EIR LEAD EDITORIAL FOR MONDAY, FEBRUARY 1, 2021
Is GameStop a Harbinger of ‘Game Over’?
Jan. 31 , 2021 (EIRNS)—Events on the Wall Street stock markets in the past two weeks offer an illustration as to how rapidly the huge City of London and Wall Street financial firms and central banks must shift both massive investment, and masses of new government tax money into a giant new “green finance” bubble, before their existing “everything bubble” collapses. They are closing in on $275 trillion in global total debt resting on $80 trillion of fluffy GDP, with the “zombie” corporate debt part of the bubble surviving entirely on zero and negative interest rate money printing by the central banks. While trying to push us down into an economically primitive world of “green” technologies and hardscrabble farming, they themselves are standing on a very shaky ledge made of masses of unpayable debts.
Stock holdings are equity rather than debt; but stock-market margin lending is about $750 billion in debt on the New York market alone.
Without attempting any “insider” analysis or forecasts, there are some obvious aspects to the recent days’ booming of stocks pushed by the sub-reddit #WallStreetBets, which suggest the U.S. stock markets, and perhaps also precious metals markets, may be approaching a crash set off by a disappearance of liquidity. There is reason for financial firms to be nervous about the markets on the coming days—which could also see some SEC charges of market manipulation by the young brokers involved in #WallStreetBets.
First, there are gold and silver bugs among those pushing the “herd investing” of retail stock investors doing battle with hedge funds in the past two weeks. These precious metals bugs are looking for a “silver short squeeze” early this week, and there seems to have been no question that liquidity has become missing or inadequate in silver trading. By the nature of the stock and options trading which has been driving up GameStop, AMS, Bed, Bath and Beyond and other declining franchises, it has added an extra load of margin borrowing on an already greatly overvalued and over-margined stock market. The Robinhood and Ameritrade online brokerages, through which much of this trading was occurring, suffered losses of required liquidity last week and refused trades suddenly, causing some retail investors to take substantial losses in the middle of the general boom in these stocks.
Illiquid brokerages are sometimes signals of markets preparing to crash. “Manias” for stocks of little inherent corporate value—remember the tulip bubble—are another such signal. The huge preponderance of computerized program trading of stocks can amplify liquidity losses in relatively secondary financial firms into a crash, as in October 1987. And silver trading involves a valuable commodity rather than a stock. An attempt to organize a huge “silver short squeeze” against hedge funds, this week or in coming weeks, could create demand for a significantly larger amount of liquidity (margin loans) from more brokerages and investment banks which may not have it—as well as drawing the attention of the SEC on the question of attempting to “corner the market.”
It should be noted that the Federal Reserve stepped in to make liquidity loans to Wall Street firms in the last days of last week. Sixteen months ago a severe liquidity problem in the U.S. interbank market, initially appearing to involve just a few highly leveraged, derivatives-trading hedge funds blown off for interbank loans by banks, had to be hosed down by hundreds of billions in Fed liquidity loans, including to big Wall Street banks themselves, and then by QE4 in October 2019. The global central banks’ QE5, starting in early March 2020, has drowned everything since.
The current liquidity problems are being dismissed as in very small stock categories that brokerages and investors really don’t even notice, etc. But what matters to a debt liquidity crisis is not necessarily the size of the fuse—this one is quite small—but the immense size of this debt bomb.
We must recognize that the “COVID relief bills,” now with number six coming up, have not served in any way to recover the productive economy lying underneath this crushing “everything bubble” of debt. The “stimulus checks” going indiscriminately to anyone making up to $75,000/year and households with up to hundreds of thousands in annual income, have fed the speculation now causing alarms. We must instead mobilize and demand productive credit from a nationalized Fed, a Glass-Steagall clampdown on the Wall Street casino, and investments of that credit in newly productive infrastructure beginning with medical and public health infrastructure—here and in developing countries by cooperation with major powers including China. That will stop the disastrous “green finance bubble” scheme of the biggest banks, and tamp down the speculative mania of the little guys as well.