By: Andrew Moran
During the Sell Everything frenzy that was pervasive during the historic market rout in March, the short sellers developed a bad reputation for being opportunistic, greedy, and odious. There were widespread rumors that the U.S. government would mirror South Korea and slap a temporary ban on short selling to put a lid on the profuse bleeding occurring on the New York Stock Exchange. But are short-sellers vile creatures who should be sent to a remote island without a high-speed internet connection and a brokerage account? Hardly. Just because they make the bulls look bad in a bear market does not mean they should be cast out like lepers. In fact, they should be revered and celebrated because the shorts are like medical experts informing the public about a dangerous virus emanating from China.
Stop Short
Shorting the market can be performed in two ways. The first, which is done mostly by hedge funds and money managers, involves borrowing shares and purchasing them at a lower price in the future. The second, which is typically executed by mom-and-pop investors, consists of acquiring bearish exchange-traded funds (ETFs) or exchange-traded notes (ETNs) that trade inverse to the leading indexes. A couple of examples would be the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) or the ProShares UltraPro Short QQQ.
Burn The Shorts?
Bill Ackman, a billionaire hedge fund manager, became public enemy number one when it was revealed that he turned $27 million into $2 billion by betting against the market. It did not help that when he made this immense fortune, he was on CNBC proclaiming that “hell is coming” and hotel stocks could go to zero, and the White House should shut down the nation for 30 days. He later went to Twitter and recommended a month-long rent, interest, and tax-free holiday without evictions or defaults. Ackman later clarified that his interview was bullish rather than doom and gloom.
Others did not see his comments as positive. Former hedge fund manager Michael Novogratz urged the business news network to remove Ackman from the air “before people start jumping off bridges.” Even if Ackman had good intentions, the market fell an additional 4% that day.
Whether Ackman’s remarks were in good faith or not, people like him are continually lambasted by governments, activists, and the press. The handwringing is understandable: The majority lost a fortune, and the minority made a killing.
Between February 19 and March 19, U.S. shorts reported a one-month paper profit of $343.67 billion from the S&P 500 and the Nasdaq Composite Index’s peaks. In the first half of March, short positions in U.K. stocks surged 40% from the same time a year ago. In early March, stock short selling in South Korea reached a yearly high of just under $1 billion.
The trading practice became so prevalent that Seoul imposed a six-month ban on short selling, and it may be extended based on market conditions. This is the third time in the nation’s history that the government instituted a prohibition on shorting – the last one was in 2011. France, Italy, and Spain issued one-day suspensions of betting against selected companies and then longer bans for all stocks listed on their exchanges. Austria, Belgium, and Greece adopted similar policies. Andrew Bailey, the head of the Bank of England (BoE), did the most British thing possible and said on the BBC, “Just stop what you’re doing” – all that was missing was his top hat and a cup of tea.
In Defense Of Shorts
Anytime there is a severe market drop, market critics and government regulators blame the shorts. They are used as scapegoats. But most of the culpability is misguided and attributed to many fallacies.
For one thing, critics will argue that short selling can overwhelm financial markets, but the data show that most of the activity in recent weeks has been long selling. Another complaint lodged against shorts is that they are unpatriotic by making money off others’ misfortune, but they are sending signals to their comrades. It might seem counterintuitive, but short sellers offer a vital service to markets by exposing overvaluation, sharing important trends, and revealing to investors information they would prefer was not revealed.
A short is comparable to someone who decides to buy gold because he or she fears inflation or relocates to another part of the world over concerns about the increase in wildfires. If you were alive in 1929 with a dollface hanging on your arm and you knew Black Monday was imminent, should you be slammed for selling your holdings or shorting stocks? Of course not!
Unfortunately, we live in a time when misery must be equitable, bull runs are an entitlement, and being smart is a sin. If one person suffers, then so must everyone else. You cannot profit in an environment where there is widespread distress, and a greedy Gretchen lost 30% in one day.
Short sellers are the market detectives. They discovered the house of cards known as Enron. They knew what was up with the housing crisis. They ostensibly warned about the incoming COVID-19 danger. Let’s pin a medal on ‘em – solid gold.
Blame Somebody
ETFs, high-frequency traders, speculators, short sellers – there is always somebody to blame when the market is down. Of course, we refrain from accusing financial talk show hosts of pumping up stocks with false-positive rumors and generous analyses. We never complain about the Federal Reserve System distorting markets and producing moral hazards by injecting trillions of dollars into the market to lift asset prices. We only need to find the evildoers when things go bad. Joe Nocera of Bloomberg said it best: “But it’s easier to attack short-sellers, and always has been. And so it will continue to be until the next big fraud they expose.”
If you see it raining outside, you are going to bring an umbrella. If you think the market is going to crash tomorrow, you are going to shield your net worth from the hemorrhaging on the Dow Jones.
This was originally published on Liberty Nation.
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