The GameStop Short Squeeze

[Charlie]

"How does betting on futures help the small farmer, or help the small businessman with an innovative idea, or help a city grow?"

Catherine,

For now, set aside helping cities and set aside the fact there are futures contracts on things like weather. Instead, focus on a farmer and a small business. Let's make the famer a small, Eastern Washington, wheat farmer --I know one-- , and let's make the small business a bakery. (My son knows one.) When the farmer plants her crop, she doesn't know what price wheat will be come harvest time. Meanwhile, there are expenses that have to be paid, which generally has to be done with money borrowed from a bank, who is also guessing what the price of wheat will be and trying to estimate their risks in making the loan.

Jump now to the baker. After harvest time, especially a good harvest, wheat will be plentiful, and its price should be cheap. Hence, flour should be cheap and one less thing for the baker to worry about. But what will the price of flour be in the off season? Likely, it will be higher, and that's an uncertainty the baker would rather avoid.

Now enter something called a 'futures contract' which lets the farmer 'sell forward' and lock in a price. Ditto the baker. He or she can buy forward, agreeing now on a price of a commodity to be delivered at a future time. Now both have lessened some of their risks. (Yeah, there's miller involved, etc. But let's keep things simple.)

When futures contracts are used that way, they lessen price volatility, help to ensure 'fair pricing', and serve a valuable social function. The parties who use futures contracts that way are known as 'commercials" and actually don't make up a very large part of futures markets compared with 'speculators', who don't intend to take delivery of the commodities they are betting on, but whose betting creates markets that are 'liquid', and liquidity in a market enables price discovery and dampens price volatility, which again, is a socially valuable consequence.

For sure, all markets can experience excesses. Always have. Always will. But they are fairer and more efficient than their alternatives, which is a top-down, planned economy.

Where you and I would probably agree is when futures contracts begin to be applied to things like equity indexes, and financialization for its own sake displaces genuine economic activity, and that financialization is abetted by our dear central banksters and legislators in the giant Ponzi scheme the US economy has mostly become, where the top 0.01% controls 90% of all capital and power, not through activities that help make lives better for the wider population, but only serve to enrich the few.

Remedy? No reforms will ever happen if "the general public" keeps burying its collective head in the sand, refusing to understand how markets work, much less engage them. The "big boys" couldn't get away with the (often) illegal shenanigans they do if there were an informed public who was willing and able to take the other sides of their trades when it was obvious the big boys had stepped over the line, such as happened when they nakedly sold 140% of GME's float. A mostly small group of traders --though Michael Burry was among them-- called their bluff and mostly clobbered them. (The friend of the son of a fishing buddy --a "lowly' stock clerk but serious gamer-- got in early and made $198,000, which he intends to lock away in conservative investments rather than doing something stupid, like buying a fancy car.)

His success was a rare, one-time thing most of us will never be able to achieve. But I have friends --myself included-- who regularly pull more money out of market than we bring to them, and the one characteristic we all share is years effort to learn the game that often goes back to our childhoods and talk around the dinner table and humble beginnings like a passbook savings account our parents helped us set up.

Don't let all this talk of 'futures' make your eyes glaze over. Instead, think about trying to invest in some things that are probably a part of your daily life, like coffee, cocoa, wheat, soybeans, meat, and natural gas, using ETFs based on them.

Charlie

[catherine]

Charlie, thank you for this well-written and understandable (even for someone like me, so ignorant in the stock market) explanation. I appreciate it. I certainly never had dinnertime talks about the financial markets when I was a child!

And thanks for helping me understand that futures aren't bad in an of themselves--they are tools that can be used or abused.

Where you and I would probably agree is when futures contracts begin to be applied to things like equity indexes, and financialization for its own sake displaces genuine economic activity, and that financialization is abetted by our dear central banksters and legislators in the giant Ponzi scheme the US economy has mostly become, where the top 0.01% controls 90% of all capital and power, not through activities that help make lives better for the wider population, but only serve to enrich the few

Exactly.

[Charlie]

Catherine,

You had asked about futures contracts and what beneficial role they might play. So I spoke to that question, not to the role that equity markets play, or the currency markets, etc., each of which has its own dynamics and offers its own benefits and suffers its own abuses. For sure, the "average" person can choose to ignore them all. But doing so means one lives in a world one doesn't understand and is subject to being disadvantaged by them who would exploit that lack of knowledge.

Markets are never completely "fair". Insiders always have 'home turf' advantage. But what has happened in the last several years is that the financial markets have become increasingly democratic, enabling small investors to participate in them --if they choose-- on a fairly level footing in terms of access to information and zero-cost executions.

Charlie

[Charlie]

Best analysis of the GME situation I've seen. https://www.zerohedge.com/markets/mo...ing-risk-curve