Bonfire of the ShortsKarl Thorburn
If you’re new to high finance, then the concept of “shorting” is bizarre and convoluted. People actually make money from stocks falling? How is this possible? Why is it legal? Does this contribute anything to society? Am I missing out? Here’s how shorting works.
Let’s say you have a neighbor who is a cat lady that collects Beanie Babies. She has one prized beanie called Roary the Lion, worth $5000 (according to the intellectual darkweb, where these things are traded). Unfortunately, she’s got some bills coming due this month and she doesn’t want to be forced to sell Roary. So you offer to borrow Roary from her for 3 months in exchange for $200. She’s happy, because she’ll get her doll back in a few months and she now has enough money to cover her bills. The second you walk home with the beanie, you go online and sell it to the highest bidder. You manage to get the asking price, $5000. Now fast forward 3 months. Suddenly Beanie Babies aren’t worth as much as they used to be. You see a mint condition Roary the Lion for sale at only $100. You buy it, and give it to your neighbor. Done deal. It’s not the same doll your neighbor loaned you, but she can’t tell the difference. So during this whole process, you’ve only shelled out $300 and you’ve made $5000, for a total profit of $4700. Your neighbor would have lost the value of Roary anyway because of the market crash, but at least she got to use that $200 to pay her bills. This is shorting.
In the world of stocks, shorting is fairly common. You can find daily updates on the “most shorted” stocks, and see that hedge funds and individual traders are regularly making and losing millions of dollars by finding distressed or scammy businesses and shorting them. Occasionally short sellers will provide the markets with a valuable service — they will hire private investigators to go spy on businesses to make sure they are telling the truth about their operations. Sometimes the investigators will uncover major fraud, so the hedge fund will heavily short the company — sending a signal to other market participants: “Hey, check this out. It’s overvalued.” This is what some shorts attempted to do with Tesla. They flew drones over Tesla’s factories and storage lots, and reported that Elon Musk was hiding a bunch of unsold vehicles. This wasn’t exactly true, but the Elon-haters wanted it to be true, so they went with it. Tesla became one of the most shorted stocks of all time, forcing the price lower and causing Elon major headaches on top of his struggles with Twitter and the SEC. But the Tesla diehards believed in the company and trusted that demand for the vehicles would materialize eventually. When Tesla unexpectedly posted a quarterly profit, everything changed. The stock rocketed higher.
GameStop sitting amongst Tesla and Amazon after reddit users make it a Fortune 500 company pic.twitter.com/AVUtcjs6gl
— Jordan Deeb (@Jordan_Deeb) January 27, 2021
This brings us to another aspect of shorting that is a bit more interesting (and explains why it’s so dangerous). Let’s say you borrowed a bunch of Tesla shares at $400 and immediately sold them because you expected the price to fall soon. But instead of falling, the price starts to climb. You are contractually obligated to buy these shares back before a set date, so you are sweating bullets. The higher the price goes, the less sleep you get. The only way for you to cut your losses is to buy the shares back immediately. But if you’re stubborn, you won’t do this. Surely the market will realize Tesla are liars, right? There’s no way electric cars are really that popular. If you went long Tesla (just buying and holding shares), your potential losses are limited to what you invested. So there’s a cap. But when you short, you could lose far more than 100%. Remember that you only paid a small fee to borrow the shares, you didn’t actually buy them. To close your short position, you have to buy the shares back, and that adds to the existing demand for the stock, which drives its price even higher. It’s like an insidious trap that clamps down harder on your foot the more you struggle. This is called a “short squeeze.” It can create a cascading effect where one unfortunate short buys back shares, forcing the price higher, which destroys another short above him, forcing the price even higher, destroying another short above him, and so on.
Melvin Capital and Citron are the same folks who tried to kill Tesla $TSLA. @elonmusk is the greatest entrepreneur of our generation. He’s trying to save Planet Earth with sustainable energy and bring humanity to Mars. They almost got him. Glad Wall Street Bets is hitting back.
— Cameron Winklevoss (@cameron) January 28, 2021
That’s what happened with GameStop. A ragtag group of Reddit daytraders called /r/WallStreetBets found an illiquid stock and noticed it was loaded up to the rafters with Minecraft TNT (shorts). So they set it on fire. It didn’t require a lot of money to make this happen, because GameStop is a small company and its market was thin. The price immediately shot up, forcing shorts to buy. The hedge fund Melvin Capital was in the eye of the hurricane because they bet billions on GameStop’s demise. The final amount of losses is not yet known, but it may exceed ten billion dollars, which could put Melvin’s Jewish founder Gabriel Plotkin out of business.
Here come the shorty apologists
Give them no respect
— Elon Musk (@elonmusk) January 28, 2021
The usual suspects came out to defend the shorts, including a couple of angry billionaires complaining that working-class guys are manipulating the stock market using their coronavirus stimulus checks. But more alarmingly, we saw multiple brokerage firms halt trading on specific stocks mentioned by the Reddit crew, and even one unconfirmed case where brokers sold clients’ GameStop shares against their will. There is even word going around that the White House intervened, calling brokers to tell them to stop the buying.
The great irony of all this is that just a few years ago we were treated to regular articles in tech magazines and business newspapers lauding the advent of millisecond trading. Big-brained hedge fund managers lectured us about how they were providing a great service to society by creating automated trading bots that could buy and sell stocks hundreds of thousands of times per second. The greatest minds in computer engineering developed new and powerful optical networks to link these operations to Wall Street trading desks, achieving internet speeds exceeding a South Korean Netflix. But now we’re supposed to believe that in 2021, brokerages can’t handle a couple hundred thousand people buying shares of GameStop? Nonsense.
If this had been another hedge fund buying up GameStop to force Melvin Capital out, nobody would bat an eyelash. In fact, instigating short squeezes is an entirely legitimate hedgie strategy. What makes this frightening for the elites is that this was organized online and done in a fairly decentralized way. Once sympathetic populists got wind of what /r/WallStreetBets was up to, they instantly threw their hat in the ring (and many contributed by buying some shares). We saw the Winklevoss twins, Elon Musk, and nearly all of Bitcoin Twitter come out swinging in defense of this exciting sneak attack on Wall Street. Hilariously, a guest on Bloomberg said the incident was “as bad as the capitol riots.” Ben Shapiro appeared to straddle the fence on it, trying to keep his populist followers while also chiding them for having some lighthearted fun at the expense of his dual citizen cousins.
— Elon Musk (@elonmusk) January 26, 2021
Frankly, we needed this. Even if it’s a one-off thing, it was a community experience that brought a lot of people together, produced a lot of hilarious memes, and created a memorable moment in an otherwise wretched sea of Oliver Twist slop. It also encouraged a lot of smart white men to research finance and economics, which is a plus.
Maybe this is the beginning of the end for the financial elites. A “stop” to their “game,” if you will.
Losses on short positions in U.S. firms top $70 billion – Ortex data https://t.co/IDTls9l2M2 pic.twitter.com/Jef5H0EoK3
— Reuters (@Reuters) January 28, 2021
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Great article! Hilarious! Only white nerds could have thought of this and made this happen!
Just as a test last night I downloaded the Robinhood app and purchased some AMC stock. Today I woke up to the message that the purchase was cancelled, and I wasn’t allowed to purchase it, or Gamestop, among others. Unbelievable times we are in.
They should rename it the Sheriff of Nottingham app.
Robin Hood is an important legend of the White race, representing wily and tenacious resistance to unjust authority. That’s us. It’s not crooked insiders taking the side of Gabriel Plotkin against the people.
That’s because following Latin convention, they did not include articles. The real name of the company is Robin the Hood.
Why would I let somebody borrow my shares if I knew he intended to return them at a much lower value? Only if I were desperate for short-term cash without regard to long-term losses would this make any sense.
Therefore, when somebody decides to “short” a stock, does he somehow coerce another party to lend him the shares?
I feel like I’m missing something here . . . .
It is done without your consent, the shares are held as inventory in the brokerage firm which executed your purchase and they loan the shares, they usually charge interest to loan the shares of which you receive none of the interest. The only way to prevent this is to have the share certificate mailed to you in which case the shares are no longer in brokerage firm inventory and thus not available to be loaned
Thank you for the explanation. So basically the brokerage house and the party executing the “short” get to profit at the expense of the targeted company and it’s long-term or naive shareholders. The broker owes no duty to the company and its good-faith shareholders, and the hedge fund reaps enormous profits by forcing the price of the stock down, profits that are purely predatory and captured with little risk.
However, if the broker owes no duty to the victim, it seems he will intervene to protect the predator. Got it!
Finally an article that explains to me (a layperson on this field) what happened. In the MSM I looked for such an explanation without any success.
Good article, Karl, enjoyed reading it! This ain’t goin’ away soon either, the people smelled their combined power, and I expect them to use it in the future. Great stuff! Hail!
I know it’s Schadenfreude, but it’s nice to see the bad guys squealing like piglets.
At this point, we all need to be aware that the alphabet agencies have been unleashed in full force. This GameStop thing is hilarious. You won’t find anyone more supportive of these kinds of things than I. But I’m afraid that this groups of redditors will get the Ricky Vaughn treatment. Certainly, there are deep state feds, politicians, and powerful Wall Street (((people))) who are deliberating to look for some kind of legal loophole to go after these people. They compared it to the “insurrection” at the Capitol on the 6th. That’s concerning on its own. Just as the one-party communists effectively made any form of dissent illegal, we are going to see a clamp down on all forms of opposition to the power of the elite.
I find this money grubbing stuff rather too distasteful for my cultured palette. I am sure these financial wizard chaps must be very clever, so I’ll be waiting for Ben Shapiro(*), doyenne of the Intellectual Dark Web, to weigh in with a considered and sagacious pronouncement.
(*) Rum type but awfully sharp. Never sought money advice from him, though I did ask whether his delectable young sister would be singing Brünhilde at Bayreuth.
For me, day-trading is simple. Buy DIA (the Dow), 100 shares, wait for it to go up 2 points, which gives you a $200 profit, sell it and be happy that you have made $200 in one day. Repeat at least every other day. Get rich slow and easy. The options and shorts and all that is way beyond my skill set. However, I know that a great many readers here are much younger and probably a whole lot more tech savvy, so they can turn this into a much more highly charged game plan — which is exactly what those guys did with Gamestop. I had never heard of Gamestop until yesterday, but gamers and video games type know myriads about this whole subject, so they realized a great deal when they saw it by using Gamestop stores to buy and swap games (from what I understand). When you spot a ‘diamond in the rough’, snap it up. And then tell your friends — and you’re setting up a great profit opportunity.
However — you have to realize there are MASSIVE TAX CONSEQUENCES to all these trades! I found this out years ago, which I tried the same thing in 1999 on all the tech stocks going straight up. Yes, I made money, just simply day-trading, but when I took my stockbroker’s year-end statement to my accountant — also my best friend — she just about fainted at having to straighten out and account for all the profits and losses! Thankfully, she did not charge me her full fee, which would have been hourly, but she told me flat out that if I did this again, she would have to charge me her full fee. Yikes! So, unless you are a perfectly organized bookkeeper yourself, this is all going to cost you a bundle. I now only trade within my I.R.A. — Individual Retirement Account — which you can have only if you are working (I think — check on this). You can buy and sell within your IRA without paying taxes, until you withdraw money when you retire — I believe at 59-1/2. So, there’s a lots of ins & outs of this sort of trading. Huge hedge funds have a whole crew of bookkeepers to keep track of their trades. Be sure to look at this from every angle.
Otherwise — I think this is the greatest way in the world to make money at home in your ‘spare time’ with your ‘spare cash’. We in the WN world desperately need big bucks to keep our way of life afloat and support the writers here at CC who keep us properly educated on how to keep ourselves strong and forward-looking. From my paltry day-trading activities, I was able to make a small donation into CC’s fundraising last summer, and I’m planning another soon. Keep educating yourselves on Personal Finance — there’s a group that publishes books for Grades K-12 in Public Schools — Council for Economic Education — which teaches students of all ages how to be ‘money aware’. Start reading, if you haven’t already. Forget Capitalism vs. Socialism arguments — you need to take care of yourself first before getting all philosophical about it!
In 2012 brokerages were required to give clients the fully calculated summaries of your trading activity for you to use for your taxes. They have always been required to give this info to the IRS but as of 2012 they all give it to clients as well. The various 1099 forms (mainly 1099-INT) is all you need to easily do your taxes on your trading activities nowadays.
Here is a reference that popped up for me when I searched for the exact date (it says 2012):
From my own experience, I have been getting these summaries since about 2006 from the brokerages I use. I recall having the same experience as you prior to that though. I manually submitted paper taxes and literally had 100s of pages of trades to account for in whatever the forms of that time required! Mailing the tax forms costed a gazillion dollars!
Thanks for your welcome advice. I honestly did not do any trading from 2001 until about a year ago, just after I retired and had time to watch morning TV finance programs — Fox Business News and CNBC Business — both of which stream the latest prices and give good commentary. In 2001, on 9/11 of that year — you remember? — the market dropped massively while I was working, and I had a $20,000+ loss in one day. And now, 20 years later, after our up-and-down market of 2020, I am actually up by 20K. So, all is well and balanced in my world, except the ‘new money’ has about half the purchasing power of the 2001 money. Finance is ever fascinating — I recommend it to everyone! The profits and losses are your learning tools, and soon you’ll be as smart as the hedge fund jocks.
Good lord! We’re all supposed to be day traders now? That’s the freaking disease, not the cure.
What this episode demonstrates is how unproductive & destructive our financial elite is — how these shysters make billions from “shorts” and other such chicanery — and now let’s have a lockdown culture where we democratize the whole damn thing and everybody stays at home and day trades???? Never read, never write, never paint, never build, never invent, never cultivate land. Just day trade.
We need to install a new elite, not imitate a worthless one.
And in the meantime we can laugh with total scorn whenever they get sabotaged.
Related to this, a very good video by Joel Davis on the need to subdue the disembedded merchant class and de-financialize the economy.
In fact, I think Counter-Currents should recruit Joel Davis to write on economics. He strikes me as a very clever young chap.
Or Karl Thorburn! This was an excellent piece. Hope there is more to come from Thorburn, who I don’t recall seeing here before.
I think Counter Currents should ask Paul Waggener to write on economics — Greg Johnson interviewed him a couple weeks ago, and the interview should still be available somewhere here. It seems as if Paul lived as quite the free soul until about 30, when he decided to try living in the opposite sphere — with a good helping of wealth. Read his book “No Surrender: A Field Manual For Creating Work With Heart”. It inspired me to get a lot more active and a lot more focused. Try it yourself, to see how you can live in both worlds, and then have the proper perspective to ‘choose the better’.
Thank you for an excellent article. Our friendly (((goblins))) are never too shy about protecting their Rhinegold: where your heart lies, there is your treasure.
I seriously doubt any fund did not hedge very large naked shorts in some way or other – particularly after entering huge loss territory. SOME sort of stop loss would have been implemented. Ths whole story sounds like a ponzi scam against the users participating in it.
But then again, there HAVE been massively stupid things done by finance wizards in the past. If this video about what a Nick Leeson did at Barings is to be believed, there are some pretty stupid money managers out there:
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