Once again Wall Street’s short rorts are risking thousands of Australian jobs. And once again Australia’s media is more interested in reporting the LARP* theatrics of hedge funds and Redditors than the real life impact.
Here’s a dose of real life: GameStop’s Australian “#1 gaming and pop culture retailer”, EB Games, has hundreds of shops across shopping malls, employing somewhere between 2000 and 4000 people (although the pandemic makes numbers uncertain).
Like all retail (and other IRL** experiences such as cinema), it’s under pressure because of digital disruption and the stay-at-home COVID-19 lifestyle. Last year EB Games closed about 20 stores. Unlike, say, similarly disrupted old media, retail lacks the political clout to get the government to shake down tech platforms on its behalf.
Rather than leave matters to the actual marketplace of buyers and sellers, the masters of the universe in the financial markets decided to hurry on the collapse of retail by using “shorts”, borrowing shares to sell now, buy back (cheaper) later.
The play has been hollowing out capitalism for 30-odd years in a five-step death spiral: manufactured share price collapse through shorting, which allows a cheap private equity buyout, who gut through sackings and closures, then relaunch or rebrand, before quietly closing.
In journalism, movies and TV, the hedge funds are proudly the misunderstood anti-hero. Take the fictional Bobby Axelrod in Stan’s anchor program Billions: “We’re white blood cells scrubbing out bad companies, earning for our investors, preventing bubbles. A hedge fund like mine is a market regulator.”
The reality is that hedge funds create no value. They’re money-sloshing machines that make money on turnover, not results. This means they’re incentivised to “do something” to maximise turnover, whether that’s moving the market through shorts, falsifying results (hello Bernie Madoff!) or offering, umm, alternative services like the late Jeffrey Epstein.
That’s where the business media comes in. The best skill a fundie can have is to be able to talk a good game on business cable shows or be a source of insider gossip for the financial papers (and now newsletters and blogs).
It’s the business model of the bookmaker: the media-mediated publicity dangles the lure of comparative greed, of a “my return is bigger than yours” brag, to pull in a cashflow of investor billions which in turn deliver easy millions to the hedge fund courtesy of a 2% clip.
The result? Most hedge funds underperform the sharemarket index most of the time and charge significantly higher fees for the privilege.
The traders who populate hedge fund floors in some job creation scheme for the MBA-educated offspring of the ruling class are more like bookmakers’ pencillers than the masters of the universe they aspire to be.
Australia — and Australian media — bears some of the blame. Long before the country shipped Rupert Murdoch offshore to New York, Melbourne-born Fortune journalist Alfred Jones decided it would be safer to hedge shareholdings by using buy and sell options rather than buying and selling actual shares.
In finance, no good metaphor goes unabused: “hedge funds” are the face of systemic risk.
Post-GFC, Australia has reduced the risk: investors increasingly opt for index funds with returns boosted by franked dividends while big institutional investors, like Australia’s industry funds, have proved cautious. Most industry funds avoid hedge funds and most decline to lend shares for shorting.
So what next? Just as pokies in pubs “democratised” gambling, gamified online trading apps like the now infamous Robinhood are “democratising” access to these financial instruments. More importantly, the squeeze that r/WallStreetBets put on Wall Street funds (by bidding up GameStop stock when the hedge funds had bet on it going down) reveals what happens, as Bismark warned of politics, when people get to see just how the financial sausage is made.
It’s teaching “Wall Street” a hard lesson: it might be long on money, but it’s short on trust. As a bogey for both new Democratic progressives and right-wing Trumpian populists, it faces being clipped in turn with serious regulation.
Forget the stock exchange theatre. That’s the story journalists need to be watching.
*Live Action Role Play; **In Real Life
Just the sort of casino capitalism that brought us the GFC. (And the collapse of Dick Smith Electronics.)
But it’s part of a bigger problem – the financialisation of the economy. More and more of our late capitalist economy is no longer growing things, making things, or providing services, but just shuffling money around. Because that’s where the profits are.
This (along with insider trading) reveals what an unrealistic joke is the ‘free-market’ capitalism taught in first year economics. It’s a great theory, but doesn’t work in practice. If capitalism is to work, it needs regulation.
Agreed.
That the word economy means ‘the efficient use of resources’ seems lost these days in govt and business / finance circles.
There’s way too much profit in shuffling money.
Firstly think many retail businesses nowadays are prone to revaluations, downwards, and a choppy or uncertain outlook, beyond Covid and shorting.
Think this was a case of a small stock or company becoming a (online) popular target while ‘shorting’ has negative connotations and real e.g. regulatory issues, attached, we all do something behaviourly similar when purchasing or investing.
Most exchanges have stop mechanisms on either the index or and individual stock if it moves significantly within a session or hours; an individual can be suspended and the company would be asked for a please explain by the exchange?
We try or prefer to pay or invest in what reflects value now and in the future, whatever the asset e.g. in Oz real estate speculation is one, and not over pay (vs. to see 25%+ shaved off a share or asset valuation in short time in the future….).
A quote from Investopedia 13 Oct 2020 explains the public benefits well:
‘For instance, if a security is overvalued by the market, investors may not be willing to purchase it at its market price. A short seller in this case would profit from the security’s price returning to its true value, and investors unwilling to pay the inflated price could then purchase the security at the lower price.’
Maybe needs to be applied to the property market that is propped up by debt, state incentives, planning, speculation, sentiments and lack of financial literacy.
My understanding is that short-sellers do more than just shrewdly anticipate stock returning to it’s ‘true value’, but that they actively work to reduce its value by selling shares they don’t even own (because they’ve borrowed them) in such quantities as to cause the price to fall just so they can buy the shares at a reduced price and walk off with a profit when they return the borrowed shares. This is a total perversion of capitalist theory about productive investment.
If big short money is what is takes to clearly not give a hoot about your neighbor (ie: the ensuing ‘perversion of capitalist theory’) In fact I will bet on the likelihood of my neighbors house burning down? I had best check whether they are following the latest council provisions and protocols involved.
Let the rich have their fortunes while the starving have “$200,000 porridge” (*nod). If that is the legacy our forefathers have insisted upon. When were they ever wrong?
Maybe needs to be applied to the property market that is propped up by debt, state incentives, planning, speculation, sentiments and lack of financial literacy
Ring a ding ding.
It is propped up by so much more than that.
No one at the very bottom can get their foot through the door. The property market boom was are direct product of Neo liberalism. So much so that those at the bottom today are sleeping in cars, under shop fronts, squatting in unused homes (If they are smart). I should know. I do know. Both owners of the houses I plonked myself into were aware I was there. The first owner was very kind, giving me warning when the house would be demolished. I have faced a winter cold using a truck battery to power my laptop.
That industry boomed, and was insufficiently regulated (or unregulated) to serve the purposes of propping up the economy. Stamp duty, capital gains: then enter negative gearing.
I am not well versed in property either. But I have studied some reports on social security and housing, and the reading does reinforce how ‘housing’ like ‘shares’ are only a right for those with ‘adequate means’.
We need a bill of rights. I think Michael Herrmann would agree, as he is up against the wall with his ‘insurance claim’ that is being held hostage by a legislated containment act written (with amendments) in the first decade of the 1900’s. It is now known as the Biosecurity act of 2015. It is now a class act.
If you ask me me, the stock market needs more than an intermittent ‘stop’ button.
Freeze Wall street it into quarantine and send the áuditors in, whatever the hell that would mean. ??
class act? The case has developed into a class action: Their only recourse I dare suggest. The government will not step in clean up the mess. They are too busy with their own mess.
“The reality is that hedge funds create no value. ”
Do any share traders make value? Is it not just moving money around*?
*Except in the case of raising capital for businesses.
Thanks Christopher. I followed the ‘banana’ diagram, but to actually have it explained to a laymen like me so succinctly really saves me personally so much time otherwise, trying to figure out all this ‘nonsense’. And it is nonsense? Are hedge funds a necessary mechanism? They are just a market within a market (clearly a much more problematic one). Am I not mistaken, or are ‘hedge funds’ like the Hunger games? With Donald Sutherland holding the carrot, with retail chains and small floated or índexed(?) ‘commodities’ being left at that mercy: wanting just one bite on the carrot? Like the US bonds issues? I really am just trying to get my head around this. Any clarification or further insight would be welcomed.
Yay me. As the youtubers might say: *first*
Where is everybody? Is it a working day out there in the land of the employed? Jack? Kewl..? Agni? Peter? Ship rat? Drew? So many of you out there. You’re all gonna be very unsurprised about all the disclosed political donations that were published today too. I look forward to reading everyone’s thoughts.
It’s teaching “Wall Street” a hard lesson: it might be long on money, but it’s short on trust. As a bogey for both new Democratic progressives and right-wing Trumpian populists, it faces being clipped in turn with serious regulation.
Forget the stock exchange theatre. That’s the story journalists need to be watching.
*Live Action Role Play; **In Real Life
It faces being clipped in turn with serious regulation.
? Is it a necessary mechanism? I just don’t understand it?
Reddit prompted a buy up of GameStop shares, to leave hedge betters at their mercy? To expose the corruption? Is it a necessary mechanism, or something slimy people slithered into the system? Is it a mechanism that can be easily thwarted (if is a rotten ‘attribute’), or does any attempt to do so jeopardise the ‘integrity’ of transparency as it stands?
Much like Musk made a clear ”signal” (telling users to switch from Whatsapp (Facebook owned), and everyone reacted thinking it was didactive: to find the abstract message to accumulate person wealth, which too spiked that respective share price? Different circumstances I know, but same outcome?
Hopelessly inept. Hoping to becoming adept. Not at playing the stock market: I will stick to my dirty stinky sock collection. I know they will be worth something one day… Maybe just not in this generation. Anyone want to hedge bets on that? 🙂
Since the dawn of man (What an archaic phrase) we have been bartering at the most basic level I am sure. (Eve bartered with the devil- she was always to blame!) Then eventually did that open the door to the idea of ‘holding leverage’, beheld and ‘burdened’.
I know how to grow my own ‘economy’. There need to be rules for everyone to follow. Wall street. The church for capital. The worshipers faith may dwindle here and there. In the end the church always wins. And the worshipers will be saved, or discarded in ruin, only to be replaced so on and so forth….
There are many reasons I didn’t study economics or Law. If I was more privileged (I struggled to spell that word actually, case in point) I wouldn’t feel that way today maybe. I might be a Lawyer or Fat Cat who likes fast cars, one for every day of the month, until trade in the next year. Maybe eventually that dream ‘Porshe’ will be opportune to me at a steal of a price. My 1 share in ‘VW” stock?
Now I would discard myself from the ‘equation’ or privilege. If big money is what is takes to clearly not give two shits about your neighbor. In fact I will bet on the likelihood of their house burning down? I had best check whether they are following the latest council provisions and protocols involved.
Let the rich have their fortunes while the starving have “$200,000 porridge” (*nod). If that is the legacy our forefathers have insisted upon. When were they ever wrong?
Christopher. Thank you for an enlightening article. Great journalism.