“I, Who Hate Shorting, Just Shorted the Entire Stock Market. Here’s Why”
The comments below are an edited and abridged synopsis of an article by Wolf Richter
Richter hates shorting, and he does not recommend shorting this market. But here’s why he has done so.
The stock market has had a phenomenal rally, but there are 29.2 million people on unemployment insurance, and more who’ve lost their jobs and are either ineligible for unemployment insurance or whose state hasn’t processed the claim yet. All told, they amount to over 20% of the labour force.
Then there is the desperate plight many companies find themselves in. They are in survival mode, and they’re raising money by selling junk bonds and shares so that they have enough cash to get through this crisis.
A stock market frenzy has occurred in recent weeks; everything was bid up unless it filed for bankruptcy—and even then, they bid it up, as Hertz has shown.
These are not normal times; they are the times of record Fed money printing. Between March and June, the Fed printed $2.8 trillion and threw it at the markets—frontloading the whole thing by printing $2.3 trillion in the first month.
Credit markets turned red-hot, and speculators chased everything, including junk bonds sold by cruise lines and airlines. The Fed’s money drove up stock prices.
But over the past six weeks, something new was developing. While the Fed was talking about the asset purchase programs it would establish, it actually curtailed the overall level of its purchases.
Then in the week of June 10, the Fed’s total assets of $7.1 trillion increased by less than $4 billion. In the week of June 17, its total assets fell by $74 billion. A chart of the week-over-week change in total assets shows how the Fed frontloaded its QE in March and April, and how it then systematically backed off.
The Fed is shifting its lending and asset purchases away from propping up financial markets and toward propping up consumption by states and businesses, and ultimately spending by workers/consumers via various lending facilities. These funds are flowing into consumption, not asset prices.
And now the market has to stand on its own during a terrible economy, amid some of the worst corporate earnings ever, while over 30 million people have lost their jobs.
Richter stuck his neck out, and he’s sharing this trade for our future entertainment when it goes awry. He shorted the greatest stock market rally of all time as it moved higher above the worst economic and corporate crisis imaginable.