Meme Stocks: The Sequel

The GameStop Saga: How Redditors Took on Wall Street

In early 2021, GameStop, a struggling video game retailer, became the center of an unprecedented financial storm. This is the story of how a group of internet traders challenged Wall Street and what the latest developments mean for the company and the stock market.

The Rise of the Meme Stock

GameStop's journey from a dying retailer to the hottest stock on the market counterintuitively began with its decline. The company's business model, based on physical stores, seemed outdated in the age of digital downloads and online shopping. Its stock price reflected this decline, dropping from nearly $50 in 2014 to around $3 by mid-2020.

Enter WallStreetBets, a popular forum on Reddit where users discuss stock trading (disclaimer: don’t use this forum as actual financial advice 😯). Some members believed GameStop was undervalued and began buying its shares. This caught the attention of hedge funds, which then started shorting the stock. Shorting means borrowing shares to sell them, hoping to buy them back at a lower price and pocket the difference. If the price rises instead, short sellers can face huge losses.

WallStreetBets saw an opportunity. By buying and holding GameStop shares, they could create a "short squeeze." As the price rose, short sellers would be forced to buy back shares at higher prices to cover their positions, pushing the price even higher. The strategy worked spectacularly. GameStop's stock price surged from about $20 in early January 2021 to an astonishing $483 by the end of the month. Why did people do this? I’ll simply refer you to the mantra of WallStreetBets: Eat The Rich.

The Crash and the Aftermath

By early February, the stock had dropped back down to around $50. The trading app Robinhood added fuel to the fire by restricting purchases of GameStop shares, citing volatility. This move was criticised as protecting hedge funds at the expense of small investors, only increasing the desire of so-called Meme Stock Traders to raise the value of GameStop shares ‘to the moon’.

The saga had significant consequences. Hedge funds lost billions of dollars. According to S3 Partners, short sellers suffered $19.75 billion in losses by January 29, 2021. The event also prompted hearings in Congress, where Robinhood's CEO and prominent Redditor Keith "Roaring Kitty" Gill testified. Roaring Kitty was largely cited as being the driver of the bubble.

The Latest Developments

Fast forward to May 2024, and GameStop is back in the headlines. The company announced it had raised over $930 million by selling 45 million shares. This cash infusion aims to fund corporate expansion, including acquisitions and investments. Ironically, the announcement of the stock sale initially caused the share price to drop, but it rebounded quickly, showing a 25% increase in premarket trading. GameStop's share price remains volatile, influenced by social media and retail investors. Over the past month, shares have risen more than 98%, though analysts remain skeptical about the company's long-term prospects.

Economic Rewind

The GameStop saga is a prime example of market dynamics and economic principles in action:

1. Supply and Demand: The massive buying of GameStop shares by retail investors increased demand, driving up the price. When Robinhood restricted purchases, demand fell, causing the price to drop.

2. Market Efficiency: Traditional financial theory suggests that stock prices reflect all available information. However, the GameStop case showed that prices could be heavily influenced by investor behavior and social media, challenging the efficient market hypothesis.

3. Behavioral Economics: The episode highlights how psychological factors and herd behavior can impact financial markets. The excitement and collective action on forums like WallStreetBets drove many to buy GameStop shares, often disregarding the company's fundamentals.

4. Short Squeezes: This strategy involves forcing short sellers to buy back shares at higher prices, leading to significant price spikes. It's a risky game that can lead to massive gains or losses.

From the Team

A Spotlight On… Christina Romer

Chairs of the U.S. presidential economic advisory committee hold one of the most influential posts in the world, acting as the top advisor on economic policy for the most prominent economy. Today’s article focuses on Christina Romer, one of the four women – alongside Laura Tyson, Janet Yellon, and Cecilia Rouse – who have chaired this prestigious committee.

Renowned for her research on the Great Depression and the impacts of monetary and fiscal policy on economic cycles, Christina Romer’s work has significantly shaped contemporary economic thought and policymaking, particularly in the area of financial crises. In this article, I will explore the various financial crises through the lens of Christina Romer:

The Great Depression (1929-1939)

While it is commonly believed that increased government spending on public works was the primary factor in ending The Great Depression, Romer argues otherwise. Her research provides compelling evidence that monetary policy played a more crucial role. In 1933, the abandonment of the gold standard led to a significant devaluation of the dollar in terms of gold. This, combined the flight of European capital to the relatively stable US as war loomed in Europe, injected substantial volumes of money into the economy. Romer showed how this influx to the money supply was pivotal in stimulating economic recovery, highlighting the importance of monetary policy over fiscal measures during that period.

The Global Financial Crisis (2008)

We’ve all heard of the 2008 Financial Crisis, and most of us are familiar with the factors that caused it. However, how many know the team that helped the economy recover? Christina Romer and her team at the Council of Economic Advisors played a pivotal role in revitalising the economy, yet her contributions remain largely unrecognised.

Christina Romer chaired President Obama’s Council of Economic Advisors during the Global Financial Crisis. During which she proposed the American Recovery and Reinvestment act of 2009, a $787bn stimulus package comprising tax cuts, direct government spending on infrastructure, retraining programs, and more, which aided the recovery of the American economy.

Asset Bubbles

Her research into financial crises also led her to explore whether it is possible to achieve economic growth without the detrimental effects of asset bubbles. The goal of and economy is to foster value creation rather than value extraction, as described by Mariana Mazzucato in her book The Value of Everything – check out an earlier edition of Girl Economics to learn more about her! In a bubble-free economy, output is more likely to result in productivity improvements that generate genuine value, rather than speculative investments that ultimately prove worthless. Romer argues that “The goal of long-run economic growth without asset price bubbles is not only achievable, but is something we should expect if we put a sound regulatory framework in place and if policymakers remain vigilant.

Learn more about Christina Romer;

Thanks for reading! See you in the next issue - Erin McGurk