It is tempting to see GameStop’s soaring stock as merely the result of clownish behaviour in a chat room. That would be a mistake.
4 min
GameStop is the platonic ideal of a stock bubble.
A combination of easy money, a real improvement in the company’s prospects, technical support from a short squeeze and a mad rush to get rich or die trying pushed stock in the retailer up 64-fold from late August to Wednesday’s close. Anyone who has held on for 10 days made gains of more than 10 times their money.
It is tempting to see GameStop as merely clownish behaviour in a chat room having some amusing effects on a stock few care about. That would be a mistake.
Sure, the wildly popular Reddit group Wall Street Bets—slogan: like 4chan found a Bloomberg terminal—is full of childish chat. Several users report that they have bet their parents’ pension fund on GameStop or that the boss’s daughter has bought in. There are plenty of calls for the stock to go to $1000 or more (it started the year at $18.84).
But GameStop’s soaring stock—and similar moves in BlackBerry, Nokia and others—is a bubble in microcosm, with lessons for those of us worrying about froth elsewhere in the market.
GameStop’s rise started with some genuine good news, just as bubbles always do. Ryan Cohen, who built up and sold online pet-food retailer Chewy, started building what is now a 13% stake for his RC Ventures in GameStop last year. He pushed for the staid mall-based seller of videogames to improve its internet sales. This month he joined the board.
Mr Cohen’s arrival means GameStop at least has a chance of joining the 21st century. From the first disclosure of his stock purchases in August up to the end of November the shares tripled, helped too by the improved prospects for the vaccine-driven reopening of the economy.
Along the way, some private investors latched on to the stock, helping its rise, and it became an item of discussion on Wall Street Bets, or r/WSB as it’s known.
This month the stock moved into the pure speculative phase, producing several daily jumps of 50% or more, and fundamentals were abandoned. Many cheerleaders on r/WSB stopped even making the pretense of arguments about Mr Cohen’s chances of turning the company around. Instead, there were two justifications for buying: wanting to get in on the price action to avoid being labelled, in the abusive parlance of the forum, a “retard” who missed gigantic profits, and the self-fulfilling prospect of hurting the large numbers of short-sellers.
As the late economist Charles Kindleberger put it: “There is nothing as disturbing to one’s well-being and judgment as to see a friend get rich. Unless it is to see a non-friend get rich.”
The scale of trading in GameStop shares is as extraordinary as the daily gains in price, suggesting widespread disturbance to people’s judgment. On Tuesday, $22 billion of shares changed hands, more than in Apple, the world’s largest company, and double GameStop’s market value. Adam Smith, the founder of economics, called speculative manias “overtrading,” and this is what they look like.
The hope of getting rich is only part of what’s inflating the bubble. Kindleberger argued that speculative manias needed innovative sources of financing, and the private traders on r/WSB have one: the shift last year to make trading in options free on Robinhood and several other platforms.
Options, like other derivatives, allow traders to use implied leverage to boost their bets, similar to borrowing money. In the same way that Japan’s bubble in the 1980s was fueled by cheap mortgages, and low Federal Reserve rates combined with collateralised debt obligations to support the housing bubble of the 2000s, the bubble in GameStop is aided by an increase in the money supply of private stock traders. Stimulus checks from the government can’t hurt, either.
Bubbles also frequently have support from technical factors that prevent the asset from being priced correctly. In the late 1990s, many dot-coms had a small float available, and none for short-sellers, making it hard or impossible for those who doubted the story to have their views expressed in the share price.
In GameStop, there are plenty of short-sellers, but they are making things even worse. The stock is caught in a vicious short squeeze. Short sellers had borrowed and sold more than 100% of the stock outstanding, as some was borrowed again. As the price rose, at least some of the hedge funds bought back shares to prevent further losses, so pushing the price up even further.
The most obvious parallel here is to K-Tel, the TV retailer of compilation tapes and the Veg-o-matic food processor, among other things. It announced in 1998 that it was moving online, prompting a jump in the shares that turned into an extraordinary short squeeze. K-Tel’s appropriately named public relations representative, Coffin Communications, gave this wonderful justification to the Washington Post: “Which do you think has more likelihood of success, a pure start-up that has never sold a product, or one like K-Tel that has been in business for 35 years?”
It turned out the answer was a pure startup, and K-Tel’s shares collapsed—but not before they had soared from $3.34 to more than $35 in under a month.
The difference with GameStop is that the r/WSB mob is actively engineering a short squeeze, discussing the pain they hoped to inflict on the short sellers and encouraging buyers not to cash in their profits.
Because there are so many shares that need to be repurchased by short-sellers, this offers an exit route for those who sell. But not everyone can do this, and those who are left holding the stock when demand eventually evaporates will watch the price plummet as it reverts back to something closer to what is justified by the company’s profit potential, just as K-Tel did.
Warren Buffett attributed to his mentor, Ben Graham, the line that “in the short run, the market is a voting machine—reflecting a voter-registration test that requires only money, not intelligence or emotional stability—but in the long run, the market is a weighing machine.”
The absence of emotional stability on r/WSB is obvious and has worked out beautifully for buyers of GameStop so far. But when the stock is weighed, many will be found wanting, as they always are in bubbles.
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Strong family financial planning can help reduce taxes and support younger generations. From intrafamily loans and asset gifts to inheritance disclaimers, strategic cooperation can create meaningful financial benefits—when families have the trust and structure to make it work.
4 min
Happy is the family whose members—parents, grandparents and grown children—trust each other enough to cooperate on shared goals, especially financial ones. When that is truly the case, Uncle Sam’s tax rules can help as well.
This matters especially now that mortgage rates are above 7%, and many families are looking for ways to help younger members. If the elders have resources and are confident younger ones can cooperate, a family loan could make homeownership possible while providing the elders with a useful income stream.
Other strategies can actually lower taxes, such as when funding 529 plans or Roth IRAs, or when someone inherits a traditional IRA with required withdrawals larger than they will need.
Here are three strategies useful for functional families.
It is perfectly legal for families to lend money to a relative for a down payment or even a private mortgage.
But it is important not to cut corners, says Ryan McKeown, a CPA with Modern Wealth Enhancement in Minnesota. If the loan is for a down payment, be honest with the mortgage provider and have a formal agreement. The lender owes tax on the interest payments received.
If the loan is for a private mortgage, both sides should have legal representation with a formal written agreement, including payment terms. The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.
To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.
In addition, the lender could use the $19,000 annual gift-tax exemption (described below) to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.
If you’re going this route, McKeown advises against having a fixed plan to forgive the debt. Instead, do it in one-off letters specifying the amount—and keep careful records. Otherwise the IRS might try to treat the loan as a taxable gift.
Powerful tax-saving moves for families often use gift-tax provisions. Under current law, anyone can give anyone else up to $19,000 of assets annually, free of gift tax. That means a married couple with three grandchildren could give them a total of $114,000 in 2026.
The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient. So if someone buys $1,000 of stock and gives it away when it is worth $5,000, the recipient’s cost basis is $1,000. If the recipient later sells the shares for $8,000, the taxable gain is $7,000.
Here’s an example showing how gifts could save a family taxes. Grandma is a widow of modest means, while her child and spouse have prospered. The couple has two children, and they want to contribute $5,000 to a 529 college-savings plan for each—but they need to sell stock to do it. Their tax rate on the sale would be 18.8%, and they would need to sell about $11,000 of stock.
However, Grandma’s federal tax rate on the stock sale is 0%. If the couple gives $10,000 of shares to Grandma, she could sell them, pay no tax, and fund the grandchildren’s 529 plans. This saves about $1,000 of tax.
These moves are legal, and they could be used in other ways, such as to help a young person fund a Roth IRA.
But trust among family members is essential: Under the law, givers can’t put conditions on a gift. Grandma could use her stock proceeds to take a cruise, but she makes 529 contributions instead.
Mark Sellner, a retired tax attorney and CPA living in Sarasota, Fla., uses this strategy. His children sell stock he gives them and fund 529 plans for his grandchildren.
The family’s tax savings aren’t huge, but he likes other benefits. The sales by his children don’t boost his adjusted gross income, which in turn could raise his Medicare Irmaa premiums or his 3.8% surtax on net investment income.
Sellner doesn’t worry about his children using the funds for another purpose.
“There can’t be any strings attached to gifts. Of course, it is up to us to decide whether to make them in the future,” he says.
Two caveats: The “kiddie tax” applies to most children under age 24, and it is levied at the parents’ rate on investment income above $2,700 in 2026. Consider this before making gifts to a young person.
Investors who give away stock also forgo the step-up, an important provision that exempts assets held at death from capital-gains tax.
Sellner knows he’s losing a step-up, but says, “The children could use a little more now. Why should they wait 20 years to get it?”
A disclaimer is a highly useful strategy in which one heir renounces an inheritance in favor of another heir. Assuming family members cooperate, this can save taxes.
Here’s one example. Dad died and had a large traditional IRA that he left to Mom. She has enough assets and income to cover her expenses, and she lives in a state with a stiff estate tax. The inherited IRA would put her estate over the threshold.
Also surviving are three young-adult children. If Mom disclaims all or part of Dad’s IRA within nine months of his death, that amount could go directly to the children. They will have 10 years to empty the account, and the family as a whole will likely save estate and income taxes.
Disclaimers have many key details, especially regarding beneficiary documents. Although heirs have great freedom in choosing what assets to disclaim, the rules about who gets disclaimed property are rigid. It is best if the original owner names tiers of heirs so that if one disclaims, the next recipient is clear.
