is available on the public exchanges, betting on their continued price rise.
Not every hedge fund bet against GameStop stock prices. Senvest Management raked in $700 million in January by buying GameStop shares as they skyrocketed.
“There are huge players playing both sides of GameStop,” Thomas Peterffy, chairman of Interactive Brokers Group Inc., told the Wall Street Journal.