Before it fueled the run-up in GameStop’s stock, WallStreetBets, the Reddit message board, had another claim to fame: It helped popularize a series of memes centered on the Federal Reserve chair, Jerome H. Powell, and his central bank’s policy of keeping interest rates near rock bottom while buying government bonds to bolster the economy.
“Money printer go brrrrr,” many of them read, suggesting that the Fed chair was essentially printing money and propping up markets by pumping cash into them through its program to buy government-backed bonds.
Reddit and Twitter made images playing on Mr. Powell’s persona — he’s referred to almost exclusively as “JPOW” on WallStreetBets — so ubiquitous that they’ve become paraphernalia. Amazon now sells sweatshirts (Prime eligible!) printed with an image of the Fed chair as a Christ figure ringed in a halo of golden light. In place of the Bible, the gospel he holds declares, “Recession canceled, stocks only go up.”
The blind optimism embodied in that statement — one might call it irrational exuberance — runs the risk of inflating bubbles in markets. Some experts see the saga of GameStop as a cautionary example of problems that can develop when investors get swept up in market momentum, driven to some extent by the Fed’s attempts to keep the economy humming along with low rates and bond purchases.
“We’re observing a market mania, and the cost of money has something to do with this,” said Peter Fisher, who teaches finance at Dartmouth’s Tuck School of Business and once served in the Treasury Department and Federal Reserve. “It’s just not credible to suggest that the momentum in equity markets has nothing to do with the Fed’s efforts to keep interest rates so low for so long.”
To be clear, GameStop has been an unusual situation.
Hedge funds had been betting against the retailer’s stock, or “shorting” it, assuming its share price would fall. A rush of retail traders coordinated to make that bet go bad by pushing up GameStop’s price. Because of the way short selling works, the hedge funds were forced to buy GameStop themselves to limit their losses. The stock price skyrocketed, jumping more than 600 percent in days.
GameStop vs. Wall Street
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A mass of newly minted retail investors has poured into the stock market over the last year, thanks to a confluence of factors including fewer social opportunities and work-from-home arrangements, temporary disruption of sports betting and the rise of trading that is billed as “commission free.” Retail trading of individual stocks now represents roughly 25 percent of overall stock market volume compared with just 10 percent in 2019, according to Goldman Sachs.
But a shared belief that this is a good time to buy stocks is also fueling that trend.
Leaving aside the surge — and then the crash — in…
Read More: Do Fed Policies Fuel Bubbles? Some See GameStop as a Red Flag