It has long been considered a dying company by Wall Street because it does not have a strong online presence. It seemed to be headed in the same direction as Blockbuster after Netflix arrived with a streaming model for movie rentals to replace Blockbuster’s model of drive-to locations with physical VHS cassettes and DVDs.
GameStop was heavily shorted. Then along came the Bros!
The Bros (short for “brothers”) are mostly millennial, mostly male novice traders who used the RobinHood mobile phone app to trade stocks (using call options with leverage) the way people bet on the Super Bowl or basketball during March Madness.
GameStop went from $40 per share to over $400 per share in a matter of weeks, leaving hedge funds that had shorted GameStop with over $20 billion in losses. Of course, the GameStop pump-and-dump came crashing down, resulting in losses for the Bros also, but that’s just how bubbles go.
Here We Go Again?
What is not as well-known is that a lot of the money for the Bro’s trading came from the $1,200 COVID relief check the government handed out last spring and the $600 checks handed out at the end of December.
Many Bros were tech-savvy, unemployed and stuck-at-home, so using the government’s “free money” to have fun trading stocks was a great form of entertainment during the lockdowns. Now it’s happening again!
Young retail investors plan to use their new $1,400 government checks from the $1.9 trillion Biden bailout bill to engage in a new round of speculative trading.
For the Bros, this is more like gambling than investing. For more serious investors, there are some important implications. Once the checks are available (in about two weeks), investors should expect some enormous volatility and huge gains in whatever stocks the Bros select.
It’s impossible to know in advance what stocks will be pumped (they use a Reddit chatroom called r/wallstreetbets/ to exchange views), but you’ll know it once the frenzy starts. The other serious economic implication is that the Bros and Americans, in general, are not planning to spend their money on goods and services.
What is not as well-known is that a lot of the money for the Bro’s trading came from the $1,200 COVID relief check the government handed out last spring and the $600 checks handed out at the end of December.
Many Bros were tech-savvy, unemployed and stuck-at-home, so using the government’s “free money” to have fun trading stocks was a great form of entertainment during the lockdowns. Now it’s happening again!
Young retail investors plan to use their new $1,400 government checks from the $1.9 trillion Biden bailout bill to engage in a new round of speculative trading.
For the Bros, this is more like gambling than investing. For more serious investors, there are some important implications. Once the checks are available (in about two weeks), investors should expect some enormous volatility and huge gains in whatever stocks the Bros select.
It’s impossible to know in advance what stocks will be pumped (they use a Reddit chatroom called r/wallstreetbets/ to exchange views), but you’ll know it once the frenzy starts. The other serious economic implication is that the Bros and Americans, in general, are not planning to spend their money on goods and services.
More Debt, Less Growth
The U.S. economy is about 70% dependent on consumption; savings and investment are essential, which can be beneficial in the long-run but do nothing to expand GDP in the short-run.
Biden has said that we need the massive spending package “to grow the economy.” But it will only slow the economy because the added debt causes Americans to save more and spend less in anticipation of higher taxes down the road.
The “stimulus” actually keeps people from looking for jobs because the handouts are often more than they could be making at work. Meanwhile, the higher taxes needed to pay for the handouts also slow the creation of jobs because businesses have less money to invest or hire workers.
The only sustainable way out of the COVID recession is real growth, which comes from getting people back to work and reinvesting corporate profits. It doesn’t come from the printing press or its electronic equivalent.
Whether Americans save the money, pay down debt or invest in stocks (even as speculation), they are not spending. That’s more evidence that the U.S. is in a liquidity trap, and the Biden bailout will not help economic growth.
The U.S. economy is about 70% dependent on consumption; savings and investment are essential, which can be beneficial in the long-run but do nothing to expand GDP in the short-run.
Biden has said that we need the massive spending package “to grow the economy.” But it will only slow the economy because the added debt causes Americans to save more and spend less in anticipation of higher taxes down the road.
The “stimulus” actually keeps people from looking for jobs because the handouts are often more than they could be making at work. Meanwhile, the higher taxes needed to pay for the handouts also slow the creation of jobs because businesses have less money to invest or hire workers.
The only sustainable way out of the COVID recession is real growth, which comes from getting people back to work and reinvesting corporate profits. It doesn’t come from the printing press or its electronic equivalent.
Whether Americans save the money, pay down debt or invest in stocks (even as speculation), they are not spending. That’s more evidence that the U.S. is in a liquidity trap, and the Biden bailout will not help economic growth.
- Source, James Rickards
