I have been watching the Reddit/GameStop thing unfold and the way it’s been covered by various media sources, including Conservative pod-casts and talk radio.
The camps have split into:
“Redditors are financial terrorists who are going to destroy the stock market and economy.”
And
“Hedge funds deserve this and more because they are a bunch of fuckers who use the market like a casino and it’s only a problem when a bunch of internet randos beat them at their own game.”
I think the person who annoyed me the most on this was Ben Shapiro, who said (paraphrasing) “if you believe in the need for a stock market, you have to condemn what these Redditors are doing.”
I know what I want to happen here won’t happen, but I can believe that both sides are right and both sides are wrong because both sides are complaining about something that is orthogonal to the real problem.
The absolute, number one, real problem with the stock market is that we have a system in which the value of a stock is mostly if not totally divorced from every other metric of a company’s success.
Tesla was valued more than Ford, even though Tesla only sells 500,000 cars in a year and Ford sells about 6 million. Tesla wasn’t going to outsell or out-earn Ford. But because of the way investing works, Tesla’s valuation could be worth far more than everything about the company is actually worth.
This sort of fuckery can lead to problems like Elizabeth Holmes, CEO of Theranos, who through the culture of venture capitalism, silicon valley, and the cult of the tech CEO, used fraud to pump the sock value of her company to be worth billions while never producing a single viable product.
Then there is the attitude that a company’s main responsibility is to its shareholders. That leads to fuckery like what Boeing has done (well documented on this blog) which was great for people with Boeing stock in the short term, but literally killed people as cost-cutting in testing caused planes to fly themselves into the ground and spacecraft to fail to reach orbit.
In theory, I could start a local bakery with one storefront, take it public, and if I worked the market right, could make it worth billions in valuation from trading even though all I do is sell cupcakes one at a time to housewives.
What we need to do is regulate the stock market.
Short selling should be banned, it provides no overall economic good. It allows some people to get rich by hurting companies. Like betting that an old man with a cane will fall and break a hip. Short-sellers make money off the suffering of others.
Second, we need to figure out how to more firmly tie a stock’s value to the value of the company. You can’t have wide dispersions in value.
If the idea is that buying stock is investing in a company, betting that the company will do well, you need that company to actually do well, not just have the value of the shares do well regardless of the company’s performance, or vice versa.
The stock market cannot be a casino. Redditors proved how much of a broken system it is. Rather than attack them as financial terrorists, we need to regulate the market.
I reccomend looking up Louis Rosmans videos in this, he explains it well, makes a case for short selling, and has a very good overall take IMO that aligns mostly with what you are saying here.
One ineteresting point he makes is that this could be the uniting thing we need since we have people from all parts of the political spectrum all agreeing that something needs to be done and that reddit has shown just how bs and unfair the system is especially when trading platforms halt trading and some of those may even have had a financial incentive to do so.
I will admit that your response is a reasonable one that addresses the core issue, but obviously isn’t gonna happen anytime soon.
I shed no tears for hedge funds. They’ve done more harm than good and have buried too many companies and put people out of work so obscenely rich ppl can get richer. I don’t think I’m alone in this sentiment.
Now the little people have blatantly figured out how to beat wall street at their own game and are watching the vultures scramble to protect themselves at everyone else’s expense. This will only cause spite, and mindless revenge is addictive, so that’s why this will only escalate.
Funny bit of history, hedge funds are so-called because their original intent was to provide a hedge against market volatility for rich folks – better return than just cash, but less risk than the market proper. If they showed large losses or gains, they weren’t doing their jobs.
What we have here is the 21st century analog of the tulip craze. The stock market did not create this sort of thing. It’s been around ever since lemmings were invented.
Tulip crazy it is and it approaches casino; gamestop’s true liquidation value is next to nil and their earnings are almost invalidly low. But those engaging in shorting contracts that expire right away, effed themselves when short squeezers bought the stock.
The hedge funders played themselves. There is nothing wrong with taking long or short positions, but egregious 140% bet on short is a gamble you may not be able to pay. And here we are.
“Second, we need to figure out how to more firmly tie a stock’s value to the value of the company. ”
Nope. Not happening. Can’t happen. Those ties do not exist, cannot exist. The value of a stock is 100% based on what the public is willing to pay for it, not what the company does.
As soon as someone buys a stock, for all intents and purposes, that stock is divorced from that company. (Not a financial expert here, so forgive any technical mistakes, or misuse of words).
If I purchase a share of Boeing, I have purchased that from another person, not from Boeing. I do not “own” a share of the company.
What I do own is an IOU that says “If Boeing does great, they will cut me in for a share of the profits (dividends)(maybe), or possibly choose to buy back that ‘share’ at a higher price than I paid for it.” With very few exceptions, the value of that dividend is not going to make me rich, and odds are, it may not even cover the commission I had to pay to obtain that share of stock.
However, what I do own is an asset that others may see as valuable. It is the misperception that a share means you “own” a piece of the company is what drives stock value, not the actually company value. Some private company everyone has heard of decides to go public, and there is a feeding frenzy on the day of the IPO. Why? Because everyone wants to capitalize on the misperception that your piece of paper has anything to do with the value of the company.
If I were to approach Boeing with my piece of paper saying I own a share of their company, and ask them to give me the cash equivalent of it, they would let me know how deluded I actually am to think I own a piece of Boeing.
What you own is image, an illusion. And people are willing to spend real, hard cash for that image.
As soon as someone buys a stock, for all intents and purposes, that stock is divorced from that company. (Not a financial expert here, so forgive any technical mistakes, or misuse of words).
If I purchase a share of Boeing, I have purchased that from another person, not from Boeing. I do not “own” a share of the company.
That’s not really true.
Unless you’re buying stock from Boeing itself, e.g. as part of a tranche offering, you’re buying from another person, true, and Boeing doesn’t see a penny of that transaction; but you are indeed buying a fractional ownership in the company.
It’s a very restricted form of ownership. It doesn’t entitle you to, say, walk into an assembly hanger and grab a handful of bolts to use on your home shelving project. But, by the same token, the limited ownership rights isolate you from liability if the company does something egregious and gets sued (for instance), or does something illegal and gets shut down. And that’s one of the reasons this form of corporate self-sale was formed – it allows a company to raise money by a means other than borrowing, in a way that helps isolate the purchasers from direct risk of ownership. That makes it more attractive to a broader group of potential purchasers.
Your shares – your ownership stake – entitles you to an share of whatever distribution of profits Boeing chooses, proportional to your fractional ownership; and it also entitles you to cast votes for the company board, proposed measures, etc., again with the weight of your vote being proportional to your fractional ownership.
And, by the way, some companies do in fact have share buyback programs that you can access as an individual without a brokerage.
I’ve no idea whether Boeing is one of them. But, at least for some companies, there are means for an individual to “ask them to give me the cash equivalent of” their shares at the market rate, without going through a brokerage and often with small or no transaction fees. The same programs also usually handle dividend reinvestment. Some companies run these themselves, most will use a transfer agent so they don’t have to do the paperwork in-house.
“The value of a stock is 100% based on what the public is willing to pay for it, not what the company does.”
That’s actually a general principle of economics, articulated very precisely and clearly by Ludwig von Mises. “Price” is a psychological notion, not a mathematical one. Ditto “value”, roughly the same thing. “Inherent value” is a nonsensical concept.
For example, you can replace “stock” by “money” in that quote and it remains valid. Obviously so for fiat money, but also for “hard money”. Yes, gold has industrial applications but those applications aren’t what drive its price.
A “medium of exchange”, whether conch shells or bits of gold or snippets of funny-colored paper, is used in a community because, by community consensus, it’s convenient as a representation of value and is generally accepted as such. In a sense, it’s the universal barter item: I barter my property for your money and can then barter than money for Joe’s property, rather than having to barter my property for Joe’s directly.
Oh by the way, one easy way you can see that “value” is a psychological notion and “inherent value” an absurdity, is in every trade. In every case, each party gives up an item in exchange for a different item that the person views as higher value. If I sell my car for $1000 to you, it’s because I value the $1000 more than the car right now, while you value the car more than the $1000.
The value of a thing is what someone is willing to pay for it.
Everyone’s got their knickers in a twist over hedge funds over-shorting stocks (shorting stocks that don’t exist) and how it scrapes value from those who produce it…
Wait til the normies find out about/finally internalize the fractional reserve banking scam (and what it has done to the purchasing power of the FRN) fed.gov has not only allowed but encouraged for the last, what..hundred years or so?