The dangers of the shorted short sell

I know something is a story when my wife gloms onto it. So, it was pretty extraordinary when she focused on the financial crisis involving short sellers of GameStop stock. I’m doubtful she even understands what shorting a stock means. I’ve watched a half dozen videos on this and I still find it confusing. What she does understand is that some “little guys” found a way to hurt big investors and make them pay. That got her attention and made her absolutely gleeful.

When you short a stock, you are basically betting on a stock’s price going down. Counterintuitively, when the stock goes down, you make money. This happens not because you own the stock, but because someone lent them to you for a fee and sold them to you at the then going market price. You really only are lent the stock though because you must pay them back at an agreed upon date, which you do by selling them again before or when you have to sell them. If they go down in price while you were lent them, you pay less to buy them on the open market, keeping the profit.

If this sounds risky, it is, which is why it’s a game generally played by large institutional investors that can take the time to research stocks and make hopefully informed bets on which stocks are likely to tank. That’s because you don’t know for sure the price will go down, so you need the credit to pay back the market value of the stocks you were loaned if they go up and you don’t have the cash to sell them at their current market price. If they go up a lot, you could go bankrupt.

Stock shorting is completely legal, but that doesn’t mean it should be. As we learned this week, the system can be gamed, in this case by Reddit forum readers. They discovered that there were more shares of the stock being sold short than existed, a phenomenon made possible because there is nothing stopping a short seller from selling his temporarily owned stocks to another short seller. If a lot of little investors buy up a lot of this stock, not only will its price go up artificially, but short sellers take it on the nose when they have to pay more to buy the stock than they paid for it.

In the case of GameStop, there was for a time literally no shares to buy. That’s because stock trading apps like Robinhood, but really the brokers they use to trade these stocks, could not buy more of a stock when there were no shares for sale. In Robinhood’s case, it did not allow you to buy GameStop, but it would allow you to sell shares you had. This has the effect of lowering the price of the stock, which mitigated the loss of large institutional investors into short selling. In short, at least for a time, the game was rigged in favor of large institutional investors.

But at least for a little while, the little guys won. They effectively transferred a lot of wealth from these large companies into their pockets instead. They did it by artificially inflating a stock’s value well beyond its worth by earlier buying the stock, and counting on the fact that the stock was so over short-sold they would cost an obscene amount to buy when short sellers were required to buy back the stock at the going rate.

Robin Hood indeed. In this case though the money did not flow from the rich to the poor, but from the rich to probably mid-tier investors who learned they could out-short the short sell system through collective action. They are doing the same thing with other stocks currently often short sold, like the AMC movie theater chain. Any company in what appears to be a disappearing market becomes a likely short sell candidate stock. All these stocks are almost certainly bad long term investments, but at least for a while they can look obscenely profitable.

What if anything should be done about this? If it were up to me, I’d make short selling illegal. You should not be able to buy any stock on money you don’t have. Of course, Wall Street runs on borrowed money, so they wouldn’t like my approach to solving this problem. To them, it would be like someone not being able to replace their roof until they had the cash. This argument doesn’t work with me. Replacing your roof is a necessity. Buying a shorted or even undervalued stock is not a need; rather it’s a want.

So, it’s a game I won’t play, but it’s one I and all of you may end up playing indirectly. We’ve got plenty of money in stocks, just indirectly through mutual funds and EFTs. And they are all managed through middlemen. Right now, much of our wealth is in TD Ameritrade, but it’s likely to move to BlackRock, the world’s largest investment fiduciary. BlackRock also manages lots of funds that specialize in short selling. I don’t want any of my assets to be tainted by any of these funds that BlackRock may manage, but maybe it would. Maybe it would drag down investments as a whole if too many of these assets are in shorted stocks.

This may itself explain the stock market’s recent slump. It’s trying to price in what’s going on with the new uncertainty in the short selling market. The only real way to remove this uncertainty is to regulate it, so hopefully the SEC will institute some rules. From my perspective, short selling would become illegal just as selling and buying stocks based on insider information is today.

I don’t see much difference between what we are seeing now with shorting the short sellers and the house of cards that collapsed in the Great Recession. The difference this time though is regulators have the ability to handle this before it becomes a much greater risk to the financial system. I’m hoping they will sober up in time before all us investors are disproportionately affected.

The Tumblr brouhaha shows again that the Internet is not free

So my daughter and spouse both have Tumblr accounts. In case you weren’t aware, Tumblr is a blogging/social media site. Both my wife and daughter are LGBTQ-friendly but I had not really tuned in that people like them haunted Tumblr because it is, or was, LGBTQ-friendly.

All that changed Monday when Tumblr announced that effective December 17 the site will permanently ban explicit adult content. This caused a great furor amongst the LGBTQ Tumblr community, who apparently make up much of the site. Tumblr is full of risqué content that does not appeal to its corporate overlords, Verizon, but does appeal very much to people who post and hang out there. Verizon owns Yahoo, who bought Tumblr. And Verizon is controlled by people who frankly largely don’t understand this universe and how important is for these marginalized people to have a safe space to be themselves.

In the future, having a safe space on Tumblr will include not allowing a lot of erotic content. It will keep many sex workers from having a place to rant. For those into Slash (erotic fan fiction) like my spouse and daughter, simply sharing these erotic stories that often go into dark areas like bondage and domination on Tumblr will get dicey. The service’s automated algorithms will decide if content is too racy or not and if it is, snip!

This decision seems motivated by a rare case of obvious child pornography posted on the site, which was quickly removed. But the main issue was that the LGBTQ community, sex workers and all these alt-blank people were too weird for the corporate masters that run the site. It didn’t look good in Verizon’s report to shareholders when they had to report they were facilitating the exchange of such socially unacceptable behavior. So Tumblr will effectively be neutered and these communities of people have to figure out — again — where to hang out online. The irony is that a lot of these people migrated from Reddit, which became overrun by the right wing. Reddit too has changed policies to clamp down on things, but not to the extent that Tumblr has with its draconian action.

So it sucks for members of these communities. They keep looking for the Promised Land on social media only to be ultimately disappointed. Twitter looks like their next place of refuge, but Twitter too is not beyond censoring or removing content. They recently removed millions of fake accounts. In any event, violate their terms of service and unless you are the President of the United States you too could be cast adrift. Ask Alex Jones, who is finding it hard to find any place in social media to broadcast his racist, hate-filled stuff.

All is not entirely lost. For the Slash community, there is still Dreamwidth, which caters to those who like to write erotic fiction oriented around existing TV shows and movies, often with heavily homosexual-ized story lines. It’s not the same thing though as Tumblr. While many of these writers are LGBTQ (or at least LGBTQ-friendly), the focus of the site is fan fiction.

Social media sites are of course costly to set up and maintain, which is why major companies like Verizon own the popular ones. All those server racks, software and site monitors don’t come cheap. Moreover, it seems impossible to create one of these public sites that won’t eventually censor some content. Some stuff like child pornography is clearly crossing a line, at least by 99.9% of us. Invariably though people like those on Tumblr will test the boundaries of how much freedom these social media companies will allow. And eventually they will discover they will transgress a boundary, largely because the needs of large corporations diverge from the social media people they attract.

So I don’t expect this problem to get any better. These Tumblr denizens will be forced to move elsewhere, but they will probably be evicted there at some point too. There will always need to be some policing of these sites. There will always be some limits on just how much freedom you are allowed on these sites. Where they are owned by large, profit-making corporations, the limits of these freedoms are bound to be more curtailed, and more prudish, than the people who will be using it.

Those who pay the bills ultimately win. It’s true for my blog too. If you post what I consider to be an offensive comment I will delete it. It doesn’t bother me and I don’t see it as a free speech issue because I pay the bills. This has occasionally bothered a commenter. Apparently they figure it’s my responsibility to host their disagreeable contents forever at my expense.

And I can’t post anything I want even on my own blog either. At the moment this blog is hosted at Siteground, and when you host with them you agree to their terms of service. This essentially prohibits me from posting pornography or doing things like inciting hate speech on my site. Essentially you have to be independently wealthy enough to create your own hosting center to have entirely free speech online. But even then you are subject to local laws. I might need to host my server in some place like the Cayman Islands to post content that would be considered illegal in the United States, but it’s likely even the liberal Cayman Islands has some standards I would have to adhere to.

What’s happening at Tumblr is unfortunate for this community who is already highly hassled and marginalized. But it’s hardly unexpected. The Internet is not free. It just offers to illusion of freedom. Unless your content is forever milquetoast, it’s always susceptible to being banned.