Friday, 29 January 2021

Words of Wisdom from Authers

 

GameStop Isn't a History Lesson, It's a Syllabus

The trading frenzy surrounding the video-game retailer is a prism for a range of epochal issues.

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And they took to the streets, crying “liberty, equality, liquidity...”
And they took to the streets, crying “liberty, equality, liquidity...” Photographer: Les Lee/Archive Photos/Getty Images

Winning the GameStop Game

When this week started, I had a long “to do” list of topics to cover.

    These are all important issues. If you have thoughts about any of them, drop me a line.

    Beyond that, you’ll have to discuss these topics amongst yourselves because I’m writing a fourth newsletter in a row about a small video-game retailer in the U.S., which was worth less than $1 billion at the beginning of last month. And yes, GameStop Corp. really is the most important issue for markets.

    It’s an extraordinary saga. I am linking here to a selection of pieces my colleagues and others have been writing; I won’t waste time in recounting what is now a familiar narrative. But to bring you up to date, this is the performance of GameStop’s share price over the last month:

    Despite its Thursday 70% fall, GameStop is up almost 900% this year

    It’s hard to believe this won’t become a pivotal event in the history of finance. Here are some of the biggest questions it raises:

    Libertarianism vs Paternalism

    This is an eternal debate. Freedom means the freedom to mess things up. But governments have a responsibility to citizens, and companies have a responsibility to clients, to reduce the risks that the actions of some will harm others. Driving is the most popular analogy. Paternalism demands that manufacturers fit cars with seat-belts, but libertarianism permits people to take the risk of not wearing them.

    There is a line to be drawn. Within markets, it is best to set a few simple rules, enforce them, and leave everyone as free as possible. That way the invisible hand can work its magic. But if the invisible hand really thinks that GameStop is worth $25 billion, something has gone wrong. The Securities and Exchange Commission is considering what to do, and there is plainly a regulatory issue here. Meanwhile, the decision by Robinhood Markets Inc., the main broker used by the Redditors, not to accept trades in GameStop on Thursday has already prompted class-action lawsuits from clients. For arguments against paternalism, look at the comments below the piece by my colleague Conor Sen arguing that Robinhood did the right thing. 

    As day traders are the Davids in this drama, up against hedge-fund Goliaths, their supporters in Congress include progressive Democrats such as Representative Alexandria Ocasio-Cortez, and Senator Elizabeth Warren. The politics will be unpredictable. But a few points seem clear:

    • The issue of whether Robinhood and others really engaged in “gamification” — making trading more like a game, and helping to get people addicted to it — needs to be addressed. I think they have a case to answer

    The Future of Shareholder Capitalism

    What was intended to be one of the week’s biggest stories disappeared in the vortex of excitement caused by the sub-redditors. Laurence Fink, chief executive officer of BlackRock Inc., the world’s largest fund manager, released the startlingly assertive letter he had sent to the CEOs of every company in which his firm invests. His demands notably included:

    Given how central the energy transition will be to every company’s growth prospects, we are asking companies to disclose a plan for how their business model will be compatible with a net zero economy – that is, one where global warming is limited to well below 2ºC, consistent with a global aspiration of net zero greenhouse gas emissions by 2050. We are asking you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.

    BlackRock is trying to come up with a more palatable model for shareholder capitalism, which can guide the economy and society to better long-term outcomes, even if they don’t bring immediate returns. Viewed cynically, this is a public relations effort to make Wall Street look more virtuous; less cynically, it is an attempt to live up to the demands of stewardship. Not only do BlackRock and other big fund managers need to provide a pension for their clients in retirement, the argument goes; they also need to ensure that they have a world with a breathable atmosphere in which to retire. The truth lies between these poles and includes a realization by Fink and others that capitalism is widely seen to be failing, and that they need to do what they can to reform it from within, before having reforms imposed on them.

    The Redditors — or at least some of them — also plainly believe that they are part of a democratization of finance that will allow them to help make capitalism fairer. Rather than leave this process to big fund managers using “ESG” investing, their idea is to force a more “just” outcome. That includes, in the case of some of the companies they are now buying, the notion that it is unfair to starve them of capital. This is in part a well-intentioned attempt to rescue some companies; it sounds much like governments’ old practice of saving lame ducks and picking winners, rather than letting the market ensure that capital doesn’t go where it cannot be well used.

    Share ownership is now largely a business for institutional managers using other people’s money, who don’t have the incentives that direct owners would. The new breed of retail investors hope to reform capitalism by returning to direct ownership and breaking the hold of what they see as the corrupt institutions that now control the market. Many seem to delight in the label “anarcho-capitalist.”

    The common thread is, of course, an acceptance that the current model isn’t working. I’m far from convinced that either the BlackRock or the WallStreetBets model is the answer. But the debate over what the new model of capitalism should look like, which should have happened at least a decade ago, can be delayed no longer. 

    Accountability for the Global Financial Crisis

    Many Redditors involved in the insurrection see this as belated justice, or revenge, for the global financial crisis. Melvin Capital, the hedge fund whose bets against GameStop triggered the conflict, didn’t exist back in 2008, and as far as I’m aware nobody working there has any responsibility for the behavior that caused the crisis. But that isn’t how many of the Redditors feel about it. This is taken from a manifesto written by one of them, a teenager at the time of the crisis whose family went through considerable privations. It was sent in by several people:

    We have a once in a lifetime opportunity to punish the sort of people who caused so much pain and stress a decade ago and we are taking that opportunity… Your ilk were rewarded and bailed out for terrible and illegal financial decisions that negatively changed the lives of millions.

    There are two issues. One is legitimate; there was no personal accountability for the many people whose behavior contributed to the crisis. The other is less so; we can exact a measure of justice by punishing other people who now do things in some ways similar. Personally, I would say that short-sellers, and hedge funds in general, were quite a long way down the list of culprits for the 2008 disaster.

    The central point is that the failure to hold people to account has poisoned the body politic for the last decade. That was a scandalous failing of the Obama administration. The story of how it omitted even to attempt to prosecute the worst miscreants can be found in Jesse Eisinger’s The Chickenshit Club. There was nothing inevitable about this. Plenty of people went to jail after the Great Crash; only a generation ago, Rudy Giuliani made his name sending the likes of Michael Milken to jail; and only a few years before Lehman, the leading figures in the Enron, Tyco and WorldCom scandals (some of them revealed by short-sellers) did jail time. 

    It is presumably too late to prosecute crimes more than a decade old. To some extent, that error is now impossible to remedy. It is also important to resist the temptation to find scapegoats; nobody should be punished unless they deserve it. But somehow the legal authorities, led by the U.S., need to demonstrate that white-collar crime will be punished. Otherwise, we can expect efforts at vigilante justice to intensify.

    Inter-Generational Conflict

    It is no longer acceptable to insult people on the basis of their race, sex, or sexuality, which is as it should be. However, it now appears to be OK to attack people because of their age. Look through WallStreetBets traffic and disparaging references to boomers come thick and fast. This incident is an opportunity to get one over on a generation who have houses, guaranteed pensions, subsidized healthcare, and paid off their college bills decades ago.

    The demonization of boomers is growing alarming. One WallStreetBets post with 27,000 likes starts “All you ****king Boomers enjoyed the golden age of America...” If that seems reasonable in a way, just imagine replacing the word “Boomers” with a racial term. The level of inter-generational distrust is terrifying. 

    While personal animus isn’t justified, the same cannot be said for the notion that there is generational injustice. Plainly, the Baby Boomers had a great deal, and the Millennials and those who follow them have a terrible one. (Full disclosure: I’m in Generation X and my children are in Generation Z). Generational conflict is set to be a critical fissure for the decades ahead, particularly as the number of retirees swells relative to the number in the working population. 

    In particular, there is the intractable issue of pensions. Many defined-benefit plans appear to be in real danger of failing to meet their guarantees, at least in the U.S.; defined-contribution plans the world over appear likely to leave people with inadequate income in retirement. Does society do everything it can to honor commitments to retirees (and thereby widen the generational gap still further)? Or are we on course for some reckoning in which older people surrender some of the benefits they have been expecting? This question is central to the next book club selection — The Great Demographic Reversal by Charles Goodhart and Manoj Pradhan — which we will be discussing in a live blog on the terminal on Feb. 3.

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