We have all heard the quote “Greed is good!” from the movie Wall Street. Here’s part of the speech in which Gordon Gekko (played by Michael Douglas) created that famous line:
“The point is that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, for knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA.”
Another quote, not as well-known, tells the truth about Wall Street and the multi-billion-dollar hedge funds more succinctly: “I create nothing. I own. We make the rules, pal.”
Greed and the obscene power of the Wall Street Mafia have dominated the news the last few days. We have seen gargantuan hedge funds destroy companies to make a profit. And we have discovered that a “free” trading platform named Robin Hood that was supposed to give the little guy a fighting chance in the stock markets was actually in bed with the funds. Most of the drama is related to the funds “shorting” the stock of a game retailer named Game Stop.
Shorting is a difficult concept to grasp because there is nothing analogous to it in the everyday experience of most Americans. I will try to make it more understandable, since it impacts all of us. Perhaps the best place to start is an example that most of us have heard about: the shorting of the British Pound by George Soros.
Great Britain’s economy was weak due to extremely high National Debt, low interest rates, and high inflation. Does this sound familiar? Is there a country near you that is experiencing the same economic threats? Bullies always take advantage of weakness, and George Soros is the king of bullies. He shorted the Great British Pound (the GBP), and single-handedly broke the currency of one of the world’s strongest economies in one day. He built up a short position in the GBP to the tune of £10 Billion GBP.
Sadly, the negative effects of what became known as Black Wednesday are still felt in Great Britain. But the worst part of this story is that Soros garnered profits of over £1 Billion GBP while Great Britain lost far more. Britain had to borrow $3.9 Billion USD from the International Monetary Fund (IMF) to shore up its currency. The Bank of England spent £30 Billion GBP buying Pounds in hopes of stopping the bleeding. All together Soros cost the British Economy over £100 Billion GBP while profiting himself £1 Billion.
That is the tragedy of shorting. Soros made a lot of money, but he cost Britain 100 times as much, and almost crashed their entire economy. Today, huge multi-billion-dollar hedge funds make billions shorting the stocks of American companies. The companies they short lose many times more than the hedge funds make. It takes years for some of these companies to recover, while many others go bankrupt.
So, we understand a little about the impact of shorting companies and nations. But just what does it mean to “short” a stock or a currency? Let us use a stock for our example. A hedge fund or wealthy speculator sells stocks it does not own, in hopes of buying it back at a lower cost.
I can almost hear you yelling at me from all over the country. “That is stupid, Dr. Tom. You can’t sell something you don’t own!” I told you up front it was complicated. It is difficult to understand a new concept if you cannot relate it to something you are familiar with. Regular people do not sell things they do not own (except for the peaceful protestors of “The Summer of Love,” who destroyed business to loot merchandise that they could sell.
Let me take a stab at making shorting understandable. Let us say you own a clothing store, and you have run out of jeans. You try to order some, but your wholesaler is out of stock. Your friend who has plenty of jeans agrees to lend you two dozen pairs worth $20 each on the condition that you replace them in a certain period of time. You have just shorted jeans at $20. You take those borrowed jeans back to your store and sell them. You have just sold something you did not own.
If you later buy two dozen pairs of jeans for $20 each to replace the jeans you borrowed from your friend, you make nothing. Zero, nada, zilch. All that work and negotiating was for naught. But wait! If you can buy the replacement jeans at a lower price you will make money on this deal. You make a lot of phone calls and find a close-out deal in which you can buy the same jeans for $16 each.
Let us recap this.
You borrow 24 pairs of jeans. You sell all of them for $20 each, taking in a total of $480.You buy 24 pairs for $16 each, spending a total of $384.You return your friend’s jeans and pocket a profit $96 (or 20%).
Of course, it is not as simple as that. For instance, if you were shorting a stock you would pay commissions both when you sell and when you buy. And there will be interest to pay from the time you borrowed the jeans until you returned the same number of jeans.
“Interest? What interest?” Remember, you borrowed the jeans; you did not buy them. Your friend may not charge you interest, but your broker certainly will.
Here is how it works. The shorter calls his broker and says he wants to borrow 1,000 shares of XYZ. If those shares exist in any of the broker’s client’s margin accounts, he will loan them to the shorter. The client whose shares were lent never knows that the transaction occurred. So, if you do not want your shares lent out, open a cash account rather than a margin account.
The shorter made this transaction because he believes the stock will go down – or sometimes, as we will see, because he wants to force the stock to go down. He sells the shares at the current market price. Let us say XYZ is selling for $50 per share. Then he either waits for the stock to drop – or, worse, he illegally manipulates the market for that stock to make it drop in price.
Either way, he buys the stock when it is profitable for him – let us say $40. He made $10,000 selling $1,000 shares of a stock he did not own, and then using the money he got from the sale to buy the 1,000 shares back and return them to the lender. Amazingly, he paid nothing except a little interest to make a $10,000 profit.
Sounds wonderful, doesn’t it? But before you run out and open a margin account so you can start shorting stocks, first you have to have a rather large amount of money in your account. You do not use it to make your trades, but the broker will insist that you have sufficient funds to cover potential losses.
The other thing you need to know is that your losses can be significant. When you buy a stock, the most you can lose is what you paid for it; a stock cannot go below zero. But when you short a stock your potential loss is unlimited. You may have shorted the shares at $50, hoping the stock would drop. But if it went up to $500, you would lose ten times $50. If you are paying close attention all day every day, you can usually catch these problems before they become disasters. But if you are sick, or have no Internet connection, you might lose a lot of money before you could close out the trade. And if something unexpected happens (such as the company getting an unexpected FDA approval for a drug), the stock could run up far more quickly than you can react. That is why it is smart to have protective stop orders on all trades – long or short.
So, to summarize:
If you buy a stock, you are “long” that stock. You buy because you believe the prospects for the company are good. If the stock goes up, you make money. If it goes down, you lose money. We are used to that type of transaction. Even if you have never bought a stock, you have probably bought something in your life that made you money when you sold it. Shorting a stock is a bit more complicated than buying one. And there are moral implications to this type of transaction.
If you sell a borrowed stock, you are “short” that stock. You buy because you believe the prospects for the company are bad; or because you believe you (perhaps in concert with co-conspirators) can act to create a negative public opinion of the stock, causing it to drop. If the stock goes down, you make money. If it goes up, you lose money.
Shorting is not for the faint of heart, but it can be learned. It is very similar to buying a stock. The process is simple. Normally you buy a stock first and sell it later. In the upside-down world of short selling, you sell a stock first, then buy it later. If you are a buyer, you want the stock to go up. If you are a seller, you want it to go down.
The real difference is that there are no moral concerns with buying a stock. The only one who will get hurt if you make a bad decision is you. That is not the case with shorting. Some people short stocks as a way of trading. If you are positive about a stock you go long; if you are negative, you go short. Whichever you do, if you are right you make money, and if you are wrong you lose money.
Some people, though, go too far. Since stocks typically drop two or three times faster than they go up, lots of money can be made shorting stocks. So, the motivation and the temptation exist to try to do something to make the stock drop. That is morally wrong, and in some cases violates the law.
I am talking about this because of the greed and avarice of several huge hedge funds that have dominated the news cycle the last few days. But it would not make sense to comment on the negative effect of shorting without first explaining what it is. Now we will talk about David and Goliath.
Goliath represents several hedge funds trading billions of dollars each. It seems they have colluded with one another to short Game Stop and make billions of dollars. The New York State Attorney General has opened an investigation into this, and into a trading platform called Robin Hood.
Before we talk about Robin Hood we will talk about David. I do not want to conflate the stories of David and Goliath with Robin Hood and his Merry Outlaws.
David represents a bunch of regular people who figured out that the hedge funds were crushing Game Stop and could potentially kill the company if allowed to continue shorting it. They got together on Reddit and started buying Game Stop. This caught the billionaires in a “short squeeze.”
To understand their dilemma, you need to understand that all buying and selling looks the same to the markets. The selling of short-sellers is lumped into the same category as the selling by people who own the stock. When investors see a lot of selling, they tend to follow the herd. They sell their stocks, which accelerates the downward pressure on the stock even more.
When faced with a short squeeze, short sellers will close their positions in order to avoid further losses. But to close a short position they have to buy the stock. Remember, all buying looks the same to the markets. So, in trying to protect themselves, the scramble by the short sellers to buy forces the stock higher and increases their losses. (I told you short selling is a dangerous game, didn’t I?)
A word from our Sponsor is appropriate here. “A faithful (right-minded) man will abound with blessings, but he who hurries to be rich will not go unpunished.” Proverbs 28:20.
The Davids were having a lot of fun, buying Game Stop and making the hedge funds panic. Their plan to make billions killing a small company was backfiring, since the guys on Reddit kept buying the stock and ruining their nefarious scheme.
Enter Robin Hood. Robin Hood is a “free” trading app that advertises that it “democratizes” stock trading. Supposedly it helps the little guy compete on an even playing field with the huge guys. The Robin Hood of lore stole from the rich and gave to the poor. They used this name because they wanted that image to rub off on them. But it turns out that they were in bed with the hedge funds.
As we well know, “There ain’t no free lunch.” The people who thought they were getting commission-free trades from Robin Hood were paying with their information. Robin Hood was selling their trading preferences and habits to the hedge fund managers.
One hedge fund lost billions due to the short squeeze and had to be bailed out by two other funds. This was too much for them They were rich and powerful elites! How dare the little deplorables challenge them? They were royalty, and the guys on Reddit were serfs. They had to be put in their place!
So suddenly their buddies at Robin Hood illegally halted all buying of stock in Game Stop. Investors could sell Game Stop (which helped the hedge funds caught in the short squeeze), but they were not allowed to buy it (which would hurt the short sellers). So once again the little guy is crushed – this time by Robin Hood which was masquerading as the champion of the little guy.
What should be shocking to all of us is that no regulator or Attorney General, saw what was happening right in front of them. It took the small investors who communicated on Reddit to blow the whistle on them. They almost brought the big guys down.
This is just one of the many reasons why I left the brokerage field after rising to national vice-president. I have been a pastor for more than four decades but have always had a job. When people ask me what I do, I say, “I’m a preacher, but I work to support my habit.” I started off as a General Contractor specializing in log homes in the mountains of North Carolina. But when I moved to Florida I was led into financial services – where the offices were air-conditioned! (Florida only has two seasons: hot and hotter.)
I have always enjoyed helping people, and I thought that was what I was doing as a financial planner. But as I was promoted into various levels of management, I saw more and more of what was really going on – and I did not like it. I saw major firms engaging in “pump and dump” schemes that put penny-stock brokers in jail. But these guys were “too big to arrest.” They had powerful friends in the regulatory agencies.
When I was promoted to national Vice-President the curtain was pulled back. The corruption was disgusting. It was like looking in the kitchen at a Chinese restaurant and seeing the dog put in the pot.
We were trained to sell all kinds of financial products, but they never spoke of the effects of inflation on them. We would say, “Great! You made 3% this year on your bond fund.” But we did not tell them that they actually lost 2%, because inflation was 5% that year.
The statements were deliberately difficult to read. Most people did not have a clue whether they were winning or losing, because the bosses wanted it that way. We were not allowed to even mention hard assets like Gold and Silver because the firm could not make a commission on Precious Metals. Even though they were much safer than stocks, and we had a legal responsibility to advise clients in their best interests (not how much commission the firm would make) we were told that if we even mentioned Gold to a client we would be fired.
I finally quit because I could not handle it anymore. I had hoped that in the years since I left things had gotten better. But the type of business I described today is even more prevalent than it was back then. And the way they treat small investors is horrible.
I spoke with a lady yesterday who asked me why her IRA was not making any money. I knew that the typical managed IRA or 401K makes about as much as inflation steals. In other words, they break even in actual purchasing power. But her story had my blood boiling. She started a personal traditional IRA in 2002 with $500. Over the years they have automatically withdrawn money from her account every month. Altogether she gave them $11,800 over 18 years. Today her account is worth $2,360. Their fees have eaten up almost all her money.
The old saying,” Power corrupts, and absolute power corrupts absolutely,” is appropriate when we consider the unholy alliance between Wall Street, the huge international banks, and corrupt politicians. This is why I abandoned paper assets altogether years ago. Hard Assets are the only way I feel the money with which God has blessed me can be invested safely. Remember, “If you can’t hold it, you don’t own it.”
Dr. Tom Barrett is a pastor, teacher, author, conference keynote speaker, professor, certified executive coach, and marketplace minister. His teaching and coaching have blessed both church and business leaders. He has been ordained for over 40 years, and has pastored in seven churches over that time. Today he “pastors pastors” as he oversees ordained and licensed ministers in Florida for his ministerial fellowship.
He has written thousands of articles that have been republished in national newspapers and on hundreds of websites, and is a frequent guest on radio and television shows. His weekly Conservative Truth article (which is read by 250,000) offers a unique viewpoint on social, moral and political issues from a Biblical worldview. This has resulted in invitations to speak internationally at churches, conferences, Money Shows, universities, and on TV (including the 700 Club).
“Dr. Tom,” as his readers and followers affectionately refer to him, has a passion for teaching, as you can see from his ministry website (www.ChristianFinancialConcepts.com); his patriotic site (www.ConservativeTruth.org); and his business site (www.GoldenArtTreasures.com). Tom's friend Dr. Lance Wallnau wrote of him, "Tom Barrett is a Renaissance man with a passion for subject matter ranging from finance to theology and American history."
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