In the last week of January something peculiar happened. The press was alight with reports of ‘meme stocks’ and the stock market being ‘broken’ by an internet forum. Gamestop is a gaming retail store that has been struggling since digital game sales now dominate the gaming market. During 2020, as Covid-19 ravaged the economy, things were looking even worse for Gamestop and they were expected to shut down. Hedge fund managers decided to ‘short’ Gamestop’s stock. At the end of January, around 140 percent of Gamestop’s public shares had been short sold.
What is shorting?
‘Short’ bets are fixed-time contracts. Shorting, or short selling, is when someone loans a stock from a company and then agrees to buy it back at the end of a set time period at the price it was loaned out for. They ‘bet’ on the stock being driven down and losing value, so that when they buy the stock back to return, they have made a profit on the difference from when they initially sold it. When large amounts of a stock are sold off, the value goes down, and when large amounts of a stock are bought, the value increases. This is how ‘betting’ works. Investors bet on the prices rising or falling.
These events are based on speculation about how much profit is going to be made by the company. There are real repercussions to this volatility. Short selling can cause companies to go bankrupt and potentially thousands of workers losing their jobs.
Collectively, the hedge funds involved in this fiasco shorted more than 100 percent of Gamestop shares. They sold more shares than actually existed, shares they never paid for only loaned. They borrowed the shares to offload them and drive the stock price down, so that the hedge funds would make a profit. When other investors see massive amounts of shares being sold, they sell their shares as they do not want to lose on their investment. As a result, the price of a stock being shorted drops even further. This is how vulture capitalists have manipulated the stock market for decades.
These hedge funds would have made a large amount of money from shorting Gamestop Stock, but the short was recognised by some people on a subreddit called r/wallstreetbets. Since the start of the year, r/wallstreetbets (WSB), amateur traders on a Reddit forum, decided to collectively attempt a short squeeze against hedge funds who were shorting Gamestop shares. WSB traders drove up the stock price by buying stocks. When their short contracts ran out the hedge funds were forced to buy back the shares at a massive increase in price. According to Fortune magazine by the end of January short sellers had lost USD$19.75 billion.
At its height, 28 January, Gamestop’s stock price reached over USD$500 per share. On this date Robinhood and other retail stockbrokers, under pressure from Wall Street investment firms, put an illegal stop to the sale of Gamestop stock. Robinhood opened trading again and allowed purchase of Gamestop stock on 5 February. The stock has seen a slight rebound – but the bubble had already burst.
This story of retail stock traders versus giant hedge funds sounds like an exciting battle of the little guy fighting back against the big corporates. But in reality, stocks and the stock market are not places for working class people to make money. Financial markets are run in favour of capitalists. Small investors are the ones who lose. During the short squeeze hedge funds cried foul of the small investors, and there is talk of regulating them to make sure that they cannot disrupt the hedge funds making profit again.
Is this a leftist struggle?
The people of WSB are not revolutionaries, as they have been painted by internet memes on social media. Al Jazeera Plus reported Alexandria Ocasio-Cortez, the US congressperson, as supporting the short squeeze while streaming on Twitch: “Everyday people were finally able to collectively organise to get back at the folks who have historically had all the marbles on Wall Street”. The problem is the majority of those who participated in the squeeze were not everyday working-class people. The forum r/wallstreetbets describes itself as “Like 4chan found a Bloomberg [sic] terminal”, and posts on the forum frequently use racist, sexist and ableist slurs. This is an alt-right environment much like 4chan. Amongst reactionary attitudes on the forum, antisemitism in particular is rife. The Anti-Defamation League (ADL) has archived findings from the forum.
Even Elon Musk participated in the Gamestop frenzy. The world’s second-richest person, who is known for union busting, is definitively not an ally to socialism. Elon Musk’s company itself has been targeted by shorting before. Capitalists compete with other capitalists to survive; Marx called them “a band of warring brothers.”
WSB traders are clearly alt-right reactionaries, which makes them the working-class and oppressed people’s foe. The stock market is simply another part of capitalism. The myth of democratic capitalism is being spread by supporters of the squeeze. The Gamestop situation has been mischaracterised by Alexandria Ocasio-Cortez and other leftists as a class struggle. It’s not a class struggle when Elon Musk is on the same side as the stock traders. The rich are the ones who won. According to The Wall Street Journal, one hedge fund made almost $700 million on flipping GameStop shares when they sold at the height of the short squeeze on 27 January.
Is the stock market fake?
The stock market has been called “astrology for rich people”. Jacobin magazine has called it “absurd”, “useless” and “an institution that serves no purpose besides making a small number of undeserving people rich.” The stock market is not the economy. The economy has not grown through the pandemic, but the stock market has. Stock markets, like the Dow Jones and S&P 500, do not measure the economy. What they do measure are share prices of top companies. The stock market consists of people buying and selling public parts of companies based on how much they think the shares will be worth in the future.
Marx, writing in his posthumously published 3rd Volume of Capital, called this speculation “fictitious capital”. Fictitious capital is a highly speculative form of capital created out of debt and credit, it is a form of capital that is not backed by actual money supply or business transactions. ‘Real capital’ is invested in actual physical means of production the hire of workers. Stocks and bonds that are bought and sold do not represent any real form of capital and vary in value according to the forecasted yield.
Marx refers to fictitious capital in Capital as “accumulated claims, legal titles, to future production” and said of stocks, “To the extent that the depreciation or increase in value of this paper is independent of the movement of value of the actual capital that it represents, the wealth of the nation is just as great before as after its depreciation or increase in value.”
In other words, the value of stocks is not related to the worth of a company. When a company’s share price goes up, that is a sign of gambling on the future value of the profits generated by the company, not of actual profit being made. Stock market speculation can help cause economic crises. When capital is invested in the stock market rather than in businesses, the real economy stutters. Why bother building a real factory, where you have to pay for the machines, the workers’ salaries and raw material when you can just gamble for titles of profits from other companies? When the profits to be made in speculative markets outweigh the real economy, economic growth stalls.
Does the stock market matter to the working class?
In the US the working class has little stake in shares. According to Edward Wolff, an economist and research associate at the National Bureau of Economic Research, the top 1 percent of households own 54.9 percent of US stock market wealth. The top 10 percent own 93.5%, while the bottom 90 percent only own 6.4 percent.
In New Zealand workers’ contributions to Kiwisaver are privately managed and invested. These savings are vulnerable to stock market volatility. When the market goes down workers lose thousands from their Kiwisaver accounts. However, the Kiwisaver companies do not lose out. They make money on the fees creamed off the workers’ contributions. Kiwisaver is part of a neoliberal strategy, promoted by the likes of the World Bank, to cut state pensions and instead make workers reliant on private institutions. According to academic Mitchell A Orenstein, “We need state-administered retirement funds that are more than enough for retirees to live off, and that aren’t allowing the rich to get richer by profiting off of workers’ savings. Ultimately these saving funds are then set to fuel speculative gambling on the stock market for these fund managers.”
The Gamestop saga shows again that the game is rigged
To quote Branko Marcetic writing in Jacobin: “It’s a reminder that there’s no such thing as “people’s capitalism” or “shareholder democracy” – the capitalist economy is structured to do what is best for the business elite.
Playing the stock market is generally a bad idea for average workers. It is one that reaps little profit. The market is rife with online scammers who try to convince people that they will make them an immense profit out of thin air. Others pretend to have become rich like Warren Buffet, so they can sell sham pseudo-economics courses. People lost money with Gamestop stocks; the squeeze didn’t work, and stock prices are back down, partially due to people selling off their stock, and partially due to people not being able to buy and only being able to sell as restrictions were put in place. Marx describes the financial system in Capital: Volume 3 as it “develops the motive of capitalist production, enrichment by exploitation of others’ labour, into the purest and most colossal system of gambling and swindling and restricts even more the already small number of exploiters of social wealth.”
They say that is the risk associated with potential reward, but as we saw with Covid, and now with Gamestop, capitalists will get bailed out when there is economic instability, the working class will not. It is workers who suffer from recession; they are the ones who lose their jobs. There’s no real risk for the rich. Capitalism is unstable in nature; it is chaotic. David Harvey puts it well in ‘A Companion to Marx’s Capital’: “Capital is not a thing, but rather a process that exists only in motion. When circulation stops, value disappears and the whole system comes tumbling down.” The stock market is a part of this process of motion, and we should put a stop to it.