The last time you heard about GameStop was when you went to the mall to buy video games as a teenager or for your ex teenager who now has their own teenager.
But last week, the brick-and-mortar gaming company was in the news as GameStop prices went thru the roof. This past Monday, they opened at $315. For reference, as recently as Jan 12, the stock was $19.95.
Why? In recent months, members of the Reddit community, Wall Street Bets, have begun encouraging each other to buy up stock of the company, efforts which began in earnest after several hedge funds announced that they would be betting against the antiquated electronics franchise. One of the first storylines to emerge from this was one that pitted the upstart nerds against the greedy hedge funds. But...like most things, the reality is a bit more complicated.
Wheaton College assistant professor of economics Enoch Hill joined global media manager Morgan Lee and editorial director Ted Olsen to break down the craziness on Wall Street and offer some deeper takeaways for those trying to navigate their market and their faith in 2021.
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Highlights from Quick to Listen: Episode #250
For listeners who aren’t as familiar with how the stock market works, can you explain what happened last week?
Enoch Hill: The core instrument that got the focus this week is called a short. When you short something, fundamentally what you're doing is you're owning a negative amount of it.
Most of the time you have a long position, which means you have a positive amount. If I said, “What position do you have in chocolate chip cookies?” If you had a jar of cookies on your counter, you'd be long the number of cookies in that jar. Now, I could also borrow a cookie from a friend and then sell it to you. In which case, I would owe my friend one cookie. So I'd have -1 cookies, in which case I'd be short a cookie.
Now, why would you ever want to be short something? Well, the PlayStation 5 recently released and retails for around $400. When I looked online today, it was selling for $800. So I have a belief that, over time, the ability to get your hands on one of these things will become easier, and consequently, the price will drop once again. So if I think the price is going to fall, it makes sense for me to sell one now and buy it back in the future.
Now I don't own a PlayStation 5, but what I might do is go to a broker and say, “Hey, I think that the PlayStation 5 price is going to drop. So I'd like to short the PlayStation 5.” I would promise to return a PlayStation 5 to them at some point in the future, and in exchange for that, I have to post some security or collateral or funds so that they know that I'm good for my word. If in the future it does indeed become the case that the PlayStation is selling for $400, then I could sell it right now for the $800, buy it back at $400 and then return the physical PlayStation to the broker. In which case I made, I made some money.
Now, suppose there are some production supply chain issues that cause the PlayStation to continue to be in short supply or It becomes the raging success of 2021 and everybody wants to buy one. In which case the price is driven up and the price goes up to say $2,000.
If the person that lent me the PlayStation is concerned that I might have incentive to walk away so they can issue a margin call, which is to say, “I want to make sure that you're not going to walk away, so why don't you give me some more collateral up the amount you have to $2,000 so that I know that you won’t just to ditch the deal.”
If I don't have the $2,000, then they can demand the PlayStation on the spot. In which case, I have to buy it at the higher cost and immediately turn it around and give it to them. I experience a loss. An interesting thing about a short is that there is no limit to the number of losses you can experience.
With GameStop, the company seemed to be on a downward trajectory. So the stock had been heavily shorted by a lot of hedge funds—a large amount of the stocks had been sold by people who didn't actually own a share; they had borrowed the shares. This caused the price of the stock to drop below what some people thought GameStop was worth.
GameStop is a brick and mortar company, but it's not doing that bad. Maybe you might think that the true value is higher than what it was trading for, and you might want to go long. However, another thing that you can do is try to force the price up so that these hedge funds that have the short position cannot actually afford to post the collateral required to continue being in the short position, at which point they have to buy the funds at the very high price.
And what this does is it causes them to realize a loss, but secondly, if you know anything about supply and demand, if somebody has to buy a large amount of something, that's an increase in demand, which is going to further drive up the price. And so at this point, you get what's called a short squeeze—the price is being driven up in an exacerbated manner as more of these people are forced to unwind their short positions.
A number of hedge funds announced that they were going to be shorting their GameStop stock. Why would they announce that they're doing that? It seems like they would make it more likely for a squeeze to occur.
Enoch Hill: So squeezes are actually an unusual thing. They're a kind of market manipulation and they're not efficient. They're not usually desired and they're not very common.
Legally, the short positions are public information. So you can go and find out how many currently held shares are shorted for any particular stock. In this case, people went for the short squeeze, but often, if you see other people are betting against the company, you might think, “Oh, it's probably not a good idea for me to hold onto this," which leads to depressing the sale price.
It seems like people could be easily hurt by this, so why do we allow this level of short selling?
Enoch Hill: Yeah, this is a great question, and an important one to understand if we want to talk about whether this type of option should even exist.
So let's go back to 2007, the beginning of the financial crisis. There is an exuberance in terms of the housing market and these mortgage-backed securities. They seem like an unsinkable asset. They seem like something that's too good to fail.
So historically, when there have been recessions, the housing market has actually been pretty smooth. If there are failures, they might be regional. You probably don't experience systematic failure countrywide. Diversifying mortgage income streams across the country—that sounds really, really good.
What we failed to take into account was that this separated the broker who is facilitating the mortgage, who is the decision-maker of when someone gets a loan or not, and the person taking out the loan. So you get this big decline in the quality of the loans being issued. Without the ability to short the market, there's no ability to articulate through the actions that you believe that the market is overpriced.
If you've seen the movie The Big Short, they're portrayed in that movie as the heroes. And what they're doing is they're saying, “We think the housing market is overpriced. We think that there's a fundamental problem.” And nobody really wanted to listen to them. But there was a fundamental problem, and the ability to short was disciplining the market from going too far off the rails.
Herbalife was another example. There was somebody who thought that this was more of a pyramid scheme than a foundationally strong company. And so they started shorting shares of the company, which brought to light that it probably shouldn't be transacting at the higher price.
So it's kind of like a check, it's a way for the wisdom of the crowds to take effect. The ability to short kind of prevents some bubbles from occurring.
Do you think that hedge funds shorting stocks are doing so with altruistic motives or is this just a positive thing that hedge funds do using a deeply cynical tool in the market?
Enoch Hill: So there is an interesting aspect with a lot of these activities where the individual beneficial action is also societally beneficial.
I was reading the article on CT about this practice of the wealthy in the Israeli community to store grain and then during a drought to sell it at higher prices. Now, this is clearly advantageous to the wealthy and it's clearly not virtuously motivated. At the same time, if there was not an incentive to store up grain during good times for the bad times, you might have mass starvation, which might be worse.
So sometimes the actions that are motivated through non-virtuous incentives result in possibly beneficial outcomes.
But there's also negative activity that can occur through hedge funds. So just like the Reddit users were systematically manipulating the market to benefit themselves and hurt someone else in the process, this can happen the other way around.
In general, I would be against market power or the ability for large movers—or in this more present case, of a combined group of small movers—to manipulate prices. And so if a company wants to manipulate prices, they could intentionally force down the price of the firm and maybe initiate a hostile take or do something else to extract wealth from the firm to the detriment of society more broadly.
So I think sometimes it can result in the benefit of society more broadly, and sometimes it can be actively against the interests of society.
A lot of people seem to be wrestling with the fairness, or lack of fairness, in the situation with GameStop. Are you familiar with attempts to regulate hedge funds in the past? Have the rules have changed for them over time?
Enoch Hill: There does seem to be significant evidence that hedge funds can successfully extract some of the wealth that is being created in a manner that is not beneficial for society. And I think that this is bad. This is something that we want, that we should be concerned about and that could be improved upon.
That said, I don't think the response as a Christian ought to be, “They sinned, I should do it too. And we should all just accept that that’s going to happen.” I think the better thing is to say, how can we systematically prevent this from happening in all cases? And it makes sense that people are frustrated and angry.
I think a lot of the anger and frustration that we're seeing expressed has to do with inequality. It seems like some certain wealthy groups or organizations are taking advantage of their position. As Christians, what should our response be and what is motivating the actions of the events that have transpired this last week? When we're trying to analyze it, there's a couple of themes that come out.
One is that there seem to be some of the individuals on the Reddit channels seem to be motivated by greed. They see an opportunity, they think GameStop’s going to go up temporarily in value, they want to get in when it's low, get out when it's high in. Other people are doing this on principle. “I want to get revenge. I want to hurt somebody else because they've hurt me.” Neither of these are classic Christian virtues or things that we really want to cultivate either individually, as a society, or as a faith practice.
There's been some great research showing how absolute income mobility has been falling, that the probability that you'll be wealthier than the prior generation has fallen pretty dramatically in very observable and empirically measurable ways. And people who have wealth are starting to accumulate wealth more rapidly. So these are systematic things that pent up a collective emotional response to this kind of demonstrates.
But I think the more productive channels might be through thinking, how do we systematically think about inequality and work towards what might be more reasonable, equitably distributed access rather than, “let's hurt them because they hurt us.”
In your experience as an economist and as a professor at a Christian college, what are you hearing when it comes to inequality?
Enoch Hill: I think that it's interesting that when we start talking about inequality, I don't have to clarify what types of inequality we're talking about.
That should be concerning, especially as Christians because I don't think most of us would articulate that the most important element of humanity or being created in the image of God is our material prosperity. Wouldn’t access to other believers or your ability to make an impact on your community or the depth of your relationship—wouldn't inequality in these sectors be better candidates for what we focused on? But we do have this peculiar and consistent action of hyper-focusing on the inequality of wealth.
Off the top of my head, it seems quite clear to me that both in the Old Testament and in the New Testament, God the Father and Christ Jesus are intimately concerned with the plight of the poorest in society. There are also a lot of verses that address inequality with the foreigner or the widow—don’t treat them in a different matter than you treat others.
But the concern or the emphasis is on treating everybody with equal honor. I think that gets to the Imago Dei, which I think is one of the most fundamentally important views of equality that we have.
Should we view investments as a method of work, or should we see it more akin to earning money without working for it?
Enoch Hill: I had an exchange student a couple of years ago from Rwanda and he viewed that the biggest thing holding Rwanda back from economic success is an undeveloped financial sector, which has counter to the view you might think of in the United States. We often think that it might be the financial sector that is holding us back.
So, which is it? Or what is the right amount? What roles does finance play? Where might it get to be detrimental?
Let’s start with what finance does. Fundamentally, what finance is trying to do is connect the resources of people who don't have good uses for those resources in the present with people who have good uses for those resources.
So when you take out a loan, usually you're doing it to do something. You just need somebody who believes in you and who has some excess wealth at present that they can lend to you. And your success becomes their success, and your failure becomes their failures.
Finance, when done well, helps allocate society's resources. So if financial institutions can accurately identify those firms with the best ideas, the most promising new medical treatments, etc., and they can channel funds to those organizations, that's probably going to be to the benefit of everyone.
A lot of countries that don't have developed financial sectors, end up funding ideas that are not necessarily the best or most productive idea—it might be incredibly inefficient, or it might be incredibly self-serving—but you might get that contract because you're going to give a huge kickback to whoever's allocating the loans or the funds or the wealth.
So a developed financial sector is actually a really good thing.
So would you say that there is a relationship between the stock market success and how well the economy is serving people overall?
Enoch Hill: The stock market is basically distributed ownership of the income stream of a bunch of companies. Normally, the reason you might buy GameStop stock is because you think that the stream of profits that they will earn in the future is higher in value than the current price. So if the price was $10 a share, and you think that they're going to be able to pay dividends of a dollar per year, that's a pretty good buy. And so that's, that's historically why people buy shares.
And what does that do for the firms? Well, it gives them the ability to raise additional funds to expand their businesses. And if companies' share prices are falling, then they probably can't raise additional funds to expand, invest, or grow.
Now, what's the relationship between the everyman and the stock market? And I think this is another particularly acute point right now, as a lot of people are losing jobs, are seeing reductions in their hours that they have to work, etc., but at the same time we see the stock market increasing.
When the stock market increases it's kind of a signal of collective optimism or pessimism about what's going to happen in the future. But recently there has been a disconnect.
The GameStop situation seemed to give people a sense of efficacy, and a way they can feel like they were making an impact instead of being victimized. How might you call Christians who are not making millions of dollars off the stock market to channel their feelings and reactions in these places?
Enoch Hill: A couple of things come to mind. The first is if we think that these companies are overvalued, it actually brings us back to the idea of the short. Like if you think a company is overvalued and that the price will fall over time, and then you can bet against the company by having a short position. So we want to think about what instruments should be out there to keep prices disciplined.
But that's not really the heart of the question that you're asking. The heart of the question is that things feel unjust and unfair. It seems like some people are making out really well through this really challenging period while other people are struggling just to make ends meet. And what can we do?
Well, first I think that we need to ask, to what end are we acting? So with these events, what happened with the GameStop episode, a hedge fund was hurt pretty badly. Now the primary actors on this Reddit page, maybe we root for them, but they're also not the saviors that we want them to be like they aren’t the source of all good. There's been a lot of like white, white supremacy language or other concerning rhetoric that's occurring on some of these Reddit pages and a lot of unvirtuous conversation.
I don't do the actions as necessarily bad or necessarily good, but something that I heard from Keller and I found impactful was that whenever we look for salvation from some sector of humanity, we're going to be disappointed because fundamentally, all of us are falling and there isn't going to be a source that is not going to eventually disappoint us. Our hope is ultimately in Christ.
And more practically, if we want to do something, taking out one hedge fund that may or may not have been acting in any systematically negative way, I don't think is accomplishing any of the things that you might hope to accomplish. It might feel good to hurt somebody else, but I don't know if that impulse is ultimately going to help anyone.
It just strikes me that there is this responsiveness that bad things happen to us, we want to do bad things to other people. And maybe it's also wrapped up in cynicism and all these other things, but if we exercise these feelings, they aren’t going to lead to societal improvement. To improve outcomes, I think we need to think more holistically.
How do we start addressing this systematic increase in inequality that we're observing? How do we get access for wider segments of the population to the things that are going to correlate to the ability to earn higher incomes? I view those as more constructive directions to take the conversation.
How should the way we read the Bible and our theology inform our approach to the stock market differently than our non-Christian neighbors?
Enoch Hill: So this is an interesting question. Here's the funny thing, I rarely think about the stock market. I don't love reading financial briefs, I invest in broad mutual funds that I have in my retirement account, but I never look at them and I never changed them.
But I think that one thing is you can check your motives and say, what am I investing for? I think that there is a good aspect to the stock market. It makes it possible for new ideas to become realities. And those might be very good ideas and very worthy ideas.
Second, the value of something is a really interesting thing. What’s the price of something now? Several historical economists, Marx and Smith included, have observed that there are lots of different ways to think about value. The price of a Bible is only a couple of dollars today, it can be the price of a medium coffee in the morning from Starbucks. But that doesn't mean the fundamental value of these things is equivalent.
But we change prices based on our actions, based on a relative demand for a good compared to its supply. So if we want to see more of some kind of company or idea coming to light, we can take action that res like collectively results in positive things coming out.
So maybe that's a way to think about these events, is that there is a great power of the internet and social media to coordinate the actions of lots of smaller individuals, of people who normally couldn't make a noticeable effect on the market. And maybe we can think about the ways we can systematically move to demonstrate that we fundamentally care about these areas of society, of creating more products like this one, etc.
Are there specific questions about our financial systems, the economy, and the markets that you perhaps think too many Christians have kind of fallen asleep to and allowed to work in the background of their lives? Are there areas you think we should intentionally engage with or give more serious theological analysis to over the next couple of years?
Enoch Hill: What, as Christians, have we maybe been lax on reflecting on?
Well, I have the ability to not seriously engage with the limitations of opportunities that might be afforded if I had a lower income or if I hadn’t had the educational opportunities that I've experienced. And I think that the decreases in mobility societally have been pretty well-documented by economists—the American dream of the 1800s isn't as strong in the present as it was at one point in time. And that has pretty strong implications.
So like, it's easy to say, if people would just work hard then they'll make enough money to make a livable wage and we want to incentivize work. But it does very much seem to be the case that more and more of the income in society is going to those who already have wealth. And how do you start if that's where it ends up? So I think we need to start thinking about this shift in the income distribution from returns to labor to returns on capital. And I don't think there's enough attention being given to this. I think as Christians, it ought to concern us.
I think another area is access to the means to the inputs to production. So when I look at the concepts of Jubilee [in the Bible], there's a reversion. There's an inability to permanently sell your land or yourself—that slaves are released and the land is returned to original owners every 50 years.
Today, the primary inputs of production are no longer land, it seems to be human capital and physical capital. But I think we need to be seriously thinking about how do we ensure that generational poverty doesn't occur because of the structures inherent in society? And what might the present-day versions of the concept supported in the idea of Jubilee look like if we were to implement them seriously today?
When we think about making investments, even as far as our 401ks, there’s been conversation around “ethical investing” and avoiding “sin stocks.” How attentive to these things do we need to be as Christians? How should kingdom values affect the actual things that we're buying with our stocks?
Enoch Hill: We can try to be, to some extent, responsible with the firms and organizations we invest in. But I don't think it's feasible for us to truly know the moral integrity and the virtue of companies or that they treat their workers well or not.
I don't know how feasible and how beneficial all of those efforts would be I want to shift us to more sacrificial thinking. If we took all of that potential effort and instead, we thought, how can I be most effectively loving the people that I come into contact with? Like day-to-day, how can I help the people that God has put in my path sacrificially through whatever income streams I have the privilege of enjoying? I think that's perhaps a more fruitful direction to take the conversation.
When I read the parable of The Good Samaritan, what I come away with is that the person that is in my capacity to help, that's the person I'm responsible to help. One economist made the observation that we spend about half of all of our income on other people and not ourselves.
The market has provided a large increase in the total level of wealth in society. And I also think that to some extent, it has crafted us or formed us to desire higher and higher amounts. But I don't know that that's necessary—at least not at the individual level. On the individual level, I think we can say, how can I sacrificially and responsibly use what I've been given towards love and good deeds, towards the people that God has placed in my path?