Prof G Markets - The Texas Stock Exchange + Is Short Selling a Dying Strategy?

Episode Date: June 10, 2024

Scott shares his thoughts on why the new Texas Stock Exchange could be an appealing choice for certain companies. He also explains how it's a symptom of a larger issue: the politicization of everything. Then Scott and Ed break down the role that short sellers have historically played in the market and why the unprecedented bull run of the past 15 years has diminished the strategy’s returns.  Order "The Algebra of Wealth," out now Subscribe to No Mercy / No Malice Follow the podcast across socials @profgpod: Instagram Threads X Reddit Follow Scott on Instagram Follow Ed on Instagram and X Learn more about your ad choices. Visit podcastchoices.com/adchoices

Join Capital Group CEO Mike Gitlin on the Capital Ideas Podcast. In unscripted conversations with investment professionals, you'll hear real stories about successes and lessons learned, informed by decades of experience. It's your look inside one of the world's most experienced active investment managers. Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc. Today's number 19.

That's the percentage of employers who claim to have had a recent college graduate bring a, get this, parent to a job interview. Ed, true story. I figured out that my parents favored my twin brother when they asked me to blow up balloons for his surprise birthday party. Hold me, Ed. Little twin humor. Little twin neglected dog humor. That's right. We're trying to clean it up.

Still PG-13. Still PG-13. Still PG-13. Welcome to Prop G Markets. Today, we're discussing the Texas Stock Exchange and the dying breed of the short seller. Here with the news is Prop G Media analyst, Ed Elson. Ed, what is the good word? I'm just pretty shocked by that stat. 19%. Makes no fucking sense.

Makes no way. You think that's right? I don't know. Surely, surely there was something wrong with the survey there. Unless I'm just completely out of touch. It's unbelievable. Yeah. No.

I asked my parents if I was an accident. They said, no, it's really more of a tragedy. That could have been our opening joke too. Yeah, there you go. You were in Scotland yesterday. How was that? And this morning. It was great.

Went up there for the night to a place called the Fife Arms in Aberdeen. By the way, one of my favorite things to do is when I look at your schedule, I will look at the hotels you're staying at and Google them and look at all the photos. So I've already seen the Fife Arms website. I know what all the amenities are. It looks quite nice. Yeah. Yeah.

What do you think? What should we have done? We pretty much just drank whiskey and had a long dinner. We didn't even take a walk. We didn't go outside. Also, I don't know if I told you this, but actually speaking of parents, my parents treat me like a God and that is they don't believe in me, Ed. They don't believe in me. Back to the Fife Arms. Do you have like a jokes website pulled up in front of you right now? Where are these coming from? 100%. So what place am I going to that you're most excited about? I love that you're stalking me.

I love doing that. I don't know. First off, where are you guys going? Where's the team going? Oh, we're going to St. Bart's. That's right. That's what happens when you work for the dog. That's right.

That's right. He sends you to St. Bart's. Did I tell you once I walked into my parents having sex. Seriously, Ed, seriously, I'm not joking. It was the worst 45 minutes of my life. You've told that one before, but yeah. Never gets old. And just a reminder, just a reminder to go listen to the Prof G Markets feed. Prof G Markets. Go subscribe. All right, get to the news. Gladly.

Get to the news. Let's start with our weekly review of market vitals. The S&P 500 hit a new record. The dollar declined. Bitcoin topped $70,000 and the yield on 10-year treasuries fell. Shifting to the headlines. Spotify is increasing the cost of its premium subscription plans, including the family, duo, and student plans.

That's its second price hike in a year. Meanwhile, Warner Brothers Discovery also announced a price hike for Max. Morgan Stanley's trading platform E-Trade is considering banning Keith Gill, also known as Roaring Kitty, over concerns of potential stock manipulation. The company is concerned that Gill's influence can enable him to pump up stocks like GameStop for his own gain. And finally, NVIDIA became the first computer chip company ever to reach a market cap of, wait for it, $3 trillion. As of Wednesday's close, the company surpassed Apple as the second most valuable company in the S&P 500, also in the world,

behind only Microsoft. Scott, your thoughts? I think that the subscription space is just such a fascinating lesson in economics and markets. And essentially what you had is everyone figured out that the future is in streaming. And it's also consistent revenue. It's not ad revenues where if there's a recession, everyone stops advertising. Even though it was a recession,

people usually don't cancel their Netflix or their Spotify. And so the market got drunk on it. This is the future and gave these companies an enormous valuations. And then the ones with the biggest market cap,

specifically Netflix, started reinvesting that capital to take an Amazon-like strategy of just using capital as a weapon and pull away from everyone else. And Netflix got up to $17 billion a year and spent on content, which no one could match. And then the markets got less excited about the space because it didn't appear anyone was very profitable and that the space had been over-invested because everyone was trying to catch up with Netflix. So it was a great time to be a gaffer. It was a great time to be in the business of production. But at some point, the music was going to end. And it ended about, I think, about two years ago when Netflix crashed.

And all of a sudden, it became clear that things like Paramount Plus just might not survive. And the market has done two things. It's consolidated, and it's also, based on the consolidation, given some players, specifically Netflix, the cloud cover to raise prices. And this cloud cover and the consolidation, because there's fewer and fewer options at the very high levels, has given this pricing power back to the organizations. And Spotify has increased prices. I think it's going to be twice now. And Spotify, for the first time, I think in a while, their stock is performing really well. The individual dual and family subscriptions will increase $1, $2, and $3 respectively. The stock popped 5% on the news. Its performance to date has been

underwhelming, and it's 25 quarters as a public company. It's only been profitable with eight of them, but things are looking up. The stocks has doubled in the last 12 months. And you're also seeing Max is increasing its prices on ad-free plans. So the companies that come out the other end of this will be the consolidate ors as opposed to the consolidate es. I think it'll do well. And that's one of the reasons our three stock picks for 25, again, invest in index funds, but it's fun to follow stocks, are Alphabet, which is up, I think, 25% or 26% on the air, and then Warner Brothers and Disney. And Warner Brothers has been a laggard. Disney's done okay because I think that the pricing power that they will register at Disney Plus and at HBO, respectively, will start to give the markets a reason to look at them again.

But this is just a case study in overinvestment and then a crash and then consolidation and then pricing power coming back. Any thoughts? I just couldn't believe the stock performance of Spotify. It's up 110% in the past year.

It's doubled. It's pretty fascinating to me. I mean, we discussed their earnings from last quarter on this podcast, which was also pretty phenomenal, 20% revenue growth. They had this massive reduction in spending, and now they're doing what great companies get to do, which is raise prices. So I think we'll see how that will affect the usership in the next earnings. It's got its next earnings call a month from now, but I have a feeling that it's not really going to hurt MAUs that much. I feel like price hikes

are always less damaging than people predict. And that's certainly been the case for Netflix, as you pointed out. Thoughts on Keith Gill and E-Trade? So I thought this was really interesting. When we first talked about it in the editorial meeting, I thought, this is bullshit. It's the SEC's job to decide what market manipulation is, not E-Trade. And then it dawned on me, E-Trade is full of shit. This is what's going on, or what I think is going on. E-Trade is worried about what happened to Robinhood. And that is, when the meme stock phenomenon went just literally parabolic, the ability to pair trades on these highly risky, highly volatile

stocks meant that the trading or the clearing firms asked them to have a certain amount of capital reserved in case the stock accelerated before they paired it with another trade. And I think E-Trade is worried that they might get caught with their pants down. Because if you remember what happened to Robinhood, they effectively said to people, you cannot buy GameStop, or I forget which equity it is. And to a certain extent, they probably should have gone out of business when they did that. And I think E-Trade looks at what's happening and says, someone in their compliance or their risk department comes back and goes, if this shit gets real again and it starts going fucking crazy, we could potentially find ourselves in a

Robin Hood-like position where the people who clear our trades demand so much equity that we don't have it. But this notion somehow that they've decided they're the arbiters of market manipulation makes absolutely no sense to me. What are your thoughts? Yeah, I found it really interesting, the debate that's going on at Morgan Stanley as you pointed out, you know, why they should ban him, but also why they shouldn't ban him. Because it actually isn't a question of legality for them, because their terms and conditions are very clear. They can basically restrict whoever they want. That's what you sign up for when you sign up with their platform. But their concern is that if they do ban him, that they're going to make enemies with the Reddit army. And that by antagonizing him, it's going to start this chain reaction.

And all of his hundreds of thousands of fans are going to leave and follow him to a different platform. And I just find it so interesting that this issue is kind of becoming a theme for every platform. And the first obvious example that comes to mind is Trump. But it's sort of like, you know, if you're a platform, if you have users, you have to develop a strategy for dealing with these larger-than-life characters with these huge followings who misbehave.

Because even if you rightly punish them, you risk losing millions of users and eventually probably millions in revenue. So it's interesting to me that a stock trading platform could be dealing with the same issues that we've seen over and over again on the social media platforms like Twitter and Facebook. And I just think that every platform, no matter what industry you're in, should have a game plan for situations like this, because it feels like it's happening more and more frequently. Your analysis is the right one. But the folks at Morgan Stanley are really smart. And they sat down and said, okay, what are the risks of a Robin Hood-like

moment for us? That is a terrible scenario for us. What are the risks we're going to lose a bunch of meme stock traders? They probably looked at their, I would imagine, their trading base and said, it's not a big part of our business. I think they would have rather not done this, all things being equal. But I think they decided the risk, the kind of tail risk or the black swan risk of an event where the stock goes to, you know, one of these meme stocks goes absolutely parabolic and there's just, you know, a 30, 50, 100, 100x increase in volume and all of a sudden the people clearing their trades freak out and say, you need 30, 40x the capital reserves here. They thought, okay, that's just not a scenario where we all want to be woken up at 2 a.m. and

try to figure out how to get more liquidity. Okay, so we piss off Roaring Kitty and his followers or some people on Reddit. they probably did some analysis and tried to figure out what percentage of our trading volume is these individuals and they said no we'd rather piss off this small group of people and not be subject to this to this tail risk thoughts on nvidia to three trillion dollars in market cap i just i've never been a company this successful if you define success by the ability to add that type of value in a short period of time, it's added $1.8 trillion year to date. It added three quarters of a trillion dollars in May.

So it's now larger than the entire stock markets of Canada and South Korea. Its market cap is larger than the GDPs of all but six countries. I mean, we were talking with Bill Cohen about Paramount. We're talking about $5 billion. Is it worth $15 billion? This company loses that in a trading hour or gains it. And it's absolutely striking. And we're going to see all sorts of stories here about thousands of employees in the Bay Area who are now worth $10, $50, $100 million. The numbers here, people can't even wrap their head around what the numbers here are. And then one of the things that Mia pulled up that just fascinates me is I believe that the S&P is up about 13% or 14% year to date, but half of that gain is NVIDIA. So the S&P outside of NVIDIA is basically up a little bit more than inflation.

So essentially, if you have money in the S&P, you're kind of flat if you don't own NVIDIA. But if you own NVIDIA or you're part of an index fund, and this is why you should be in an index fund, because you're balanced across based on a weighted adjusted ratio of the market cap, you're up 14%. But if you're buying individual stocks, most likely you're probably not doing that well unless one of those stocks was NVIDIA. And it goes back to, I think it's a lesson in the power of index investing because what I have found having been through a lot of ups and downs financially is that the pain of losing a lot of money is much greater than the joy of making a lot of ups and downs financially, is that the pain of losing a lot

of money is much greater than the joy of making a lot of money. And so diversification and index funds and getting that 14% feels really good. Now, it doesn't feel as awesome as getting 300%, but what really fucking sucks is being the guy that's not beating inflation or has lost money. So this thing is an absolute phenomena. Josh Brown had a really interesting point. I said, this is Cisco all over again. He said, yeah, there's a key distinction though. And that is as the market cap has accelerated, the PE has actually come down, which means that their earnings growth has been greater than this exponential market capitalization growth. I think this is a bubble. I think it's a matter of when, not if. But I think it's going to happen when a company, a big company who's a big

purchaser, announces they have their own ship and that it's pretty good. Or when Mary Barra from General Motors says, we're dramatically decreasing our spend in AI while it's pretty good. Or when, you know, Mary Barra from General Motors says, we're dramatically decreasing our spend in AI while it's still important to us. We've realized that it's not going to revolutionize everything we've done. That's when I think you see the bubble pop here. But this is, as of today, this is the most successful company in history

as registered by an acceleration in value. What are your thoughts? I just love seeing the star power that Jensen Huang has accumulated in the past year. Two awesome examples of that. One, that viral photo of Jensen signing a woman's shirt who comes and accosts him while he's walking out of an interview.

If you haven't seen it yet, you should go check it out. He literally looks like a rock star. I mean, he's wearing the leather jacket, but it's sort of like, it's Cristiano Ronaldo, like Justin Bieber level fame. And the second thing that I found also pretty interesting is what he did to Samsung stock. And that is Samsung rose 4% in one day after Jensen said in an interview, not that he was partnering with Samsung or that he was even conducting any sort of business with Samsung. All he said is that he has been looking at the chips that Samsung has been producing. And through that comment alone, he was able to create $15 billion

in market value and increase the stock 4%. Here's a question for you. Do you think Jensen Huang is at this point the most powerful non-politician in the world? It's a really interesting question. I think some people would argue that it's Mark Zuckerberg or Satya Nadella because of their control over such huge swaths, huge businesses, and also their ability to sway elections or not sway elections or depress teens or whatever it is they do. But what Jensen, in my opinion, sort of indicates is the financialization of everything. As a society becomes more capitalist, what it offers is different gradients of life. What do I mean by that? When I was younger, my dad would have people over who worked for him, and then we would

occasionally go over to his boss's house. His boss had the nicest house on the block, but it was still the same neighborhood, and we were all still members of the same country club. And he had a Cadillac, right? Instead of a Thunderbird, he had a Cadillac. My dad had a Gran Torino, but his boss had a Cadillac. But now, the guy who runs a company flies private and stays at a series of hotels that people just, most, 99% of people could just never even afford. The five alms, yeah. Well, or not even that. I mean, what you can do with money now, that wasn't even an option back in the 70s and 80s. Like money bought you some stuff, but it didn't buy you what it buys

you today. And so I think the reason we're morphing to a different species is one, mostly because of loneliness, but two, the financialization of everything has created different criteria. What do I mean by that? The sex symbols used to be military. Your ability to protect the tribe made people attracted to you. Now, the people we're most attracted to are the people who can offer a better life to the entire tribe. And that is, if you're very wealthy, you have power, a ton of power. And you can offer such an extraordinarily different life to not only your immediate family, but the people around you, your employees, that these people have become the new generals, the new athletes, the new movie stars. They are the sex symbols. They are the new heroes in a species that has evolved

also because they're in the technology field they're the closest thing we have to a god because we don't understand this shit similar to the way we don't understand religion but i feel like we're evolving to a different species with different criteria and different heroes and jensen huang is an example of that and And here's our strategy. I did get that picture with him at Cannes. He came up. I told you this story. He said, I like your videos. I'm like, do you want a picture? I thought he was a fan, took a picture. He walked away. I'm going to find that picture. And I'm going to announce that PropG has entered into an exclusive relationship with NVIDIA. And then we're going to SPAC. We're going to SPAC. Hell yeah. I love that.

We're going to SPAC. I'm going to get Chamath Hell yeah. I love that. We're going to SPAC. I'm going to get Chamath as an investor. I'm going to have him go on CNBC every other fucking day and they're going to pretend what he says is gold so they can fill up 18 hours of opioid-induced constipation network and they'll bring on any carnival barker to talk up any chicken shit. I love that. We'll be right back after the break with a look at the Texas Stock Exchange.

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and we all need to work together to protect each other. Learn more about how to protect yourself at vox.com slash Zelle. And when using digital payment platforms, remember to only send money to people you know and trust. We're back with Profiteer Markets. A new national stock exchange is preparing to set up shop in Texas. A group of investors, including BlackRock and Citadel, have raised $120 million to establish an alternative to the New York Stock Exchange and the Nasdaq. Those exchanges, according to the group, are too regulated. The Texas Stock Exchange plans to file with the SEC later this year,

and it wants to start trading in 2025. Scott, the NYSE and the NASDAQ have had this duopoly on the U.S. stock market for years now. How do you think the Texas Stock Exchange could affect the financial markets? Well, I like this in the sense that I think we need more competition. I just think it's a good idea to have more than two options in what is the largest equity market in the world. The U.S. markets trade more than $360 billion in value each day, and that's more than four times the liquidity of all European markets combined. So it are, it really is at this point, a bit of a duopoly. And then what you see is because the criteria and the risk disclosure

that the SEC mandates to trade on these exchanges results in a series of companies that have a halo of prestige, that if you're a publicly traded company on the NYSE or NASDAQ, it says something about you. It's like going to Princeton, for example. It says that you're smart, you're probably mentally fit, and probably an entitled douchebag. But still, despite this, the average PE in London is 13. The average PE on the Shanghai Index is 13 also. And New York City, it's 26x. That's the combined or the average PE of firms on the NYSE or the NASDAQ. So these companies offer an incredible brand halo, and they also get paid for it. So the minimum fee to the exchange for listed companies in London is 14,000 and Frankfurt at 17. And here's theopoli gets their pricing power. The NASDAQ and

the NYSE are 52 and 80,000 respectively. So I like competition. The thing I don't like about this is, of course, this is the politicization of everything. This has very much a red state feel, and they're trying to say NYSE and NASDAQ are blue state. And I thought, I never thought of them as blue. I just thought of them as financial. But it feels like everything is being politicized, right? Just as we were talking about the financialization of everything, we have the politicization of everything. And I would bet, I would bet that the person behind all of this who said, I'll be your anchor tenant is Elon Musk. I think he's so pissed off about what's happened with the SEC and his pay package, I bet he can't wait to move all of his shit and trade on the Texas, whatever it's going to call, the Yeehaw Stock Exchange or the Texas Stock Exchange.

So it's sort of discouraging that my guess is, intentionally or not, they're going to position it as red state versus blue state. What are your thoughts? Well, I think it's interesting to go over what the complaints about the NASDAQ and the New York Stock Exchange actually are. So there have been complaints about costs, particularly costs around trading data access and financial data. But that's mostly an investor complaint. It's less of an issue for a company listing itself. And, you know, there's obviously the listing fees and the annual fees, but those numbers are pretty small. There's also been complaints around regulatory overreach, just that there are too many rules and too many regulations for both

exchanges if you want to list. But the most common complaint that I'm seeing, and this is what I find so interesting about this story, is that both exchanges are too woke. Like every written opinion on this topic, there's this one fact that they love to talk about, which is that the NASDAQ has these rules around board diversity. And the rules are that one, your board has to have at least one female director, and two, your board must have at least one non-white or LGBTQ plus director. I think those rules are ridiculous, personally. But I also find it pretty ridiculous that you would go out and create an entirely new exchange, basically just to spite these other exchanges that you think have become too woke.

So I agree with you. I think it's important to have a board that looks at least somewhat representative of your customer base and your employee base. But the exchange is mandating it? I just don't think they should be in that business. No one charged the NYSE or NASDAQ with social engineering or solving the world's diversity problems. I don't think that's the business they're in. I think it's a lot of virtue signaling. And I think investors can make up their own minds. So they have kind of created an opportunity or a white space, but they'll also have lower or less stringent disclosure or filing mandates. This will be more like we're a market maker and we're in the business. We're going to be more.

They're not going after investors. They're going after investors on the woke shit, which is, you know, I don't know, what a fine. But who they're really going after is companies by saying that we're going to make it less expensive and less onerous for you to list on this exchange. And then they'll say to consumers, I just smell mus here. I smell Musk here. I think Tesla and SpaceX and I think that Twitter or X, whatever it's called, are going to end up on this exchange. And then some of the politicians in Texas will urge companies to relist on this exchange. It'll be a state thing like Texas and New York, we hate each other. We'll stop sending money to New York. Yeah. I mean, you mentioned like fees, that fee that you mentioned before, $80,000 for annual fee to be on the New York Stock Exchange. Like that's nothing. I just can't see the value proposition here

being anything but screw the woke liberals. Yeah, but as someone who has, I didn't run a public company, but I founded a public company, I think that, what did I think? I think it was like, I think we figured out to be public costs two to three million bucks a year in terms of the accountants you've got to hire, the audit requirements, the filings.

It's real cabbage. And my guess is they're going to try and say to businesses, we're much lower cost, not only on the fee. Yeah, with the regulation. You know, they're just, they're going to try and position themselves as more business friendly on the supply side and on the demand side to consumers, you know, we're Texas. I think this story also plays into a larger economic story about Texas, and that is businesses just love Texas right now. Just some stats on that. It's one of the leading states in terms of business relocation. And Texas is now tied with New York for having the second highest number of S&P 500 companies in the state. They're both just behind California.

That's a great stat. That includes old companies like Exxon and AT&T, also new players like Tesla and Oracle. GDP growth was 5.7% last year. That's the second highest in the nation. And then, of course, there's this Texas versus Delaware story that's playing out where Elon wants to reincorporate Tesla in Texas instead of Delaware. He's encouraging all these other companies to do the same. What are your thoughts on Texas and just the possibility that it could lead the u.s in terms

of business activity i think texas is fantastic i think it's done a great job i can't stand it when people create a stereotype around texas as being this kind of republican but i mean austin's an amazing city and it's attracting a ton of business and it's really, it's a progressive place. Houston's a decent city. Dallas, I mean, Dallas, one of the things I was just so moved by is that I have a friend whose daughter is severely disabled and they moved to Dallas because Dallas has developed an enormous infrastructure of nonprofits and healthcare companies and public infrastructure that is specifically focused on kids with severe disabilities. And you just immediately go like, fuck, yeah. I mean, right on Texas, right? And that it's so strong and it has such a reputation

for this that a lot of people with kids who are struggling move to Dallas. And also, all the stereotypes about it being just a bunch of white good old boys in cowboy hats, there's a huge Indian population. It's a wonderful state. I love that they're offering zero taxes, which forces other cities to take a really close look at at least their state taxes. A lot of people would argue in terms of consumption taxes, it's actually a middle to upper tax state. That's a different talk show. Actually, Texas' effective tax rate on businesses is 5.4%. That's the 14th highest nationally. But their headline news is zero state income tax. Will Prof G move to Texas? I don't think I will ever live in Texas because I don't need to.

I get to live in New York and London, which so it's like, yeah, I mean, you know, that works for you. That's a good idea for you, Ed. I will not be moving to Texas. Let's move on to our second story. Come on. Why not? I thought you were a closeted Republican. I thought you were like Texas. No, you love saying that about me.

I don't know. I love New York. I'm having a closeted Republican. I thought you were like Texas. No, you love saying that about me. I don't know. I love New York. I'm having a great time here. I just have the feeling that Texas is overrated and people go because they don't want to pay taxes. And that just doesn't sound that appealing to me. But I don't know. I haven't...

Actually, I went for South by Southwest, but we were there for maybe 24 hours. So I didn't really get to experience it properly. So I'm not really giving it a fair review. I can totally see you in Austin. I can totally see you at the proper hotel at the bar getting like totally rejected by every, every recent UT grad. Why does that make me happy? Why does that make me happy? I'm a podcaster. Hi, I'm a podcaster. You may have heard of me. We'll be right back after the break with a look at the decline of short selling.

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and 2023 was barely an improvement. Even the most famous in the game have bowed out. Jim Chanos, who's known for calling BS on Enron, gave up on shorting last year. Assets in his short-selling hedge fund had cratered from more than $6 billion in 2008 to less than $200 million in 2023. Now, as a reminder, short-selling is a strategy where you borrow a stock, sell it, and then buy it back at a lower price. You're essentially betting on the stock going down.

But Scott, why do you think this strategy is dying off today? Well, I would argue this is cyclical, not structural, because since 2009, the S&P has increased 655%. So if the market had lost 90% of its value, it would have been awesome to be in the short business. So, I mean, there's just, if you were short over any extended period of time in the last, you know, in the last 15 years, you've gotten your ass handed to you. And it's been hard to raise money. And finally, you've probably thrown in the towel.

And typically, when people start throwing in the towel is usually the time. Julian Robertson, arguably one of the greatest investors in history, Tiger, saw just these crazy stocks going up and up in the internet and threw in the towel, I think in 99, and then they crashed. So I think this is just purely cyclical. Now, I would argue that short sellers play in a really important part of the market. They are very good in a really important part of the market. They are very good at giving the other side of the narrative. When everyone barks up the same tree, you get stupid. When you watch CNBC, you get stupid because I think the vast majority of the people there are basically just pumping.

Their advertisers are kind of long. Their exchanges and trade like Chuck, his proprietary algorithm. If you just order this investment strategy on LaserDisk, which gives you a hint of just how sophisticated he is, or on Betamax or VHS, you can spend more time with your family. So they're going to have a long bias. Most of the people there are talking about pumping up stocks. It's really important to have people come on and say, this is why this stock is overvalued. Also, there's a lot of whistleblowers in this, which I think is probably helpful. They call bullshit on companies. And also in cases where firms

misrepresent their financial statements, short selling is associated with a faster discovery of the fraud. And it also diminishes share price inflation that occurs when firms misstate their earnings. So this is important. It's also short selling is used by large institutions as a means of hedging their long exposure because yeah, it's sure you give up some on the upside, but if things go to shit, your widows and your orphans don't. The reason I go short sometimes,

or at least the way I justify it in addition to the crack cocaine dope that I have to gambling, is that I think while I'm so long, especially heavy in tech, because that's kind of what we do, it's not a bad idea every once in a while to just have a bit of a short position. And hedge funds are supposed to be 60-40, 60% long because of the natural trajectory of the markets is usually up, but also to go short. And what's ended up happening over the last 15 years is hedge funds really aren't hedge funds. What they are is levered long funds. And so I think it's absolutely an important part of the market. The people fomenting this bullshit are CEOs and people

who get angry at short sellers who happen to show up on earnings calls and say, okay, you're an automobile company, not a software company, and you're trading like an AI company. And they don't like those people. They want all longs such that they can have basically a series of sycophants and stenographers asking them questions and writing about them. So I think it's really important. And the fact that short selling has gotten so out of vogue and so many of these funds have been crushed, I think that means one thing. And I want to ask you, young Padawan, what does that likely mean, Ed? Sorry. Jesus Christ. Go back to your lightsaber training. You're clearly not ready for the beauty. Repeat the question. Well, okay, let me put it this way. Do you think short funds are going to beat or miss or underperform the market over the next five years based on what you have learned on this podcast?

Well, I think we probably have a different view. That's it. You are banned at Tatooine. You are seriously—have you fucking learned nothing? I said I think we're going to have a different view. I think they probably underperform, but I think you're going to say that it's cyclical and that they're going to overperform. Well, the fact that you have people getting out of this business means that there's less people trying to borrow money, which means the interest costs on borrowing stock will go down, which means on a risk-adjusted basis, there's going to be more upside to shorting stock. So I would argue that this is exactly the time to think about a hedge fund or a diversified index fund that does occasionally short some companies. And I would suspect that the few short funds that survive this or go into this or run into the fire are going to overperform the market because, as Jamie Dimon said, a recession is something that happens every seven years. It hasn't happened in

15 years, and we are due. But haven't we been due for the past, I mean, as you just said, we've been due for the past eight years. 100%. And we keep using your credit card to juice the markets. But at some point, what you just said is scary. I remember in 1999, the Wall Street Journal put out an article saying maybe we have moved to a new economic model that because of technology that is deflationary and productivity has gotten so crazy that there's no reason that the markets aren't in a new era where they have sustained increases. And then we saw what happened in 2000. The only thing I have 100% certain of is the market is absolutely going to throw up and even crash. I just don't know when.

But that is part of the animal spirits and the beauty of the market. And that hasn't happened in 15 years, which leads me to believe when it happens, it's only going to be more severe. Concerning. I mean, the other side to this is that there's just a lot less. I'm getting away from the markets themselves, just focusing on shorting. There's a lot less upside to going short, even if you're right. I mean, that's statistically true because when you sell short, your maximum return is 100%

because the stock can only go to zero. Meanwhile, your downside is unlimited because the stock can keep rising into perpetuity. But here's one stat that I found very surprising, which is that Hindenburg Research, which we've talked a lot about on this podcast, kind of the gold standard of short-selling firms today, it actually doesn't make that much money. And you might remember this short-seller report that they released on Adani

Group, which we covered. And that was this industrials company in India that's owned and operated by this guy Gautam Adani, like the Indian billionaire, richest guy in India. So when they released that short seller report, it wiped out $70 billion in market value, just through their actions. According to Bloomberg, apparently they only made $50 million off of that trade, which is just, feels like peanuts to me. And the firm itself, I think only has like 12 to 20 employees, some really small number.

And it just feels like there's not actually that much money in the short selling game, even if you're right. I mean, you've gone short in the past. Have you ever made like a meaningful amount of money on a short position? Yeah. So I write covered calls. When I have a stock that's gone way up, I'll write covered calls way out of the money as a means of taking some money off the table and hedging a little bit. So, yeah, I've made meaningful money, but I do it a little bit differently. I don't like to write naked calls because your loss is infinite. It's like collecting dimes in front of a bulldozer.

It's a lot of fun until it's not. But writing covered calls where you write, essentially you sell a call at a higher price and kind of collect rent against your stock. And if the stock skyrockets, it's a net wash. You give up some upside, but technically it's a wash because the stock goes up. But yeah, I have made, I think I told you this in 21, I made a ton of money. 22, I made decent money. 23, I lost a ton of money. And so far this year, I just haven't done as much of it because I'm trying to just sort of, I don't want to be staring at my phone all fucking day. But the way I see it is,

I don't think of it as an investment strategy on its own. I think of shorting as a great way to hedge. I can sort of understand that market. I do think the ultimate strategy for a young person who has the benefit of time is just to go into SPY or to dollar cost into an index fund. But shorting is a valuable part of the market. And especially if you find your portfolio, for whatever reason, is highly concentrated in a specific sector and you don't want to sell because you don't want to incur short-term capital gains. I think that I like the idea. It's worth it to take a little bit off the table in terms of upside to reduce some of the downside. I think that's a way to live a more kind of

emotionally balanced life, if you will. There have been a lot of arguments in the past and today that short selling is harmful to companies, it's harmful to investors, It's a predatory practice where you're profiting off of people's losses. And a lot of people have argued that it should be banned. And in some cases, by the way, we have banned it. For example, in 2008, during the financial crisis, the SEC made it illegal to short financial stocks. And that was all part of an effort to sort of stem the decline and restore faith in the market my assumption is you just flat out disagree but where do you stand on short selling regulation do you think there's any do you think those guys have a point i would imagine that they

saw kind of systemic risk to the entire markets in the economy and so from the short term they said look we just can't have short sellers we can't have a run on the bank that might crash the global economy. Fine, I get it. In general, I don't see why anyone would have any less license to go short a stock versus go long it. And it can reduce risk for people. It creates a different level of scrutiny, which is really good, creates more transparency. And you have to have, it's really important to have a deliberative body where we have Democrats and Republicans giving each side of the issue such that we shape through evidence and debate better solutions. What CEOs are saying, whose economic well-being is tied to the company long,

are saying is we don't want a debate. We don't want anyone looking over my shoulder. We don't want a counter narrative. I want all of you to bark up the same fucking tree so I can vest my options and have my Gulfstream before this pile of shit crashes. You need these people. You need these people out saying this is why this company is overvalued. That's an important... The shit I get on... Hands down the most shit I've ever gotten on Twitter is when I say a stock is overvalued because the entire venture capital industrial complex is like how dare you call my dog walking app not worth $2 billion. And it's important that investors have both sides of the story. That plays a hugely important role. All right, let's take a look at the week ahead.

We'll see earnings from Oracle and Adobe, and we'll also see the consumer price and producer price indices for May. Do you have any predictions, Scott? Well, I can't help it. I've been watching the GameStop saga again, and it's up, I don't know if you saw this, it's up 30% today.

It's at 40 bucks as we record this. My prediction is, I don't know where it's going to be next week. I don't even know where it's going to be the week after, but my prediction is within 90 days, it's below 20 bucks. My thesis all along has been that when Michael Jordan jumps into the air, it looks as if he's never going to come down, but gravity is underlying valuation. It's fundamentals. And this is a company that on any reasonable—it's trading at a P of $1,830 right now. And at some point, the people in the stock are going to go, okay, this is fun, we're gambling, but at some point, we need to cash in our chips. And I think it'll be as violent coming down. And to say it's an okay company is really generous. And this company will be below 20 bucks a share within. This isn't financial advice

because this thing could be at 60 or more tomorrow. But in 90 days, I think it's below 20 bucks. I think it's cut in half, if not more. Gravity, gravity, Ed. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Our executive producers are Jason Stavis and Catherine Dillon. Mia Silverio is our research lead and Drew Burrows is our technical director. Thank you for listening to Profit G Markets from the Vox Media Podcast Network.

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