The stock market is all a-buzz over the shares of GameStop soaring over 1700% in the last week. Looks like a bunch of kids in social media set Wall Street on fire.

I had to really brush up on my economics to figure this one out. Because I think that the Democrats will make a big stink out of this (indeed, it’s already happening), we should talk about it.

 

How Does the Stock Market Work

So a bunch of Reddit users decided to mess with the stick market, targeting their ire on the hedge fund managers on Wall Street. Regular folks who do not know much about the stock market are celebrating this. I thought it was kind of funny and wasn’t sure how it was legal until I listened to Tucker Carlson and the Ben Shapiro Show (you should subscribe).

The stock market is there so that people can invest in a public company. What’s nice about this is an individual can actually own part of a company and the company is able to raise funds to reinvest into the company. If a company has a good strategy and is well run, they have a good chance at making a profit making the company more desirable, raising the stock price. Likewise, a company with crappy management and no strategy will force the stock price to go down. Basically, the stock market is good because it gives an actual value to a company.

Sometimes a company will not have the correct value. It will either be priced to low of priced to high. If the price of a stock costs too much, people who know the value of a company will buy the stock, raising the price of the stock until it reaches the appropriate price. If a stock is priced to high, well, enter the hedge fund manager.

This is how it works:

• A hedge fund manager will “borrow” a stock for a certain amount of time with the promise to return the stock plus a fee. Let’s say I borrow a stock that is overpriced at $100. I promise that, in a week, I will return the stock plus give the guy $10.
• The hedge fund manager sells the stock, getting $100.
• The stock corrects to $20.
• The hedge fund manager buys the stock for $20.
• He returns the stock to the original owner plus the $10. The hedge fund manager makes $70 profit on the stock.
• This is called a “shorting a stock.”

Now, things can go wrong and this is where there is a lot of issues people have with hedge fund managers. Lets say that stock doesn’t go down but goes up to $300 a share. Then the hedge fund manager gets screwed because he has to buy it at $300 to return the stock and still has to pay the $10. This is called a “short squeeze.” What people hate about this is the government will usually bail out the hedge fund manager but will not usually bail out the regular guy.

I understand why people get mad at the government for doing this but I don’t know why people blame the hedge fund managers. It’s like people playing with the tax laws to pay less taxes. It’s the government’s fault.

 

Now enter Game Stop

Game Stop is a video game store. They sell game new and used consoles, new and used video games and collectibles. It is an expensive store and cannot compete with companies like Amazon. It is not particularly profitable. The stock price was $17.25 a share in January.

A bunch of Reddit users decided to screw with the market. What they did was get together and all of them started buying the Game Stop stock. This raised the price incredibly. One Reddit user bought 50,000 shares of the stock worth about $56,000. Hedge fund managers saw that the stock was inflated and thought they could make a killing (the stock doubled) so they went out to short sell the stock. But the Reddit users had different ideas.

Instead of selling their stocks, the Reddit users bought more. The stock ended up going to a little over $347 a share. That is over a 2000% increase in price! The hedge fund managers were screwed. I am not kidding when I say this: the hedge fund managers took billions of dollars in losses.

Today, the stock is dropping like a rock but the damage is done. As of this morning, shares of GameStop were down 44% and I’m sure it is going to be down by a lot more. The government is going to have to bail out those that lost their shirts and is very concerned about the situation.

Is this a good thing? Not really. It can be funny how the experts were completely fooled but it can also be true that this is not a good thing. It shows how easily the stock market can be manipulated. Don’t be surprised that this situation does not come up by the Left as showing how bad capitalism is. They will say it is an unstable system absent of any morality and that it needs to be changed.

So let’s get into that. First thing we need to take a look at is if this whole thing was legal.

 

Was This Legal?

The first thing I wondered was whether this was legal. Did these Reddit users break insider trading laws? The answer is no. Let me explain.

If Martha owns 1000 shares of the widget stock that is already at the market price, say, $10 a share. She may not make any money. She may decide that this isn’t good. So she calls all her friends and says that widgets are going to go straight up and they should buy as soon as possible before the stock soars. Her friends contact their friends and all start buying the stock. The stock begins to rise artificially based on Martha’s lie about the strength of the stock. When the stock hits $30 a share, Martha sells making a 200% profit. This is illegal. She artificially inflated the stock by lying to other buyers of the stock. This is fraud.

Insider trading violations can also occur in the opposite direction. If you didn’t know, I was talking about Marth Stewart, who served some time in jail for insider trading. She did not make a profit on those stocks but got a tip that her stocks would go down. She sold her stocks in order not to lose money. I think she ended up still losing $50,000.

But, in this case, the Reddit users did not hide anything. They said they were going to experiment with manipulating the stock market and screw the hedge fund managers. There was no lying and no fraud. So there were no laws broken. All it did was show the weakness of the stock market. These guys just made a lot of money while others lost their shirts.

 

Is This Unethical?

I had a conversation with a friend who lives with me. He wanted to know what this whole thing was about. That’s why I looked this up and learned what happened. We had the conversation about whether this was legal and I explained based of my understanding of this. But, then, he asked whether or not I thought this was ethical or moral. This is a great question and I had to think about it. I came up with an analogy.

One decides to go to a casino to gamble. Everyone knows that the goal of a casino is to take all your money so they can make a profit. Most people know that the slot machines are manipulated in order to payoff a certain amount. If I put in a dollar, I can expect the machine to payoff a certain amount to keep me playing. Every once in a while, the machine will payoff a jackpot. The casinos are not hiding this. They tell you, “These machines have the highest payouts.” Gamblers also know that once a machines hits a jackpot, he might as well find another machine because that machine will not payout anytime soon. In the old days, a winner would perform one more spin just so that other gamblers would not know the machine hit a jackpot, luring other gamblers to it.

Is the casino unethical for setting machines to only win at certain times? No because people already know or suspect this is happening.

Is the player that takes a spin unethical for taking a spin after winning a jackpot so other players will play the slot? No. He wants the machine to restart the count to another jackpot so he can play the machine later.

It might sound like a weird analogy but it’s not. The stock market is the casino of capitalism. Even the most professional stockbrokers know they could lose money at any time.

I’ll go a step further: I don’t blame the Reddit users for screwing around with the stock market, I blame the hedge fund managers for not doing their research. One would think that if a stock goes up 200% maybe one would ask why that is happening. Maybe, the hedge fund managers should have did a little more research before dumping billions of dollars into a stock without knowing what was happening with the stock. If one of those guys had jus read a Reddit post, they would have known what is going on. Or maybe they shouldn’t have just jumped on to this stock, right away, and waited to see what was happening.

So, no, I don’t think this is unethical. It is the risk one takes in the stock market. There is also a chance that the Reddit users could have failed and lost money also.

 

Was This Immoral?

I never like mixing morality with the stock market. That’s alright, I don’t mix morality with gambling (unless someone has a real problem). But I was asked if what the Reddit users did was moral and right.

I’d have to say no but maybe. Here’s why.

First thing I do is look at the motivation of the Reddit users.

First motivation, they wanted to experiment with manipulating the stock market. They were making an experiment. This, in itself, is not immoral. But remember this line from Shakespeare’s Romeo and Juliet: “The road to Hell is paved with good intentions” (OK, I know it wasn’t really Shakespeare who said this). They did not really research who would be hurt with this manipulation. I’m just not sure this makes what they did immoral based on my gambling analogy.

Second motivation was to screw hedge fund managers. I think this is immoral. They went out to hurt a specific group of people. I think that’s immoral no matter how rich they thought these people were. But, what’s worse, is the hedge fund managers aren’t going to get hurt as much as the casual, uneducated investors. The little guy is going to be the one holding the bucket. The hedge fund managers will get out in time and get a government bailout. It’s the individual that is going to lose their money. Screwing the average Joe, even the professional, I think is immoral.

Finally, they wanted to make money. The Reddit users took a risk, invested money on an experiment and succeeded. I see nothing immoral about this.

The question is if one motivation immoral does this make the entire action immoral? That’s a good question. But, again, I return to my casino analogy. The stock market is a game and it is gambling. One better be ready to deal with the losses. I lost nothing. That’s because I don’t gamble in the stock market. My 401K did not take a nosedive because I invest in preferred stocks. So, in the long run, I don’t think this was immoral. It is just about the motivations of the individual Reddit investor.

 

Was This a Good Thing for the United States or Capitalism

Two things can be true at once. I think this experiment was really funny and good for these folks for proving a point while working the system to make a ton of money. I do not hold any ill will against people who are clever.

That being said, I don’t think this was a great exercise for capitalism or Wall Street.

• This screwed to little man. In screwed the casual, uneducated investor who has lost a lot of money.
• It shows that the stock market has its vulnerabilities. This is inviting governmental regulations on the stock markets.
• It shows the “evil” and “greed” of capitalism. Watch the Left say this is going to use this to “prove” that they need to change the system.
• This is another excuse by Big Tech, supported by Democrats, to ban people. Already, that Reedit group was banned. A bunch of online trading apps have banned the trading of GameStop, Blackberry and AMC Theaters, all of which these Reddit users invested in. What was the reason? The group fomented hate speech and violence. What? This is bad. This the excuse Democrats and the Big Tech Bros will always use to limit the freedoms of people.

The last point is an important point. I even heard on Fox News’ The Five, mostly run by Conservatives that this could have been a Right Wing bucking of the system. Maybe, but usually the simple answer is the most accurate. Maybe it was a bunch of millennials with technical and economic experience that just wanted to mess around. Maybe this had nothing to do with overthrowing the system. Maybe these guys just wanted to experiment with the Stock Market.

Not everything, good or bad, must be political. It seems that even Conservatives forget that.

More reaction is coming.

https://www.dailywire.com/news/the-gamestop-controversy-what-you-need-to-know