The Briefing, Albert Mohler

Monday, February 1, 2021

It’s Monday, February 1st, 2021.

I’m Albert Mohler, and this is The Briefing, a daily analysis of news and events from a Christian worldview.

Part I

What Exactly Is Going On with GameStop, Reddit, and Wall Street? And What Does a Biblical Worldview Teach Us about the Stock Market?

Was it just irresponsible speculation that led to economic collapse? Was it a David versus Goliath equation? What exactly was going on with Reddit, Wall Street? What’s going on with the price of GameStop? The reality is that many people who hadn’t given much attention to stocks, much less stock speculation, much less to something that would be called shorts or stock options and all the rest, people that hadn’t given much attention to Wall Street, all of a sudden were interested when a stock that had a very low valuation went up 1700% in a matter of weeks. And it did so driven by chatter and online discussion, chat rooms and, and other online venues. And it’s not only GameStop, it was also a few other stocks, most notably AMC Entertainment and Blackberry.

So what’s going on here? Well, the story is about a group of non-conventional investors who in the practice of what’s been known as day trading, were actually trading in undervalued stocks to see if using their online forums, they could boost the price and it turned out that they could successfully boost the price. As I said, with GameStop, which is a store that used to be rather popular in malls, but now in the digital age, it’s not all that highly valued, but the reality is, for a brief period of time, it stock appeared to be going out the roof for no obvious reason whatsoever. Well, these stories tend to end the same way, and that is with a falling price of a spectacular stock. And behind this are some big issues of worldview concern as well. As you look at this story, it does get presented by some, as David versus Goliath.

These individual investors who brought ruin, it leads to massive losses to some very large established Wall Street funds, including hedge funds. How did they do it? Well, that’s an interesting story in itself. On online forums such as Reddit, some of these individual investors started talking up the stock even as they bought it. They wanted to see if by talking it up, by speaking of its value and looking at its speculation potential for the future, they could drive the price up. It turns out they could. It turns out that as you had a crowd of people, all of a sudden now investing largely with rather small amounts. These are very small investors when you look at the market as a whole, but they might be investing a rather sizeable amount of their own wealth or their own money on hand. And it turns out that some of them are about 14 years old.

It turns out that these investors are overwhelmingly young, and overwhelmingly male. You might say that something like the mania about a video game got turned into an online real time investment story. And that investment story led to that 1700% rise in the value of the stock of GameStop. But that stock began to correct, that’s the word that is used by the market for what happens when a stock that’s too highly valued, then is devalued to meet some reasonable expectation. What’s reasonable for GameStop? Well, it’s a whole lot less than the $483 per share that the stock had at its height. And again, that’s an increase of 1700% just in a matter of weeks, but it’s also true that there is no way that the company was worth that much. As Wall Street observers understood, you can drive the price of a share up to $483, but that doesn’t make the company worth $483 a share.

Eventually that kind of speculation, and we’ll explain what that is, but that kind of speculation comes to a collapse simply because, it is based upon people having some kind of confidence that the stock is going to go up, but the moment it begins to go down, well, there is often then in that correction, an exodus from the stock. It can be Swift going up and if anything, it can be swifter in the general pattern coming down. But there are some really big issues here. First of all, why would so many in the media and popular culture, see this as something like a David versus Goliath? Well, it is because, even though there are legal mechanisms, of course, for individual investors to be involved in trading, the reality is that most of the action on Wall Street is by a handful of really big firms.

And it turns out that they hedge their bet so to speak, and I mean that literally, they do so with hedge funds. And these hedge funds are funds that are put together with largely, liquid investments that allow them to hedge over against other kinds of investments. So, if there is a loss in other investments, the hedge can make up for it. In order for the hedge to work, it has to be rather counter-intuitive, which means to say, it follows an investment philosophy that’s largely the opposite of the funds or investments that you’re trying to hedge. If you’re following me, it simply means that sophisticated and generally large investors, especially large investors, they’re very, very careful to make certain that they do not have an unbalanced portfolio when it comes to asset allocation.

They want to make certain that they’re invested across a spectrum of strategy so that if one strategy goes down, they will at least be partially protected by the fact that other portions of the market are likely to remain stable, or actually to go up. The counter-intuitive nature infuriates many of the small investors who can’t actually fulfill that same kind of hedging. Furthermore, over the course of the last several decades, mechanisms such as stock options and the different kinds of strategies for stock options have become more and more legal, and more and more common, even in the portfolios of many Americans and therefore, 401(k)s are in their investment plans or mutual funds, the reality is there are a lot of stock options out there, and there are also mechanisms such as shorting a stock.

Now, what does that mean? Well, this is going to require just a little bit of thinking, but track with me because it’s very interesting. If you’re a massive investor, if you’ve got a huge fund, then you might take some of those dollars and buy a stock that you think is going down, now that’s counter-intuitive. Why would you buy a stock that’s going down? Well, you do so because shorting means this, you borrow stocks from someone else and then you hold them for some time believing the stock will go down. If you borrow, so to speak, a thousand shares of the stock because you thought the stock was going down, and then the entity from whom or from which you borrow them says, “I want my stocks back.”

You have to give back a thousand shares of the same stock at the price that has gone down, then you have actually made money because you are giving back the shares of the stock at a lesser value than when you borrowed them. You pocket the difference. Well, what happened in the case of GameStop? Well, it’s really interesting because there had been many on Wall Street, particularly institutional investors that had shorted the GameStop stock. And that meant, they had been borrowing a lot of those shares because the price was going down and they were going to pocket difference. But when the stock goes up, it can be catastrophic for those funds and all of a sudden, Goliath was losing billions of dollars. It actually happened. You had some of these big firms that lost billions of dollars because when all of a sudden the stock went up, and not just a little bit up, demonstrably up 1700% up, they had very real skin in the game.

Now the upshot of all of this is that there are likely to be all kinds of autopsies and investigations about AMC Entertainment, and about GameStop, and about Blackberry and other stocks that were irrationally highly priced in this process and driven up by this kind of online speculation. But the reality is, this is a very old story on Wall Street, it’s a very old story in human economics. The very reality is speculation comes down to the fact that there are people who will invest in the hope that something will be overpriced. Furthermore, there are people who will speculate by investing in an enterprise that they hope is going to be a breakout, that will grow exponentially in value and thus the stock price and their investment value will multiply commensurately. But the problem with speculation is that it’s out in front of the economic reality. Otherwise, it wouldn’t be speculation.

If you’re paying $50 for something worth $50, that’s not speculation, but if you’re buying something for $50 that’s worth 10, but you think it’s going to be worth 100 in the future, that’s speculation. And of course, as speculation always worked, well, the economy wouldn’t work because everyone would be trying to get ahead. The reality is, that never works. It is never the case that in a stock market, everything right rises equally or falls equally. The reality is, given different sectors, different management, different circumstances, there all kinds of information points go into investing. And furthermore, even the best educated investor is to some extent, absolutely dependent upon factors and forces that are outside control or expectation. You’re not guaranteed anything.

And the media loves a story like this. In fact, we all do, it’s fascinating. I read article after article on the GameStop issue because it was interesting seeing all these young people, including teenagers, including in one case, a very young teenager whose mother gave him for Christmas GameStop stock, just as a way of helping the boy to learn basic economics. Well, he learned it in a big way, pocketing some significant change.

But the reality is that what goes up must come down. That was a principle that was well-stated by Alan Greenspan back in the 1990s, when he described the stock market itself as driven then by what he called, “irrational exuberance.” Now, Alan Greenspan was known for a certain kind of muddled speech that was actually called green speech. But even as you look at that term, irrational exuberance, it raises the question just how much exuberance is rational. But nonetheless, the point is, investors sometimes get overly excited about the market. They have outsized expectations about the market, and he warned that this leads to an eventual disappointment, which is of course what happened just a matter of years after Alan Greenspan issued the warning. Irrational exuberance turned into very rational disappointment, but over time, just to look at the United States, the stock market actually has produced wealth. It reflects wealth and it produces wealth. And over time, investors, individual and institutional have generally done very well by leaving their funds invested in the market.

Part II

Has David Beat Goliath in This Wall Street Craze? The Answer Isn’t At All Clear Yet

Well, that’s an economic reality. What’s the worldview thinking? What’s the worldview analysis that we should bring behind it? Sometimes I may ask, is it even actually moral for Christians to be involved in the stock market because it’s just a form of gambling? But that’s what becomes very crucial in our understanding.

The stock market rightly understood, is not to be anything tantamount to gambling. It’s supposed to be about investing in confidence, about real value that will be produced by the companies that issue the stock. The real value means there’s real growth in the business, there’s real development and innovation, there’s increased productivity, there’s increased wealth. And you’re just investing in the hope that by owning shares in that company, some of that wealth will come to you.

And in order to distribute, most investors invest in not only several different companies, but several different funds and different kinds of funds. That’s just wise investing. Remember that Jesus, by the way, in the Parable of the Talents, he brought criticism against the one who buried the treasure rather than seeking to invest and multiply it. It was actually Jesus who said the wise steward is the one who multiplies the investment, wants to see the investment grow. Now there are better and worse ways to do that, there are more faithful and less faithful ways to that. And when it comes to investing in the stock market or in funds, Christians have to understand that the businesses with which we involve ourselves also have moral meaning. For example, Christians wouldn’t want to invest in a company the business of which has pornography. We wouldn’t want to do that, even though it might be very lucrative, it would be wrong to make that investment.

But of course, you also have to recognize that in a fallen world, involvement in any kind of stock market in any kind of economy has never untainted, which is to say, just to speak for example to American taxpayers, because of the issuance of treasury bills and even our government’s investments, you’re involved in things you wouldn’t want to be involved in. But the point is as good stewards, we would want to be as strategic in our stewardship as possible to be faithful. But looking at all of this, we have to recognize that the stock market isn’t gambling because it’s not about luck. It is to be about skill and investment, it’s to be about real value growth.

That’s what we’re looking for, real growth in the equity as it’s called. We’re looking for real productivity, real innovation. We’re looking at real economic gains, and in a Christian worldview perspective, based upon Genesis 1 and taking dominion, that is a part of what we want to see. We want to see flourishing, we want to see businesses grow, we want to see people employed, we want to see good things made, we want to see people be able to have clothing and food and all kinds of things that add up to a flourishing society.

So was it wrong for these individual speculators to drive up the price of GameStop and AMC and Blackberry? Well, it might’ve been, investigations will reveal that. But the one thing that has to be kept in mind from a Christian worldview is this, when you are looking at that kind of speculation, you can artificially drive the price up until just about everyone recognizes that’s what you’re doing. And at that point, the price isn’t going to go up, it’s going to go down.

But there’s an interesting little footnote to that. And that’s this, it is surprising given human nature, that even when people find out the truth, they find out that there’s not really a $483 value behind a stock, it’s interesting that for some time, they may continue to hold the stock because after all, sometimes we can talk ourselves into the fact that there’s hope for something that really is a baseless hope. There’s something else to keep in mind here, which is that when you think about the big investor class, Americans tend to think of some plutocrat on Wall Street, the so-called wolves of Wall Street and they think of them making all the money. And look, there are many of them and there are many wolves.

But the reality is that the average investor in the United States is a public school teacher in California through the California Teacher’s Pensions Fund. So when you’re looking at this and you even look at a hedge fund, and those hedge funds lost billions of dollars, you can say, well, those battled anonymous hedge funds lost that money.

But the reality is, it’s likely to be reflected in the quarterly report given to some public school teacher who may have retired in Montana. One of the things you see in the Christian worldview is that the timeline becomes very important. There’s nothing wrong with making a lot of money in a short amount of time, if it’s based upon the production of something real in value. But if it’s not based upon something real and value, the shortened time is probably an indication that is not going to last. And that’s something you should know on the front end.

The Christian worldview privileges stewardship, and stewardship does look for growth, stewardship does give a privilege to investment and stewardship and savings and thrift. It does prioritize productivity and growth and flourishing. It does recognize that in a fallen world, there are going to be both ups and downs. And it also makes very clear, as we understand ourselves that we can be, as Alan Greenspan said, marked by irrational exuberance.

And that takes me back where we began, gambling is wrong. The Bible makes that very, very clear. And the question is, can Christians invest in the stock market if it’s just a form of gambling? But the point is, it shouldn’t be a form of gambling, it should be a form of investing. But it can be a form of gambling if it becomes represented by this kind of speculation in which it is basically, trying to hope that enough people will buy an overpriced stock so that you can make some money in the short term, but if you’re making the money, someone else’s losing it. So by the way, the one of the most interesting aspects of the GameStop’s story is this, yes, you had a bunch of these hedge funds that lost billions of dollars, but they’re likely to get it back.

The reality is that the people who are going to be holding the bag are likely to be in the most interesting stories, individual investors, who probably didn’t have that much to lose who nonetheless, are losing. Because in speculation for someone to win, someone else has to lose. But it’s a good time for Christians to think about the fact that our investments, including investments in stocks and bonds and other mechanisms, our investment in the economy should be based upon the hope for, and the anticipation of, real value, real economic right activity, real growth, because our concern is not merely to grow economically, but to grow in ways that lead to human flourishing, to people, having the things they need to an economy that is growing in a way that helps to build the entire society.

The Wall Street Journal, which is not writing from a Christian perspective, but often says the truth about such matters, concluded its editorial, and it points to Reddit. That was the online forum in which a lot of this exuberance about GameStop was found. The editors of the Wall Street Journal turned to the fact that regulators are certain to look into the situation. But then they asked this question, “How about reminding people that investments carry risk, that stocks fall and rise and that the GameStop losers won’t be bailed out.” It is fun in the short-term to see David beat Goliath, but in this case, it’s not at all clear that David beat Goliath.

Part III

It’s Still True, the House Always Wins: Understanding the Moral Nonsense of Gambling

But next, as we’ve been talking about gambling indirectly, let’s talk about gambling directly because Wall Street is noticing the explosion of actual gambling. The Associated Press ran a story last week by Wayne Parry, the headline was, “Gambling, Media a Sure Thing.” Now what it means by that is a synthesis, a combination of gambling and media. What that tells us, is that many major media entities in the United States are deciding that involvement in gambling in some form is in their corporate future. That’s a very interesting development.

As Parry tells us, “Different types of gambling are quickly coming together with each other, and with media outlets, and Wall Street is taking notice. Casino gambling, internet gambling, sports betting and daily fantasy sports are no longer separate silos with unique audiences. Gambling companies are increasingly combining them and partnering with media companies to expand the reach of gambling.” And then the Associated Press tells us, “The expansion is leading Wall Street analysts to predict fast-growing revenue over the U.S. In the next five to 10 years, Morgan Stanley sees a $15 billion sports betting and internet gambling market by 2025.” McCory Research says that the same market could be 30 billion by 2030. Now from a Christian worldview perspective, what does that tell us or what should it tell us? Well, number one, let’s remember that Christians understand gambling to be a violation of the principle of stewardship.

It’s a violation of the idea that we should be privileging thrift, we should be investing in value, we should be working towards common human flourishing which is what happens when an economy rises. Gambling is actually based on something very different than investing. Rightful investing as we’ve said, is based upon a real growth in value. Gambling is generally based upon one of two things.

Number one, sheer luck that is to say, sheer odds contingency. Or secondly, a betting of the odds over against some kind of achievement, some kind of race, kind of boxing match, some kind of, well, this or that. And it’s very interesting that in the context of COVID with so many of the events, events-based gambling had depended upon not happening. It’s really interesting that in the horse racing business, there is now an accent on what are called, historical horse races, historical sports betting.

If you’re not familiar with that, that we’ll just look it up. It’s interesting in itself, but it’s based upon the fact that people are gambling on races or upon a system based upon raises that took place in some cases, long ago. What does this tell us about human nature? It tells us that there is a gambling mania. And here’s something very interesting, governments are actually, according to scripture, to be judged by whether or not they hold up practices that are just and lead to the protection and flourishing of the economy, or whether they incentivize things that are unjust. Now judged by that principle, governments should try to shut down gambling. But what happens is government see the opportunity to gain revenue by gambling. And we’ve seen this argument come over and over again, it’s a victimless crime, people are simply voluntarily investing and they’ll make the argument that it’s just a matter of a people paying a tax, basically because they volunteer to, rather than a tax that they are coerced to give by confiscatory taxes.

But that is moral nonsense because the governments are now enticing people to lose money, because gambling only works if the vast majority of those gambling lose money rather than gain money. And when it comes to things like state-based lotteries, which are predatory, that is, they are incentivizing people risking money they really can’t afford to risk. And when they predominantly sell lottery tickets and even focus their advertising in the communities that are least able to lose money that way, the government, instead of becoming protector actually serves as predator. And as different kinds of forms of gambling are now multiplying, and you see the fusion of gambling with media, you also see different States that are deciding they want to get in the gambling business in a big way. And so we’re looking at a vast expansion and betting on professional sports. There is of course, an entire market sometimes legal, sometimes illegal on betting on other sporting events.

And of course the moral complications just get deeper and deeper. And when you have a sports figure, what do you do when there’s sports betting? Well, the sports figure may not be allowed directly to bet on sports, maybe the sport that the better is in and much less when it comes to the better’s his own team. But actually there are ways around that. There’s indirect betting, there’s direct betting. And frankly, when you bring this amount of money into the equation, there are all kinds of opportunities for collusion, all kinds of opportunities for corruption.

It’s also interesting to see some of the moral language that’s very revealing in this kind of account. Just consider the statement made by David Schwartz in this article, he’s identified as a gambling historian with the university of Nevada at Las Vegas. These combinations seem to be the wave of the future, but then listen to this language coming from the professor, “With geographic expansion nearly complete in the U.S. Texas is the biggest unserved market still out there. Casino companies are looking to grow their revenues by expanding into new forms of gambling and online and sports betting are the most prominent. Even daily fantasy sports is seen as a viable route as seen by recent moves by Bally’s and Caesars. The media partners get more content and more eyes on their product.”

What’s the morally revealing language? Well, the part that struck me was the fact that Texas is here identified as, “The biggest unserved market still out there.” The biggest unserved market, that means that morally, well, you need to go serve that market. That seems to be the imperative that is behind this language. You could put it another way, Texas is at this point, the most protected state when it comes to the intrusions of casino gambling. But then that would require a very different moral judgment on gambling than is prevailing in the United States.

And in particular, in headlines such as, “Gambling and Media are a Sure Thing.” The one sure thing about gambling is that there are only winners if there are even more losers. And remember this, the old adage was right, the house always wins.

Thanks for listening to The Briefing.

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I’ll meet you again tomorrow for The Briefing.

R. Albert Mohler, Jr.

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