You’ve Decided to Buy Twitter, So Who Are You Going to Call?  Investment Banks, of Course

Elon Musk. (Photo from the Associated Press.)

That’s what Elon Musk did in April 2022.  In early April, Musk purchased about 9% of Twitter’s shares.  On April 25, he became the owner of Twitter by buying the roughly 90% remaining shares for $54.20 per share. The total he paid for these remaining shares came to $44 billion. Following his often unorthodox style, Musk announced his plans in a tweet on Twitter. Where did he get the money to fund such a large purchase? 

According to Forbes magazine, in March 2022, Musk was by far the richest person in the world with total wealth of about $270 billion—nearly $100 billion more than Amazon founder Jeff Bezos, who is the second-richest person.  While it appears that Musk could afford to buy Twitter without having to borrow any money,  Bloomberg estimated that in April 2022 Musk had only $3 billion in cash. Much of his wealth was in Tesla stock or his ownership shares in SpaceX and the Boring Company, both of which are private companies that, therefore, don’t have publicly traded stock. Musk was reluctant to fund all of his offer for Twitter by selling Tesla stock or finding investors willing to buy into SpaceX and Boring.

Musk turned to investment banks to help him raise the necessary funds. Investment banks, such as Goldman Sachs, differ from commercial banks in that they don’t accept deposits, and they rarely lend directly to households. Instead, investment banks have traditionally concentrated on providing advice to firms issuing stocks and bonds or to firms (and billionaires!) who are looking for ways to finance mergers or acquisitions.  A syndicate of investment banks, including Morgan Stanley (which served as Musk’s lead adviser), Bank of America, Barclays, and what an article in the Wall Street Journal described as “nearly every global blue-chip investment bank aside from the two [Goldman Sachs and JP Morgan Chase] advising Twitter,” put together the following financing package. Initially, Musk wanted to raise $46.5 billion in financing—more than in the end he needed. Of that amount, Musk would provide $21 billion and the investment banks would provide loans for the remaining $25.5 billion. As collateral for the loans, Musk pledged $60 billion of his Tesla stock. 

Musk’s financing was a combination of equity—the $21 billion in cash—and debt—the $25.5 billion in loans from investment banks. To fund his equity investment, he was considering selling some of his stock in Tesla but hoped to attract other equity investors who would put up cash in exchange for part ownership of Twitter. According to press reports, Apollo Global Management, a private equity firm was considering becoming an equity investor. (As we saw in Chapter 9, Section 9.2, private equity firms raise equity capital to invest in other firms.)  Musk’s purchase is called a leveraged buyout (LBO) because (1) he relied  on borrowing for a substantial part of his purchase of Twitter and  (2) he intended to take the company private—the company would no longer have publicly traded stock.

Why would Musk want to buy Twitter? He shared the view of some industry analysts that Twitter’s management had failed to take advantage of opportunities to increase the firm’s profit. The actions of Musk and the investment banks were part of the market for corporate control. As we discuss in Microeconomics, Chapter 8, Section 8.1 (Macroeconomics, Chapter 6, Section 6.1), in large corporations there is often a separation of ownership from control. Although the shareholders legally own the firm, the firm’s top management controls the firm’s day-to-day operations. The result can be a principal-agent problem with the management of a large firm failing to act in the best interests of the firm’s shareholders. The existence of a market for corporate control in which outsiders buy stakes in firms that appear to be poorly managed can make firms more efficient by overcoming these moral hazard problems.

             But Musk had another reason for buying Twitter. As he stated in an interview, “Having a public platform that is maximally trusted and broadly inclusive is extremely important to the future of civilization.”  It was unclear whether this and similar statements meant that  after gaining control of Twitter he might take actions that won’t necessarily increase the firm’s profitability. 

            Elon Musk’s purchase of Twitter is a high profile example of the role that investment banks can play in determining control of large corporations. 

Sources: Kurt Wagner, “Elon Musk Lands Deal to Take Twitter Private for $44 Billion,” bloomberg.com, April 25, 2022; Cara Lombardo and Liz Hoffman, “How Elon Musk Won Twitter,” Wall Street Journal, April 25, 2022; Michele F. Davis, “Elon Musk Vets Potential Equity Partners for Twitter Bid,” bloomberg.com, April 21, 2022; Sabrina Escobar, “Elon Musk Isn’t Twitter’s Only Problem. It Faces a Number of Short-Term Headwinds,” barrons.com, April 21, 2022; Cara Lombardo and Liz Hoffman, “Elon Musk Says He Has $46.5 Billion in Funding for Twitter Bid,” Wall Street Journal, April 21, 2022; Andrew Ross Sorkin, Jason Karaian, Vivian Giang, Stephen Gandel, Lauren Hirsch, Ephrat Livni, and Anna Schaverien, “Elon Musk Wants All of Twitter,” New York Times, April 14, 2022; Rob Copeland, Rebecca Elliott, and Cara Lombardo, “Elon Musk Makes $43 Billion Bid for Twitter, Says ‘Civilization’ At Stake,” Wall Street Journal, April 14, 2022; “The World’s Real-Time Billionaires,” forbes.com, April 24, 2022; Musk’s tweet announcing his offer to buy Twitter can be found here.

Is Vladimir Putin Acting Rationally?

Photo of Russian President Vladimir Putin from the Wall Street Journal.

On February 24, when Russian President Vladimir Putin launched an assault on Ukraine he apparently expected within a few days to achieve his main objectives, including occupying the Ukrainian capital of Kyiv and replacing the Ukrainian government. After three weeks, the fierce resistance of the Ukrainian armed forces have resulted in his failing to achieve these objectives. Although the Russian military had expected to experience few casualties or losses of equipment, in fact Russia has already lost more military personnel killed than the United States has since 2001 in Afghanistan and Iraq combined, as well as experiencing the destruction of many tanks, planes, and other equipment. 

The United States, the European Union, and other countries have imposed economic sanctions on Russia that have reduced the country’s ability to import or export most goods, other than oil and natural gas. The sanctions have the potential to reduce the standard of living of the average Russian citizen.

Most importantly, the war has killed thousands of Ukrainians and inflicted horrendous damage on many Ukrainian cities.

Despite all this, is Putin’s persistence in the invasion rational or if he were acting rationally would he instead withdraw his troops or accept a political comprise (at this writing, negotiations between representatives of Russia and Ukraine are continuing)?  First, recall the economic definition of rationality: People are rational when they take actions that are appropriate to achieve their goals given the information available to them. (We discuss rationality in Microeconomics, Chapter 10, Section 10.4, and in Economics, Chapter 10, Section 10.4.) Note that rationality does not deal with whether a person’s goals are good or bad. In this discussion, we are considering whether Putin is acting rationally in attempting to achieve the—immoral—goal of subjugating a foreign country.

Peter Coy, a columnist for the New York Times, discusses three reasons Putin may continue his attack on Ukraine even though, “The bloody invasion of Ukraine has been a disaster” for Putin. The first reason, Coy recognizes, involves an economic concept. His other two reasons can also be understood within the economic framework we employ in Microeconomics.

First, Coy argues that Putin may have fallen into one of the pitfalls to decision making we discuss in Chapter 10: A failure to ignore sunk costs. Coy notes that Putin may want to continue the attack to justify the death and destruction that has already occurred. However, those costs are sunk because no subsequent action Putin takes can reduce them. If Putin is continuing the attack for this reason, then Coy is correct that Putin is not acting rationally because he is failing to ignore sunk costs in making his decision. 

There is a subtle point, though, that Coy may be overlooking: Putin is effectively a dictator, but he may still believe he needs to avoid Russian public opinion turning too sharply against him. In that case, even if recognizes that he should ignore sunk costs he may believe that the Russian public may not be willing to ignore the costs of the death and destruction that has already occurred. In that case, his refusal to ignore this sunk cost be rational.

Coy’s second reason why Putin may continue the attack is that he may believe “just another few weeks of fighting will be enough to subdue Ukraine.”  Although Coy doesn’t discuss the point in these terms, it would be rational for Putin to continue the attack if he believes that the marginal benefit of doing so exceeds the marginal cost. (We discuss this point directly in Chapter 1, Section 1.1 “Optimal Decisions Are Made at the Margin,” and provided many examples throughout the text.)  The marginal cost includes the additional Russian military casualties and losses of equipment from prolonging the war and the cost of economic sanctions to the Russian economy. (It seems unlikely that Putin is taking into account the additional loss of life among Ukrainians and the additional devastation to Ukrainian cities from prolonging the war.)

The marginal benefit from continuing the attack would be either winning the war or obtaining a more favorable peace settlement in negotiations with the Ukrainian government. If Putin believes that the marginal benefit is greater than the marginal cost, he is acting rationally in continuing to attack. 

Coy’s final reason why Putin may continue the attack is that “he has little to lose by fighting on.” Although Coy doesn’t discuss the point in these terms, Russia may be suffering from a principal-agent problem. As we discuss in Microeconomics, Chapter 8, Section 8.1 (also Economics, Chapter 8, Section 8.1 and Macroeconomics, Chapter 6, Section 6.1) the principal-agent problem arises when an agent pursues the agent’s interst rather than the interests of the principal in whose behalf the agent is supposed to act. In this case, Putin is the agent and the Russian people are the principal. Putin’s own interest may be in prolonging the war indefinitely in the hopes of ultimately winning, despite the additional Russian soldiers who will be wounded or killed and despite the economic suffering of the Russian people resulting from the sanctions.

Although as president of Russia, Putin should be acting in the best interests of the Russian people, as a dictator, he can largely disregard their interests. Unlike his soldiers, Putin isn’t exposed to the personal dangers of being in battle. And unlike the average Russian, Putin will not suffer a decline in his standard of living because of economic sanctions.

Appalling as the consequences will be, Putin’s continuing his attack on Ukraine may be rational.

Sources: Peter Coy, “Here Are Three Reasons Putin Might Fight On,” New York Times, March 14, 2022; Alan Cullison, “Talks to End Ukraine War Pause as Russia’s Offensive Intensifies,” Wall Street Journal, March 14, 2022; and Thomas Grove, “Russia’s Military Chief Promised Quick Victory in Ukraine, but Now Faces a Potential Quagmire,” Wall Street Journal, March 6, 2022.

Macro Solved Problems on Treasury Bonds and Defining Inflation

Ernie Banks of the Chicago Cubs poses for a portrait circa 1963. (Photo by Louis Requena/MLB Photos)

With the owners of the Major Labor Baseball teams and the Major League Players Association having finally settled on a new collective bargaining agreement, the baseball season will soon begin. Ernie Banks, the late Hall of Fame shortstop for the Chicago Cubs, was known for his upbeat personality. However bad the weather might be at Chicago’s Wrigley Field, Banks would run on the field and say, “What a great day for baseball! Let’s play two.”

In honor of Ernie Banks, today let’s do two Solved Problems in macro. They both involve errors that students in principles courses often make. So, in that sense they would also work as Don’t Let This Happen to You features. 

Solved Problem 1.: Bond Yields and Bond Prices

An article in the Financial Times had the following headline:  “U.S. Government Bond Prices Drop Ahead of Federal Reserve Meeting.” The first sentence of the article reads: “U.S. government bond yields rose to multiyear highs on Monday ahead of this week’s Federal Reserve meeting ….”

a. When a media article mentions “U.S. government bonds,” what type of bonds are they referring to?

b. Is there a contradiction between the headline and the first sentence of the article? Is the article telling us that U.S. government bonds went up or down? Briefly explain.

Solving the Problem

Step 1:  Review the chapter material. This problem is about the inverse relationship between bond yields and bond prices, so you may want to review Macroeconomics, Chapter 6, Appendix, “Using Present Value” (Economics, Chapter 8, Appendix, “Using Present Value”). You may also want to review the discussion of U.S. Treasury bonds in Macroeconomics, Chapter 16, Section 16.6, “Deficits, Surpluses, and Federal Government Debt” (Economics, Chapter 26, Section 26.6, “Deficits, Surpluses, and Federal Government Debt”).

Step 2: Answer part a. by explaining what media articles are referring to when they use the phrase “U.S. government bonds.” As discussed in Chapter 16, Section 16.6, most of the bonds issued by the federal government of the United States are U.S. Treasury bonds. The Treasury sells these bonds to investors when the federal government doesn’t collect enough in tax revenues to pay for all of its spending. So, when the media refers to U.S. government bonds, without further explanation, the reference is always to U.S. Treasury bonds. 

Step 3: Answer part b. by explaining that there is no contradiction between the headline and the first sentence of the article. An important fact about bond markets is that when the price of a bond falls, the yield—or interest rate—on the bond rises. The reverse is also true: When the price of a bond rises, the yield on the bond falls.  The reason why this relationship holds is explained in the Appendix to Chapter 6: The price of a bond (or other financial asset) should be equal to the present value of the payments an investor receives from owning that asset. If you buy a U.S. Treasury bond, the price will equal the present value of the coupon payments the Treasury sends you during the life of the bond and the final payment to you by the Treasury of the principal, or face value of the bond. Remember that present value is the value in today’s dollars of funds to be received in the future. The higher the interest rate, the lower the present value of a payment to be received in the future. So a higher yield, or interest rate, on a bond results in a lower price of the bond because the higher yield reduces the present value of the payments to be received from the bond.

Therefore, whenever the yield on a bond rises, the price of the bond must fall (and whenever the yield on a bond falls, the price of the bond must rise. So, we can conclude that the headline of the Financial Times article and the first sentence of the article are consistent, not contradictory:  Because the prices of Treasury bonds fell, the yields on the bonds must have risen.

Source: Nicholas Megaw, Naomi Rovnick, George Steer, and Hudson Lockett, “U.S. Government Bond Prices Drop Ahead of Federal Reserve Meeting,” ft.com, March 14, 2022.

Solved Problem 2: Being Careful about the Definition of Inflation

An article in the New York Times contrasted inflation during the 1970s with inflation today:

“Price increases had run high for more than a decade by the time Mr. Volcker became chair [of the Federal Reserve Board of Governors] in 1979 …. Shopper expected prices to go up, businesses knew that, and both acted accordingly. This time, inflation has been anemic for years (until recently), and most consumers and investors expect costs to return to lower levels before long, survey and market data show.”

a. What does the article mean by “inflation has been anemic for years”?

b. In the last sentence what “costs” is the article referring to?

c. Is the article correctly using the definition of inflation in the last sentence? Briefly explain.

Solving the Problem

Step 1:  Review the chapter material. This problem is about the definition of inflation, so you may want to review Macroeconomics, Chapter 9, Section 9.4, “Measuring Inflation” (Economics, Chapter 20, Section 20.4, “Measuring Inflation”).

Step 2: Answer part a. by explaining what the phrase “inflation has been anemic for years” means. Anemia is a medical disorder that usually has the symptom of fatigue. So, the word “anemic” is often used to mean weak. The article is arguing that until recently, the inflation rate had been weak, or slow.  

Step 3: Answer part b. by explaining what the article is referring to by “costs.” Economists typically use the word costs for the amount that firm pays to produce a good—labor costs, raw material costs, and so on. Here, though, the article is using “costs” to mean “prices.”  Costs is often used this way in everyday conversation: “I didn’t buy a new car because they cost too much.” Or: “Has the cost of a movie ticket increased?” 

Step 4: Answer part c. by explaining whether the article is correctly using the definition of inflation. In writing “consumers and investors expect costs to return to lower levels” the article is making a common mistake. The article seems to mean that consumers and investors expect that the rate of inflation will be lower in the future. But even if the rate of inflation declines from nearly 8 percent in early 2022 to, say, 3 percent in 2023, prices will still be increasing. So, prices (“costs” in the sentence) will still be higher next year even if the rate of inflation is lower. In other words, even if the rate of increase in prices—inflation—declines, the price level will still be higher. 

It’s a common mistake to think that a decline in the inflation rate means that prices will be lower, when actually prices will still be increasing, just more slowly.

Source: Jeanna Smialek, “Powell Admires Volcker. He May Have to Act Like Him,” New York Times, March 14, 2022.

Fanatics: The Unlikely Unicorn

Image from fanatics.com website.

unicorn is a startup, or newly formed firm, that has yet to begin selling stock publicly and has a value of $1 billion or more. (We discuss the difference between private firms and public firms in Economics and Microeconomics, Chapter 8, chapter opener and Section 8.2, and in Macroeconomics, Chapter 6, chapter opener and Section 6.2.) Usually, when we think of unicorns, we think of tech firms. That assumption is largely borne out by the following list of the 10 highest-valued U.S.-based startups, as compiled by cbinsights.com.

FirmValue
SpaceX$100.3 B
Stripe$95 B
Epic Games$42 B
Instacart$39 B
Databricks$38 B
Fanatics$27 B
Chime$25 B
Miro$17.5 B
Ripple$15 B
Plaid$13.4 B

Nine of the ten firms are technology firms, with six being financial technology—fintech—firms. (We discuss fintech firms in the Apply the Concept, “Help for Young Borrowers: Fintech or Ceilings on Interest Rates,” which appears in Macroeconomics, Chapter 14, Section 14.3, and Economics, Chapter 24, Section 24.3.) The one non-tech firm on the list is Fanatics, whose main products are sports merchandise and sports trading cards.  Because a unicorn doesn’t issue publicly traded stock, the firm’s valuation is determined by how much an investor pays for a percentage of the firm. In Fanatics’s case, the valuation was based on a $1.5 billion investment in the firm made in early March 2022 by a group of investors, including Fidelity, the large mutual find firm; Blackrock, the largest hedge fund in the world; and Michael Dell, the founder of the computer company.

These investors were expecting that Fanatics would earn an economic profit. But, as we discuss in Chapter 14, Section 14.1 and Chapter 15, Section 15.2, a firm will find its economic profit competed away unless other firms that might compete against it face barriers to entry. Although Fanatics CEO Michael Rubin has plans for the firm to expand into other areas, including sports betting, the firm’s core businesses of sports merchandise and trading cards would appear to have low barriers to entry. There are already many firms selling sportswear and there are many firms selling trading cards. The investment required to establish another firm to sell those products is low. So, we would expect competition in the sports merchandise and trading card markets to eliminate economic profit.

The key to Fanatics success is that it is selling differentiated products in those markets. Its differentiation is based on a key resource that competitors lack access to: The right to produce sportswear with the emblems of professional sports teams and the right to produce trading cards that show images of professional athletes. Fanatics has contracts with the National Football League (NFL), Major League Baseball (MLB), the National Hockey League (NHL), the National Basketball Association (NBA), and Major League Soccer (MLS)—the five most important professional sports leagues in North America—to produce jerseys, caps, and other sportswear that uses the copyrighted brands of the leagues’ teams. (In some cases, as with the NBA, Fanatics shares the right with another firm.)

Similarly, Fanatics has the exclusive right to produce trading cards bearing the images of NFL, NBA, and MLB players. In January 2022, Fanatics bought Topps, the firm that for decades had held the right to produce MLB trading cards. 

Fanatics has paid high prices to these sports leagues and their players to gain the rights to sell branded merchandise and cards. Some business analysts questioned whether Fanatics will be able to sell the merchandise and cards for prices high enough to earn an economic profit on its investments. Fanatics CEO Rubin is counting on an increase in the popularity of trading cards and the increased interest in sports caused by more states legalizing sports gambling. 

That Fanatics has found a place on the list of the most valuable startups that is otherwise dominated by tech firms indicates that many investors agree with Rubin’s business strategy.

Sources:  “The Complete List of Unicorn Companies,” cbinsights.com; Miriam Gottfried and Andrew Beaton, “Fanatics Raises $1.5 Billion at $27 Billion Valuation,” Wall Street Journal, March 2, 2022; Tom Baysinger, “Fanatics Scores $27 Billion Valuation,” axios.com March 2, 2022; Lauren Hirsch, “Fanatics Is Buying Mitchell & Ness, a Fellow Sports Merchandiser,” New York Times, February 18, 2022; and Kendall Baker, “Fanatics Bets Big on Trading Card Boom,” axios.com, January 5, 2022.

Solved Problem: U.S. Treasury Bonds and the Russian Invasion of Ukraine

Supports: Macroeconomics, Chapter 10, Section 10.5, Economics Chapter 20, Section 20.5, and Essentials of Economics, Chapter 14, Section 14.2.

On March 2, 2022, as the conflict between Russia and Ukraine intensified, an article in the Wall Street Journal had the headline “Investors Pile Into Treasurys as Growth Concerns Flare.” The article noted that: “The 10-year Treasury yield just recorded its largest two-day decline since March 2020, while two-year Treasury yields plunged the most since 2008.”

a. What does it mean for investors to “pile into” Treasury bonds?

b. Why would investors piling into Treasury bonds cause their yields to fall?

c. What are “growth concerns”? What kind of growth are investors concerned about?

d. Why might growth concerns cause investors to buy Treasury bonds?

Solving the Problem

Step 1: Review the chapter material. This problem is about the effects of slowing economic growth on interest rates, so you may want to review Chapter 10, Section 10.5, “Saving, Investment and the Financial System.” You may also want to review Chapter 6, Appendix A (in Economics, Chapter 8, Appendix A), which explains the inverse relationship between bond prices and interest rates. 

Step 2: Answer part a. by explaining what the article meant by the phrase “pile into” Treasury bonds. The article is using a slang phrase that means that investors are buying a lot of Treasury bonds.

Step 3: Answer part b. by explaining why investors piling into Treasury bonds will cause the yields on the bonds to fall. As the Appendix to Chapter 6 explains, the price of a bond represents the present value of the payments that an investor will receive over the life of the bond. Lower interest rates result in a higher present value of the payments received and, therefore, higher bond prices or—which is restating the same point—higher bond prices result in lower interest rates. If investors are increasing their demand for Treasury bonds, the increased demand will cause the prices of the bonds to increase and cause the yields—or the interest rates—on the bonds to fall.

Step 4: Answer part c. by explaining the phrase “growth concerns.” In this context, the growth being discussed is economic growth—changes in real GDP.  The headline indicates that investors were concerned that the Russian invasion of Ukraine might lead to slower economic growth in the United States.

Step 5: Answer part d. by explaining why investors might purchase Treasury bonds if they were concerned about economic growth slowing. Using the model of the loanable funds markets discussed in Chapter 10, Section 10.5, we know that if economic growth slows, firms are likely to engage in fewer new investment projects, which would shift the demand curve for loanable funds to the left and result in a lower equilibrium interest rate. Investors who have purchased Treasury bonds will gain from a lower interest rate because the price of the Treasury bonds they own will increase. In addition, stock prices depend on investors’ expectations of the future profitability of firms issuing the stock. Typically, if investors believe that economic growth is likely to be slower in the future than they had previously expected, stock prices will fall, which would make Treasury bonds a more attractive investment. Finally, investors believe there is no chance that the U.S. Treasury will default on its bonds by not making the interest payments on the bonds. During an economic slowdown, investors may come to believe that the default risk on corporate bonds has increased because some corporations may run into financial problems. An increase in the default risk on corporate bonds increases the relative attractiveness of Treasury bonds as an investment.

Source: Gunjan Banerji, “Investors Pile Into Treasurys as Growth Concerns Flare,” Wall Street Journal, March 2, 2022.

Inflation, Interest Rates, and Stock Prices

Caution: Long post!

An article in the Wall Street Journal quoted an economist at a financial services firm as noting that strong growth in wages could lead to sustained inflation. The article stated that as a result “the yield on the 10-year U.S. Treasury note [rose to] within reach of 2%” and that: “Rising [bond] yields this year have rattled markets and hurt tech stocks in particular ….”

What are the links between wage inflation and price inflation, inflation and bond yields, and bond yields and stock prices—particularly the prices of tech stocks?

The link between wage inflation and price inflation. The monthly “Employment Situation” reports from the Bureau of Labor Statistics (BLS), in addition to providing data on payroll employment and the unemployment rate, also provide data on average hourly earnings (AHE). AHE are the wages and salaries per hour worked that private, nonfarm business pay workers. AHE don’t include the value of benefits that firms provide workers, such as contributions to 401(k) retirement accounts or health insurance. The following figure shows changes in AHE from the same month in the previous year. The figure shows that since the Covid-19 pandemic first began to affect the U.S. economy in March 2020, AHE have moved erratically. But since the fall of 2021, growth in AHE has been consistently above the 2 percent to 4 percent range that prevailed in the years after the end of the Great Recession of 2007–2009.

Employee compensation is the largest cost for most firms.  For the economy as whole, employee compensation is about 80 percent of total costs. When firms pay higher wages per hour, their costs per unit of output don’t rise unless the wage increases are greater than the rate of growth of labor productivity, or output per hour worked. Increases in wages in the range of 5 percent to 6 percent are well above the rate of growth of labor productivity and, so, firms are likely to pass through the wage increases by raising prices. Note that the higher prices may prompt workers to push for higher wage increases to offset the decline in the real purchasing power of their wages, potentially setting off a wage-price spiral. (We discussed the possibility of a wage-price spiral in a recent post here.)

The link between inflation and bond yields.  When investors lend money by, for instance, buying a bond, they are concerned with the interest rate they will receive after correcting for the effects of inflation. In other words, they focus on the real interest rate, which is equal to the nominal interest rate, or the stated interest rate on the loan or bond, minus the expected inflation rate:

            Real interest rate = Nominal interest rate – Expected inflation rate.

We can rewrite this relationship as:

            Nominal interest rate = Real interest rate + Expected inflation rate.

The second equation indicates that if investors expect the inflation rate to increase, then, unless the real interest rate changes, the nominal interest rate will increase.  The Fisher effect is the idea associated with Yale economist Irving Fisher that the nominal interest rate rises or falls by the same number of percentage points as the expected inflation rate. So, for instance, if investors expect that the inflation rate will increase from 3 percent to 5 percent, then the nominal interest rate will also increase by two percentage points.

Because of real-world frictions, such as the broker fees that investors pay when buying and selling bonds and the taxes investors pay when they sell a bond that has increased in price, the Fisher effect doesn’t hold exactly. Still, most economists agree that an increase in the expected inflation rate will cause an increase in nominal interest rates. The following figure shows movements in the interest rate on 10-year Treasury notes (blue line) and in inflation (red line). Note that, roughly speaking, the interest rate on the 10-year Treasury note is higher when inflation is higher and lower when inflation is lower.  (We discuss real and nominal interest rates in Macroeconomics, Chapter 9, Section 9.6 and in Economics, Chapter 19, Section 19.6. We discuss the Fisher effect in Money, Banking, and the Financial System, Chapter 4, Section 4.3.)

The link between bond yields and stock prices. As wage inflation leads to price inflation and price inflation leads to higher interest rates on bonds—particularly U.S. Treasury bonds—why might stock prices be affected? First, investors consider U.S. Treasury bonds to be default risk free, which means that investors are certain that the Treasury will make the interest and principal payments on the bonds. Stock investments are much riskier because they depend on the future profits of the firms issuing the stocks and those profits may fluctuate in ways that are difficult for investors to anticipate. So as interest rates on Treasury bonds increase, some investors will decide to sell stocks and buy bonds, which will cause a decline in stock prices. 

Second, most people value funds they will receive now or soon more highly than funds they will receive in the more distant future. For instance, if someone offered to pay you $1,000 today or $1,000 one year from now, you will prefer to receive the money today.  In other words, the present value, or value today, of a payment you won’t receive until the future is worth less than the face value of the payment. For instance, the present value of $1,000 you won’t receive for a year is worth less than $1,000 in present value. The higher the interest rate is, the lower the present value of payments, such as dividends, that you will receive in the future. 

Economists believe that price of a financial investment, like a bond or a stock, is equal to the present value of the payments you will receive from owning the asset. If you own a bond, you will receive interest payments and payment of the bond’s principal when the bond matures. If you own a stock, you will receive dividends, which are the payments that firms make to shareholders from the firms’ profits. Therefore stock prices should reflect the present value of the dividends that investors expect to receive from owning the stock. (We discuss present value and the relationship between interest rates and stock and bond prices in Macroeconomics, Chapter 6, Appendix, in Economics, Chapter 8, Appendix, and, more completely, in Money, Banking, and the Financial System, Chapter 3, Section 3.2 and Chapter 6, Section 6.2.)

The Wall Street Journal article we quoted above notes that the rising interest rate on the 10-year Treasury note was causing price declines in tech stocks in particular. The explanation is that tech firms often go through an initial period in which they may make very low profits or even suffer losses. Investors may still be willing to buy stock in tech firms because they expect the firms eventually to increase their profits and the dividends they pay. But because those profits will be earned in the future—often after a period of losses that may stretch for years—the present value of the profits and, therefore, the price of the stock depends more on the interest rate than would be true of a firm making breakfast cereal or frozen pizza that will be steadily earning profits through the years. Therefore, we would expect, as the article indicates, that the prices of tech firms are more likely to decline—or to decline more—when interest rates rise than is true of other firms. 

The following figure shows the interest rate on the 10-year Treasury note (blue line with scale given on the left) and the values of the Nasdaq composite stock index (red line with the value for January 1, 2010 set equal to 100 and the scale given on the right). The Nasdaq includes the stocks of more tech firms than is true of the other widely followed stock market indexes—the S&P 500 and the Dow Jones Industrial Average. The figure shows that the declining interest rate on 10-year Treasury notes that began in late 2018 and continued through mid-2020 coincided with increases in the prices of the stocks in the Nasdaq index—apart from the spring of 2020 during the beginning of the Covid-19 pandemic.  The most recent period shows that increases in the interest rate on the 10-year Treasury note have corresponded with a decline in the Nasdaq, as noted in the article.

Source: Sam Goldfarb, “Elevated Bond Yields Approach Key Milestone,” Wall Street Journal, February 7, 2022; U.S. Bureau of Economic Analysis, “Prices, Costs, and Profit per Unit of Real Gross Value Added of Nonfinancial Domestic Corporate Business,” January 27, 2022; and Federal Reserve Bank of St. Louis.

New Information on Fed Policy Affects Stock and Bond Prices

Jerome Powell (photo from the Wall Street Journal)

Most economists believe that monetary policy actions, such as changes in the Fed’s pace of buying bonds or in its target for the federal funds rate, affect real GDP and employment only with a lag of several months or longer. But monetary policy actions can have a more immediate effect on the prices of financial assets like stocks and bonds. 

Investors in financial markets are forward looking because the prices of financial assets are determined by investors’ expectations of the future. (We discuss this point in Economics and Microeconomics, Chapter 8, Section 8.2, Macroeconomics, Chapter 6, Section 6.2, and Money, Banking and the Financial System, Chapter 6.) For instance, stock prices depend on the future profitability of firms, so if investors come to believe that future economic growth is likely to be slower, thereby reducing firms’ profits, the investors will sell stocks causing stock prices to decline.

Similarly, holders of existing bonds will suffer losses if the interest rates on newly issued bonds are higher than the interest rates on existing bonds. Therefore, if investors come to believe that future interest rates are likely to be higher than they had previously expected them to be, they will sell bonds, thereby causing their prices to decline and the interest rates on them to rise. (Recall that the prices of bonds and the interest rates (or yields) on them move in opposite directions: If the price of a bond falls, the interest rate on the bond will increase; if the price of a bond rises, the interest rate on the bond will decrease. To review this concept, see the Appendix to Economics and Microeconomics Chapter 8, the Appendix to Macroeconomics Chapter 6, and MoneyBankingand the Financial System, Chapter 3.)

Because monetary policy actions can affect future interest rates and future levels of real GDP, investors are alert for any new information that would throw light on the Fed’s intentions. When new information appears, the result can be a rapid change in the prices of financial assets. We saw this outcome on January 5, 2022, when the Fed released the minutes of the Federal Open Market Committee meeting held on December 14 and 15, 2021. At the conclusion of the meeting, the FOMC announced that it would be reducing its purchases of long-term Treasury bonds and mortgage-backed securities.  These purchases are intended to aid the expansion of real GDP and employment by keeping long-term interest rates from rising. The FOMC also announced that it intended to increase its target for the federal funds rate when “labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment.”

When the minutes of this FOMC meeting were released at 2 pm on January 5, 2022, many investors realized that the Fed might increase its target for the federal funds rate in March 2022—earlier than most had expected. In this sense, the release of the FOMC minutes represented new information about future Fed policy and the markets quickly reacted. Selling of stocks caused the S&P 500 to decline by nearly 100 points (or about 2 percent) and the Nasdaq to decline by more than 500 points (or more than 3 percent). Similarly, the price of Treasury securities fell and, therefore, their interest rates rose. 

Investors had concluded from the FOMC minutes that economic growth was likely to be slower during 2022 and interest rates were likely to be higher than they had previously expected. This change in investors’ expectations was quickly reflected in falling prices of stocks and bonds.

Sources: An Associated Press article on the reaction to the release of the FOMC minutes can be found HERE; the FOMC’s statement following its December 2021 meeting can be found HERE; and the minutes of the FOMC meeting can be found HERE.

Elon Musk Makes Tesla a Multinational

In 1901, U.S. Steel became the world’s first corporation with a stock market value greater than $1 billion.  In October 2021, Tesla joined Alphabet (Google’s corporate parent), Amazon, Apple, and Microsoft as the only U.S. corporations whose stock market value exceeds $1 trillion. (The Saudi Arabian Oil Company is the only non-U.S. firm with a market value above $1 trillion.) 

As large U.S. corporations developed in the late nineteenth and early twentieth centuries, a key problem facing them was how to allocate the firms’ scarce financial capital across competing uses. (A thorough—and lengthy!—discussion of the development of the modern U.S. corporation is Alfred Chandler’s book, The Visible Hand: The Managerial Revolution in American Business.) By 1940, many large corporations had formed executive committees comprised of the chief executive officer (CEO), the chief operating officer (COO), and other so-called C-suite executives.

Executive committees typically don’t become involved in the day-to-day operations of the firms, leaving those responsibilities to lower level managers. Instead, executive committees devote most of their time to strategic issues such as whether to introduce new products, where to locate sales and production facilities, and how much of the firm’s resources to devote to research and development and to marketing. The decisions that an executive committee concentrates on involve how best to allocate the firm’s financial capital, funds that come from investors who buy the firm’s stocks and bonds and from the firm’s retained earnings—the firm’s profits that aren’t distributed as dividends to the firm’s shareholders. In allocating these funds, executive committees face trade-offs of the type we discuss in Chapter 2. For instance, if a U.S.-based firm uses funds to build a factory in another country, it may not have the funds to expand its domestic factories.

Allocating the firm’s financial capital will not have much effect on the firm’s profits in the short run but can be the main determinant of the firm’s profitability—and even its survival—in the long run. For instance, the failure of Blockbuster Video to expand into offering rentals of DVDs by mail or to offering a movie streaming service, resulted in the company shrinking from having 4,000 stores in the early 2000s to a single store today. In contrast, the decision in 2018 by U.S. pharmaceutical firm Pfizer to partner with BioNTech, a small German firm, to develop vaccines using messenger RNA (or mRNA) biotechnology proved very profitable for Pfizer (and saved many lives) when the Covid-19 virus led to a worldwide epidemic.

At Tesla, CEO Elon Musk has final say on strategic decisions, a situation typical of many large firms where a single executive, through stock ownership, has control of the company. One of his key decisions has been where to locate his production facilities. In making this decision, Musk faces trade-offs in how to use the scarce funds the firm has available for expanding production capacity. Building a facility in one place means not being able to fund building a facility in another place. In addition, funds used to build new factories is not available to increase research and development on autonomous cars or on other improvements to car design or technology. 

Initially, Tesla operated a single factory in Fremont, California. Built in 1962, the factory had been owned by General Motors and then jointly by GM and Toyota before being sold to Tesla in 2010. In 2019, Tesla began construction of a second factory in Shanghai, China and in 2021 was awaiting final governmental approval to build a factory in Grünheide, Germany.

Why would Tesla, or another U.S. firm, decide to build factories in other countries? The simplest answer is that firms expand their operations outside the United States when they expect to increase their profitability by doing so. Today, most large U.S. corporations are multinational firms with factories and other facilities overseas.  Firms might expect to increase their profits through overseas operations for five main reasons:

  1. To avoid tariffs or the threat of tariffs. Tariffs are taxes imposed by countries on imports from other countries. Sometimes firms establish factories in other countries to avoid having to pay tariffs.

2. To gain access to raw materials. Some U.S. firms have expanded abroad to secure supplies of raw materials. U.S. oil firms—beginning with Standard Oil in the late nineteenth century—have had extensive overseas operations aimed at discovering, recovering, and refining crude oil.

3. To gain access to low-cost labor. In recent decades, some U.S. firms have located factories or other facilities in countries such as China, India, Malaysia, and El Salvador to take advantage of the lower wages paid to workers in those countries.

4. To reduce exchange-rate risk. The exchange rate tells us how many units of foreign currency are received in exchange for a unit of domestic currency. Fluctuations in exchange rates can reduce the profits of a firm that exports goods to other countries. (We discuss this point in more detail in Economics, Chapter 28, Section 28.3 and in Macroeconomics, Chapter 18, Section 18.3.)

5. To respond to industry competition. In some instances, companies expand overseas as a competitive response to an industry rival. The worldwide competition for markets between Pepsi and Coke is an example of this kind of expansion.

All of these reasons, apart from 2., likely played a role in Tesla’s decision to build factories in China and Germany.

In 2021, Tesla was building a factory in Austin, Texas. It was also moving its corporate headquarters from California to Texas. With these actions, the firm may have been responding to lower taxes in Texas and lower housing costs for its workers.

In October 2021, Tesla’s $1 trillion stock market value seemed very high relative to the profits it was currently earning and also because it made Tesla’s value greater than the values of the next nine largest car makers combined. The price of its stock reflected the expectation among investors that Tesla’s profits would increase in future years. Tesla’s decisions about locating its new factories would play a key role in determining whether that expectation turns out to be correct. 

Sources: Rebecca Elliott and Dave Sebastian, “Tesla Surpasses $1 Trillion in Market Value as Hertz Orders 100,000 Vehicles,” wsj.com, October 25, 2021; Al Root, “How Tesla Gained $175 Billion in Value From Hertz’s $4 Billion Order. It Makes Perfect Sense,” barrons.com, October 26, 2021; Bojan Pancevski and Jared S. Hopkins, “How Pfizer Partner BioNTech Became a Leader in Coronavirus Vaccine Race,” wsj.com, October 22, 2020; William Boston, “Tesla Awaits Green Light for Production in Germany,” wsj.com, October 12, 2021; Niraj Chokshi, “Tesla Will Move Its Headquarters to Austin, Texas, in Blow to California,” nytimes.com, October 13, 2021; and Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business, Cambridge: Harvard University Press, 1977; and Tesla.com.

WeWork Gets SPAC’d

In 2021, SPACs were the hottest trend on the stock market and had become the leading way for companies to go public. A public company is one with shares that trade on the stock market. Private firms make up more than 95 percent of all firms in the United States. Most will never become public firms because they will never grow large enough for investors to have sufficient information on the firms’ financial health to be willing to buy the firms’ stocks and bonds.

But some firms, particularly technology firms, grow rapidly enough that they are able to become public firms. Apple, Microsoft, Google, Uber, Facebook, Snap, and other firms have followed this path. When these firms went public, they did so using an initial public offering (IPO). (We briefly discuss IPOs in Economics and Microeconomics, Chapter 8, Section 8.2 and in Macroeconomics, Chapter 6, Section 6.2.) With an IPO, a firm uses one or more investment banks to underwrite the firm’s sales of new stocks or bonds to the public. In underwriting,investment banks typically guarantee a price for stocks or bonds to the issuing firm, sell the stocks or bonds in financial markets or directly to investors at a higher price, and keep the difference, known as the spread.

Beginning in 2020 and continuing through 2021, an increasing number of firms have used a different means of going public—merging with a SPAC. SPAC stands for special-purpose acquisition company and is a firm that holds only cash—it doesn’t sell a good or service—and only has the purpose of merging with another firm that wants to go public. Once a merger takes place, the acquired firm takes the place of the SPAC in the stock market. For instance, a SPAC named Diamond Eagle Acquisition merged with online sports betting site DraftKings in April 2020. Once the merger had been completed, DraftKings took Diamond Eagle’s place on the stock market, trading under the stock symbol DKNG. By 2021, the value of SPAC mergers had risen to being three times as much as the value of IPOs.

Some firms intending to go public prefer SPACs to traditional IPOs because they can bargain directly with the managers of the SPAC in determining the value of the firm. In addition, IPOs are closely regulated by the federal government’s Securities and Exchange Commission (SEC). In particular, the SEC monitors whether an investment bank is accurately stating the financial prospects of a firm whose IPO the bank is underwriting. The claims that SPACs make when attracting investors are less closely monitored. SPAC mergers can also be finalized more quickly than can traditional IPOs.

The experience of WeWork illustrates how some firms that have struggled to go public through an IPO have been able to do so by merging with a SPAC. Adam Neumann and Miguel McLevey founded WeWork in 2010 as a firm that would rent office space in cities, renovate the space, and then sub-lease it to other firms. In 2019, the firm prepared for an IPO that would have given the firm a total value of more than $40 billion. But doubts about the firm’s business model led to an indefinite postponement of the IPO and Neumann was forced out as CEO.

WeWork was reorganized under new CEO Sandeep Mathrani and went public in October 2021 by merging with BowX Acquisition Corporation, a SPAC. Although WeWork’s stock began trading (under stock symbol WE) at a price that put the firm’s value at about $9 billion—far below the value it expected at the time of its postponed IPO two years before—investors seemed optimistic about the firm’s future because its stock price rose sharply during the first two days it traded on the stock market. 

Some policymakers are concerned that individual investors may not have sufficient information on firms that go public through a merger with a SPAC. Under one proposal being considered by Congress, financial advisers would only be allowed to recommend investing in SPACs to wealthy investors. The SEC is also considering whether new regulations governing SPACS were needed. Testifying before Congress, SEC Chair Gary Gensler sated: “There’s real questions about who’s benefiting [from firms going public using SPACs] and [about] investor protection.” 

It remains to be seen whether SPACs will retain their current position as being the leading way for firms to go public.

Sources: Dave Sebastian, “WeWork Shares Rise on First Day of Trading, Two Years After Failed IPO,” wsj.com, October 21, 2021; Peter Santilli and Amrith Ramkumar, “SPACs Are the Stock Market’s Hottest Trend. Here’s How They Work,” wsj.com, March 29, 2021; Benjamin Bain, “SPAC Marketing Heavily Curtailed in House Democrats’ Draft Bill,” bloomberg.com, October 4, 2021; and Dave Michaels, “SEC Weighs New Investor Protections for SPACs,” wsj.com, May 26, 2021.

The Wild Ride of GameStop’s Stock Price

Supports:  Hubbard/O’Brien, Chapter 8, Firms, the Stock Market, and Corporate Governance; Macroeconomics Chapter 6; Essentials of Economics Chapter 6; Money, Banking, and the Financial System, Chapter 6.

We’ve seen that a firm’s stock price should represent the best estimates of investors as to how profitable the firm will be in the future. How, then, can we explain the following graph of the price of shares of GameStop, the retail chain that primarily sells video game cartridges and video game systems? The graph shows the price of the stock from December 1, 2020 through February 9, 2021. If the main reason the price of a stock changes is that investors have become more or less optimistic about the profitability of the firm, is it plausible that opinions on GameStop’s profitability changed so much in such a short period of time?.

  Sometimes investors do abruptly change their minds about the profitability of a firm but typically this happens when the firm’s profitability is heavily dependent on the success of a single product. For instance, the price of the stock a biotech firm might soar as investors believe that a new drug therapy the firm is developing will succeed and then the price of the stock might crash when the drug is unable to gain regulatory approval.  But it wasn’t news about its business that was driving the price of GameStop’s stock from $15 per share during December 2020 to a high of $347 per share on January 27, 2021 and then down to $49 per share on February 9.

            To understand these prices swings, first we need to take into account that not all people buying stock do so because they are making long-term investments to accumulate funds to purchase a house, pay for their children’s educations, or for their retirement. Some people who buy stock are speculators who hope to profit by buying and selling stock during a short period—perhaps as short as a few minutes or less. The availability of online stock trading apps, such as Robinhood, that don’t charge commissions for buying and selling stock, and online stock discussion groups on sites like Reddit, have made it easier for some individual investors to become day traders, frequently buying and selling stocks in the hopes of making a short-term profit.

Many day traders engage in momentum investing, which means they buy stocks that have increasing prices and sell stocks that have falling prices, ignoring other aspects of the firm’s situation, including the firm’s likely future profitability. Momentum investing is an example of what economists call noise trading, or buying and selling stocks on the basis of factors not directly related to a firm’s profitability. Noise trading can result in a bubble in a firm’s stock, which means that the price rises above the fundamental value of the stock as indicated by the firm’s profitability. Once a bubble begins, a speculator may buy a stock to resell it quickly for a profit, even if the speculator knows that the price is greater than the stock’s fundamental value. Some economists explain a bubble in the price of a stock by the greater fool theory: An investor is not a fool to buy an overvalued stock as long as there’s a greater fool willing to buy it later for a still higher price. 

Although the factors mentioned played a role in explaining the volatility in GameStop’s stock price, there was another important factor that involved hedge funds and short selling. Hedge funds are similar to mutual funds in that they use money from savers to make investments. But unlike mutual funds, by federal regulation only wealthy individuals or institutional investors such as pension funds or university endowment funds are allowed to invest in hedge funds. Hedge funds frequently engage in short selling, which means that when they identify a firm whose stock they consider to be overvalued, they borrow shares of the firm’s stock from a broker or dealer and sell them in the stock market, planning to make a profit by buying the shares back after their prices have fallen.

In early 2021, several large hedge funds were shorting GameStop’s stock believing that the market for video game cassettes would continue to decline as more gamers switched to downloading games. Some people in online forums—notably the WallStreetBets forum on Reddit—dedicated to discussing investing strategies argued that if enough day traders bought GameStop’s stock they could make money through a short squeeze. A short squeeze happens when a heavily shorted stock increases in price. The speculators who shorted the stock may then have to buy back the stock to avoid large losses or having to pay very high fees to dealers who had loaned them the shares they were shorting. As the short sellers buy stock, the price of the stock is bid up further, earning a profit for day traders who had bought the stock in anticipation of the short squeeze. One MIT graduate student made a profit of more than $200,000 on a $500 investment in GameStop stock. Some hedge funds that had been shorting GameStop lost billions of dollars.

Some of the day traders involved saw this episode as one of David defeating Goliath because the people executing the short squeeze were primarily young with moderate incomes whereas the people running the hedge funds taking substantial losses in the short squeeze were older with high incomes. The reality was more complex because as the price of GameStop stock declined from $347 on to $54 on February 4, some day traders who bought the stock after its price had already substantially risen lost money. And all the winners from the short squeeze weren’t day traders; some were hedge funds. For instance, by early February, the hedge fund Senvest Management had earned $700 million from its trading in GameStop’s stock.  

Economists had differing opinions about whether the GameStop episode had a wider significance for understanding how the stock market works or for how it was likely to work in the future. Some economists and investment professionals argued that what happened with GameStop’s stock price was not very different from previous episodes in which speculators buying and selling a stock will for a time cause increased volatility in the stock’s price. In the long run, they believe that stock prices return to their fundamental values. Other economists and investors thought that the increased number of day traders combined with the availability of no-commission stock buying and selling meant that stock prices might be entering a new period of increased volatility. They noted that similar, if less spectacular, price swings had happened at the same time in other stocks such as AMC, the movie theater chain, and Express, the clothing store chain. An article on bloomberg.com quoted one analyst as saying, “We’ve made gambling on the stock market cheaper than gambling on sports and gambling in Vegas.” 

            Federal regulators, including Treasury Secretary Janet Yellen, were evaluating what had happened and whether they needed to revise existing government regulations of financial markets.  

Sources: Misyrlena Egkolfopoulou and Sarah Ponczek, “Robinhood Crisis Reveals Hidden Costs in Zero-Fee Trading Model,” bloomberg.com, February 3, 2021; Gunjan Banerji,  Juliet Chung, and Caitlin McCabe, “GameStop Mania Reveals Power Shift on Wall Street—and the Pros Are Reeling,” Wall Street Journal, January 27, 2021; Gregory Zuckerman, “For One GameStop Trader, the Wild Ride Was Almost as Good as the Enormous Payoff,” Wall Street Journal, February 3, 2021; Juliet Chung, “Wall Street Hedge Funds Stung by Market Turmoil,” Wall Street Journal, January 28, 2021; and Juliet Chung, “This Hedge Fund Made $700 Million on GameStop,” Wall Street Journal, February 3, 2021. 

           

Questions 

  1. During the same week that the price of GameStop’s stock was soaring to a record high, an article in the Wall Street Journal noted the following: “Analysts expect GameStop to post its fourth consecutive annual decline in revenue in its latest fiscal year amid declines in its core operations [of selling video game cartridges and video game consoles in retail stores].” Don’t stock prices reflect the expected profitability of the firms that issue the stock? If so, why in January 2021 was the price of GameStop’s stock greatly increasing when it seemed unlikely that the firm would become more profitable in the future?

Source: Sarah E. Needleman, “GameStop and AMC’s Stocks Are on a Tear, but Their Businesses Aren’t,” Wall Street Journal, January 31, 2021

2. In early 2021, as the stock price of GameStop was soaring, a columnist in the New York Times advised that: “A better option [than buying stock in GameStop] would be salting away money in dull, well-diversified stock and bond portfolios, these days preferably in low-cost index funds.”

a. What does the columnist mean by “salting money away”?

b. are index funds and why might they be considered dull when compared to investing in an individual stock like GameStop?

c. Why would the columnist consider investing in an index mutual fund to be a better option than investing money in an individual stock like GameStop? 

Source: Jeff Sommer, “How to Keep Your Cool in the GameStop Market,” New York Times, January 29, 2021.

Instructors can access the answers to these questions by emailing Pearson at christopher.dejohn@pearson.com and stating your name, affiliation, school email address, course number.