Economic Weekly: Blowing bubbles

The heady rise of the GameStop share price stole the financial market focus over the past week. This rise was reportedly driven higher by a group of sharemarket enthusiasts on a social media platform Reddit who challenged hedge funds’ short positions on the stock.  By driving demand higher, those short positions become increasingly expensive and risky to hold, in turn forcing the hedge fund managers to buy the stock to close out the position.  Anecdotally, the trading strategy posted on Reddit started out late last year over a genuine view that GameStock was undervalued (back when it was around $5 per share), believing the size of the short position to be unjustified relative to GameStock’s financial performance (listen to NPR Planet Money podcast ‘Cant Stop Game Stop’ for a great summary of the GameStock share price debacle and a simple explanation of short positions and the idea behind triggering a ‘short squeeze’).  However, it appears the trading strategy has caught on more widely and got somewhat out of hand, driving the price to astronomical levels hand - GameStop’s current share price is currently $222, evoking comparisons to the Tulip Bubble.  Reddit traders have now reportedly shifted focus to silver, driving silver prices higher over the weekend.  The volatility has some financial market participants nervous about the fall-out once the bubble finally bursts.

Back in NZ, the focus is on the December quarter employment figures released on Wednesday morning.  We expect the unemployment rate to lift from 5.3% to 5.6%, in line with market expectations and also the RBNZ’s November forecast.  See our full preview here.  Overall, the labour market picture is looking much better than expected and it’s likely the peak in the unemployment rate is likely to be lower over 2021, compared to our forecasts from late last year.  The economy has recovered faster than expected over Q3 last year, with the level of economic output (GDP) bouncing back to pre-COVID levels. The ANZ monthly business confidence survey suggests this momentum continued over Q4, with business confidence also back above pre-COVID levels by December.  Furthermore, monthly job data from StatsNZ also point to improving labour demand (see chart opposite).  Coupled with stronger than expected inflation data for Q4, the economy has proved itself to be on much sounder footing than ourselves and the RBNZ expected had been expecting, which reinforces our view that no further monetary stimulus is required at this point.  Nonetheless, challenges to the economic outlook remain, with economic growth likely to be fairly soft this year slowed by weak exports of services and weak population growth.  With borders expected to remain closed for the rest of the year and the impacts felt unevenly across the economy, there remains a case for targeted fiscal support.

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Mark Smith

Senior Economist

Mark joined ASB in 2017, with over 20 years of public and private sector experience working as an economist in New Zealand and the UK.

His resume includes lengthy stints at ANZ and the Reserve Bank of New Zealand, and he has also worked at the Bank of England, HM Treasury and the New Zealand Transport Agency. Mark's areas of specialisation include interest rate strategy, macro-economic analysis and urban economics.

Born and bred in the Waikato, Mark studied at Waikato University where he graduated with a Master of Social Sciences, majoring in Economics.

Mark's key strengths are the ability to use his extensive experience, inquisitive nature, analytical ability, creativity and pragmatism to dig a little deeper and to deliver common sense solutions to tackle complex problems.

When not at work Mark likes to travel, keep fit and spend time with his friends and family.