In institution, I was constantly educated that supplies are intended to stand for possession. If I possess supply in a firm, I cooperate that business’s returns, and also obtain ballot legal rights because business’s future. Stocks are intended to stand for a profit-sharing arrangement in between shareholders and also the company. It utilized to be this way.
Google shares give no ballot legal rights to financiers, and also no obligation for dividends. It’s why Google can make $30 billion over a four-year duration and also yet see its supply cost continue to be stationary. Amazon won’t offer its investors a suggested timetable of liquidation; if you genuinely possessed an item of the business you’d be qualified to ask for it. Yet having supply in these non-dividend-paying business is not the like having possession of the business. Their supply is simply a paper that you can market to various other financiers, which is dealt with as a different entity from the business itself. It’s even more comparable to a lawful Ponzi plan.
I’m not discussing actual Ponzi systems, although those are still extremely common right now. Bernie Madoff would certainly be honored: Kathy Bazoian Phelps, the attorney behind The Ponzi Scheme Blog, has actually determined 3 to 10 brand-new Ponzi systems each and every single month because the 2008-2009 Madoff detraction. But I’m discussing the whole securities market itself, where the success of a financial investment relies on the financiers that can be found in later on, and also at a greater cost. The much more financiers that purchase supply, the much more the cost increases, making that supply appear like a great financial investment to others. More individuals purchase, which presses the cost much past the real worth of the business. There comes a snapping point where the only want to generate income depends on the idea that individuals following you will certainly press the supply also greater, evaluation be damned.
That is precisely just how a Ponzi plan functions.
I am not the initial to make this contrast, certainly. A publication qualified The Ponzi Factor, by Tan Liu, indicates several instances that reveal the inconsistency in between a firm’s worth and also their supply rates. Tesla supply was trading at $20 in 2010, and also by 2017 it had actually climbed to $380. However, that exact same year, Tesla reported an incredible loss of $4.3 billion. As of this writing, Tesla’s supply is floating about $700; 2020 was the first time the company reported a full-year profit.
An also much better instance simply occurred in February, which led me to create this. I’ll offer you the run-through, since it’s fairly a tale. Robinhood, certainly, is a broker agent application that permits anybody to make “free” professions on the marketplace. Trades are just cost-free since Robinhood makes a large percentage of its profits by transmitting individuals’ professions with business referred to as market manufacturers. They make the remainder of their cash in various other methods, such as from the passion in individuals’ accounts.
Remember: If you aren’t spending for an item, you are the item.
Members of r/wallstreetbets—a Reddit community of mostly amateur investors, though not all—saw that some big Wall Street hedge funds were wagering versus Video gameStop, a brick-and-mortar computer game shop fading quick in an age of downloaded and install video games and also on-line purchasing. Hedge fund supervisors thought the out-of-date business would certainly go the method of Blockbuster, and also designed a fast method to make a great deal of cash by wagering versus its supply. This technique is called shorting. This breaks the whole factor of having a stock exchange, yet I swerve.
Essentially, shorting a supply indicates obtaining shares of supply from a broker and also right away marketing them, prior to a supply is anticipated to go down. Instead of wishing their supply increases, as an investor does, brief vendors just generate income if the supplies go down. Once it goes down, the bush fund supervisors purchase the obtained shares back at a price cut and also return them to the broker, making a revenue.
If you obtain this idea, you can miss my description in package listed below. But if your eyes polished over, allow me offer you a very easy instance.
Shorting a Stock:
Suppose you have 4 enthusiast’s stamps worth a dollar each. I ask if I can obtain them for a week, and also you allow me since you’re amazing like that. I right away market those 4 stamps to a dealer/sucker for 4 bucks. (Four stamps at $1=$4.)
Then, one week later on, I need to offer you the stamps back. But BAM! Their worth goes down! Now the stamps are just worth 25 cents each! I purchase them all back from the supplier for a dollar. (Four stamps at .25 =$1.)
So I offered the stamps for 4 dollars, and also purchased them back for one dollar. That indicates I made $3 revenue off of your stamps. Even if you billed me a bit of passion for obtaining them, I still made a rather wonderful offer.
Now do this with genuine cash, numerous times over, and also you obtain a suggestion of why hedge fund managers are so rich.
And if that didn’t do it for you, Twitter has an even easier explanation.
Hedge fund managers are allowed to buy millions of shares at one time, and they do. The problem in the GameStop fiasco is that the hedge funds got waaaay too greedy. The price for the stock at GameStop dropped significantly, as expected, but the hedge funds waited and waited, hoping to ride it out until the stock dropped to near zero. Though they had borrowed money to borrow the shares, it appeared they were waiting for GameStop to go bankrupt—a best-case scenario, where they wouldn’t even have to bother to buy the shares back.
The Reddit group caught on to what the hedge fund managers were doing, and they turned the tables by betting against the hedge funds. Soon, thousands of the so-called “retail investors” were buying thousands of shares of GameStop on Robinhood and apps like it.
In late January, GameStop stock was suddenly worth more than either Apple or Walmart. This made absolutely no sense at all, but it was hilarious to see Wall Street scrambling. Some called it the “Reddit Rebellion,” and the media ran story after story about the little people revolting and beating Wall Street at their own game. Crowdfunding billboards began popping up in cities urging people to buy (and more importantly, hold) $GME so they could get in on it. One Twitter user paid $18 for one hour to rent billboard space in Times Square. It worked, and millions of investors did just that.
For a brief period of time, it looked like the little guy was, for once, going to have a Trading Places moment.
But in real life, Wall Street always wins. Consider the tale of two Citadels.
Robinhood generates a huge amount of revenue from Ken Griffin’s Citadel Securities. Citadel makes users’ trades for the Robinhood app, so it briefly knows what investors are buying and selling before the trade is made. It’s legal, even though it’s a conflict of interest.
Even as Citadel Securities was making the app’s rapid fire $GME trades, Citadel LLC, Griffin’s hedge fund, was bailing out Melvin Capital—a hedge fund that was near-fatally exposed by the GameStop fiasco.
Robinhood then took the unprecedented step of blocking their customers’ trades on stocks targeted by r/WallStreetBets, including GameStop. App users could sell $GME, which would drive the price down, but could no longer buy it. The backlash was immediate, drawing bipartisan condemnation from Congress. The House Financial Services Committee announced a hearing on hedge fund manipulation.
Several Robinhood customers claimed Robinhood went beyond freezing their ability to buy. Robinhood vehemently denied this; users shared screenshots allegedly showing that Robinhood sold off their shares without their consent.
The billionaire Robinhood CEO, Vlad Tenev swears that saving all things Citadel wasn’t the reason for the shenanigans, citing market dynamics and clearinghouse deposit requirements.
Those sudden concerns just happened to favor the hedge funds.
Such Wall Street games are legal because Ronald Reagan successfully pushed for massive deregulation of the stock market in the early 1980s. Bill Clinton made it even worse when he signed legislation in 2000 that further deregulated the market. At least Clinton admits that he later came to regret it, especially after the 2008 stock and housing market crashes.
There are many flaws in American financial markets, but the practice of using stock options for executive compensation is one of the worst. Quite simply, the practice encourages those at the top of a corporation to loot their company for short-term gains. Since stock options are now the dominant form of senior management compensation, executives are now incentivized to only focus on immediate results, at the significant expense of the long-term goals of the operation. Forget about any consideration for the general welfare of the public or the environment.
Worse is the manipulative practice of stock “buybacks.” It used to be that when companies had a large surplus of cash, they would invest in the company, hire more workers, roll out a new product, or conduct research and development. After Reagan deregulated the stock market in 1982, companies had a new option: buy their stock back. Stock buybacks were illegal up until then because it is blatant market manipulation. Long story short, if the company buys back a lot of its stock from the marketplace, then earnings are distributed among fewer shares, which then raises share value. Corporate executives have quite an incentive for doing this because their compensation is now tied to the stock market. Many executives do it, including GameStop’s new CEO back in 2019.
As recently as 2018, when corporations received that gigantic corporate tax break from Trump’s GOP, American companies used that money not to raise wages or innovate, but to buy over a trillion dollars in stock buybacks. This money really did not go toward company investments, but it sure did make the wealthy class even richer. Since the Reagan era, income inequality has soared in large part due to the explosion of such compensation packages tied to the stock market for corporate executives, who today make up almost 60% of the top 0.1% of earners. This destructive behavior destroys the middle class, stifles innovation, and depresses wages.
Yet the real problem with the stock market, at least according to NASDAQ CEO Adena Friedman, isn’t the games that Wall Street likes to play, or the buybacks, or the decades of deregulation. No, the problem is poor people, like you, like the so called “retail investors” of r/WallStreetBets, who had the gall to talk to each other on social media about investing.
The solution, Friedman says, is to stop social media coordination; she even bragged about having new technology to monitor social media during trade activity so they can “Robinhood” them by blocking their ability to purchase shares.
Take that, poors.
Now, I am not an investment adviser, and also I am certainly not suggesting that anyone reading this shouldn’t invest in the supply market, especially if your company matches your 401(k). Stocks are definitely the easiest way to invest, and that’s by design.
Yet for we poors, there are opportunities outside the stock market that are worth considering.
Unlike stocks, which are sold on a centralized market, bonds aren’t publicly traded on any exchange. Instead, you must buy them from brokers. You can also buy U.S. Treasury bonds directly from the government. The bond market is regulated by the Financial Industry Regulatory Authority (FINRA). Unlike stocks, you must get paid regardless of performance. It’s like a loan. Our country would be much better off if we had a large-scale, regulated bond market instead of the stock market we have today.
Real estate is always an alternative. It’s not as easy as buying stock, requires a lot of research, and definitely has more initial investment. But real estate offers more stability and lower risk than stocks, plus better returns and greater diversification.
However, if you can’t afford or don’t want to own property, real estate investment trusts (REITs) are a different way to invest in real estate, with a lower entry point. They are bought and sold like stocks, and by law, 90% of the profits must be distributed as dividends to shareholders.
I’m not talking about running your own farm, although that would be pretty awesome—and the government does allow a 100% tax deduction for the costs of running a farm. (Just sayin’.) If you don’t want to buy a farm, Farmland REITs purchase farmland in a wide geographic area and then lease the land to farmers; investors earn a return on owning farmland without owning one. Additionally, several platforms provide access to farmland investments through crowdfunding.
If you think about it, no matter the state of the economy, people have to eat; now there are ways to own a slice of sustainable farmland for a heck of a lot less than the cost of buying an entire farm.
Stock reform is desperately needed, and it’s one of those rare issues where there’s enough bipartisanship to get something done, yet honestly, I don’t expect any significant change to happen in my lifetime. The economy will have to crash many more times before people seriously discuss a complete overhaul of the stock market.
Biden’s pick for the SEC is Gary Gensler, who proved to be a strict regulator of big banks when he headed the Commodity Futures Trading Commission. He didn’t mention Robinhood by name, but said one of his top priorities will be to conduct a thorough review of the issues regarding trading apps. Robinhood’s leadership, as well as that of Citadel, Melvin, and also yes, even r/wallstreetbets, found themselves in the House hot seat in February.
It’s a good start, but we need to do more than just focus on a few bad actors. Congress should, at minimum, create an independent commission, with subpoena power, to fully study the dishonest structure of the current U.S. supply market. Only after that can we unite to find real solutions for reform. Americans deserve at the very least that a lot.